Last year Zynga (NASDAQ:ZNGA) couldn't keep its executives. They left in droves.
Now the social gaming leader can't keep its underlings. Zynga's letting them go in droves.
Shares of Zynga tumbled 12% yesterday after announcing that it will let go of 520 employees -- roughly 18% of its workforce -- in a move that will result in as much as $80 million in pre-tax annualized cash expense savings.
Investors often applaud cost-saving moves, but they had no problem seeing right through this one. Zynga's still flush with cash from the fleecing of investors in its IPO. It doesn't need to be in capital preservation mode. The model just isn't working.
In revealing that Zynga's bookings for the current quarter will clock in at the lower end of the outlook that it provided just six weeks ago, it telegraphs the continuing degradation of Zynga's business.
This isn't the same Zynga that was hyped up as a Facebook (NASDAQ: FB) coattails play at the time of its IPO. Facebook is still growing, becoming less dependent on Zynga's fading bookings as it explores new revenue streams. The leading social networking website operator is expected to grow its revenue 32% this year. Zynga, on the other hand, is now expected to post a 25% plunge on the top line.
We can't necessarily blame Zynga. Social gaming on Facebook just isn't the goldmine that we thought it would be. Just ask Electronic Arts (NASDAQ:EA).
Visitors to its seemingly popular The Sims Social on Facebook are greeted with charming proposition.
"Build a home. Build a relationship. Build a life."
However, that home is actually just a short-term rental. That relationship is a one-night stand. That life is as good as dead.
Despite drawing roughly a million monthly visitors on Facebook, EA is shutting the virtual community down on June 14. Pet Society and SimCity Social will also be shutting down on that date.
EA's move may seem cruel to the players that have built up their virtual digs, but Zynga actually shuttered nearly a dozen games late last year. They argue that they don't have much of a choice. Given the difficult monetization of social gaming, a diversion needs a really substantial audience to remain feasible for a large software company to maintain. The problem, naturally, is that pulling the rug from under hundreds of thousands of invested gamers whenever one of these games shuts down is that the potential audience for future titles no longer trusts the company.
Why would anyone explore an EA or a Zynga virtual realm? Why would anyone actually pay up for virtual goods?
It is really a surprise that Zynga's bookings are running soft, especially outside of its FarmVille stronghold? Is it really a shock that after telling millions of gamers to go away late last year that it's now doing the same thing to hundreds of its hires?
The social gaming model is flawed, and Zynga's got the pink slips to prove it.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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