Why Zynga May Not Be Worth Every Penny

I've had reservations about Zynga and its free-to-play social gaming model for a while now. I did warm to the company a little after reading fellow Fool Tim Beyers' take on the company. But the more research I do, the less I like Zynga's long-term prospects.

The field will get crowded quickly
Zynga has proved that free-to-play games can be profitable -- and major game developers have taken notice. Big names have now begun to move into the market:

• Majesco Entertainment (Nasdaq: COOL) acquired Quick Hit -- a developer of free-to-play sports titles -- to beef up its social gaming division.
• Electronic Arts (Nasdaq: ERTS) has already released 41 Facebook games. Most have been forgettable, but it's working on bringing its strangely addictive and in-game-purchase-friendly life-simulator to the platform with The Sims Social. EA's recent purchase of PopCap Games could be a big winner as well.
• THQ (Nasdaq: THQI) will launch Margaritaville Online -- a resort simulator inspired by the lifestyle and music of that other Buffett -- this fall.
• Take-Two Interactive (Nasdaq: TTWO) just launched a beta version of CivWorld -- the Facebook incarnation of the popular Civilization series. It's like Empires and Allies, except that you can actually enjoy playing it.

You also can't write off surprise hits from smaller developers -- something like the runaway success of Rovio's Angry Birds on mobile devices. The barriers to entry in social gaming are simply too low, which is especially dangerous, since the casual gaming audience is so fickle.

The CEO leaves a lot to be desired
An ex-Zynga employee told the SF Weekly that the company's founder and CEO, Mark Pincus, once said in a meeting, "I don't [bleeping] want innovation. You're not smarter than your competitor. Just copy what they do and do it until you get their numbers."  

A look back at Zynga's greatest hits shows this practice in action. It goes well beyond merely copying concepts, which is standard practice in the gaming world. The company stops just shy of lifting entire games.

Zynga's Farmville bears a disturbing resemblance to an earlier game called Farm Town, right down to the big-headed characters. The creators of Mob Wars actually sued Zynga over its version, Mafia Wars. The more you look, the worse this trend gets.

The speech Pincus gave at UC Berkeley might be even more galling. He told the audience that his revenue-building strategy was to do "every horrible thing in the book." Among other examples, he spoke of giving poker chips to players who downloaded the Zwinky tool bar -- a particularly annoying piece of spyware. Pincus justified his less-than-honorable tactics by saying they allowed him to make a profit and retain control of his company.  Now that the company is an undeniable success, he's promised to remove the more scam-tastic offers.

Foolish takeaway
The head of this company that will supposedly revolutionize gaming doesn't believe in innovation, and he's admitted to putting revenue generation ahead of customer satisfaction. Meanwhile, he's busy competing in a sector where the barriers to entry are low and big players are starting to get interested. Zynga is almost begging a smarter, slightly more customer-focused company to overtake it.

With all due respect to Tim Beyers, I can't call Zynga a Rule Breaking investment in the Foolish sense. At best, it might be a Faker Breaker. It looks like a disruptor, but unless management seriously changes its philosophy, I don't see Zynga staying on top for long.

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