There's a new scapegoat in town. His name: Mark Stanleydaq. Or is it Morgan Nasberg? Nas von Stanleyberg? OK so creating a celebrity dating name out of Morgan Stanley, Mark Zuckerberg and NASDAQ is harder than it looks.
Assigning who's most at fault is equally hard, so I won't attempt to. Instead let's take a look at what happened to one of (last time I promise) Nas von Stanleybergâ's cousins: Zynga (ZNGA +0.00%). The Internet and mobile-based games maker has been getting bludgeoned ever since Facebook (FB 0.57%) went public. I stretched this morning for a rare and long ascension of the ivory tower to look at Zynga through the lens of one of my favorite business school frameworks.
As shown by the graph, compliments of Morningstar, Zynga and Facebook stock prices are basically handcuffed to each other. Really quickly, let's run through the pre-Facebook IPO Zynga financials. Quarter revenue was up 32% to $321 million with earnings of 6 cents a share excluding stock-based expenses. Those earnings are down 38% from same period a year ago due largely to Facebook's 30% stake of revenue generated through the social media site. Monthly unique users were up to 182MM from 150MM and the company raised revenue guidance slightly to $1.5B for the year.
I promised you some academia, so let's take a tiny step away from the tangibility of financial reporting and break down Zynga's business with Harvard Business School Professor Michael Porter's 5 Forces Model.
Bargaining Power of Suppliers VERY HIGH
From 10Q We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future.
Facebook, along with mobile phone providers, has massive bargaining power over Zynga. The good news is that Zynga accounted for 15% of all Facebook revenue last quarter, which is equally impressive and advantageous for a healthy relationship going forward. The bad news is that Facebook keeps 30% of revenue generated through its site. I shudder imagining myself as the CEO of a firm completely at the mercy of another that has no real competitors. Be afraid.
Bargaining Power of Customers HIGH
Of the 182MM unique monthly users last quarter, Zynga converted a pathetic 3.5MM to paying customers. Sure, it is a 21% increase from same quarter a year ago, but converting roughly 2% of people to the pay version is a low number anyway you dice it. Also, buying a game on the mobile platform at least means you no longer see ads. You pay $3 and the advertisers lose you as an impression. Currently, $3 per user is probably a higher value then what Zynga would get from advertisers per user, but that is likely to change as mobile advertising matures and users shift to mobile from computers.
Threat of New Entrants SUPER, SUPER HIGH
In a move of pure desperation very similar to Facebook's egregious billion dollar Instagram purchase, Zynga bought Draw Something maker OMGPOP for $180MM. Draw Something operates on exactly the same model as Zynga's mobile games: offer a teaser version of the game with limited features, serve ads, and attempt/largely fail to convert users to the ad-free full version of the game. There is nothing patentable about this platform and competitors can easily enter and create games. Â After all, two of Zynga's most lucrative games are Words with Friends, a rip-off of Scrabble, and Scramble with Friends, a rip-off of Boggle. Further, brand loyalty is non-existent and Warren Buffett's economic moat is nothing more than a dirt path around the castle.
Threat of Substitute Products MEDIUM
Playstation, Xbox, Wii. God forbid a football or a book ("ew," say the younger readers). I went medium here because, although traditional videogame users are still large in numbers, the shift to mobile is already being realized. Plus, you can't play Xbox under your desk in class, so these aren't pure substitutes. Carrying around a phone and mobile gaming platform is clunky and their merge is inevitable.
Intensity of Competitive Rivalry HIGH AND CLIMBING HIGHER
Facebook has over 900 million users. There are only 6.8BB total people in the world. Soon enough Facebook and its partners will have to look at the market like the tobacco industry. Tobacco companies view the market as a pie that they assume won't grow; they are constantly clawing for a bigger slice of the pie in lieu of trying to grow the pie itself. This is inevitable for Facebook and friends and is going to put added pressure on the competition between Zynga and its rivals.
Michael Porter can't like Zynga's chances here. People are going mobile, sure, but monetizing that move is equally troublesome for Zynga as it is for Facebook. If you play their mobile games you have surely noticed that a ton of the ads are house ads, ads placed for free that advertise Zynga itself or other products from its portfolio. Any good Ad Sales VP will tell you, house ads imply the ad market is not there or a sales rep did not do his job.
Two things are clear: Zynga does not look like a promising investment opportunity and my future at Perez Hilton as a celebrity dating guru is dim.