Zynga (NASDAQ:ZNGA) recently reported disastrous second-quarter earnings -- revenue plunged 34%, year over year, to $153 million, while losses widened from $15.8 million to $62.5 million.
Zynga's stock is now down 80% from its all-time high of $14.69 in March 2012. Its fall from grace started in November 2012, when Facebook (NASDAQ:FB) barred Zynga from displaying Facebook ads, using Facebook credits, or releasing Facebook-exclusive games. Shortly afterwards, a flood of mobile games like King Digital Entertainment's Candy Crush and Supercell's Clash of Clans marginalized top Zynga titles like FarmVille, CityVille, and Zynga Poker. Zynga's sluggish transition from browser-based games to mobile ones further exacerbated the problem.
To deal with that crisis, Zynga inexplicably hired Xbox head Don Mattrick -- the man responsible for the Xbox One's doomed media-center strategy -- as its new CEO last July. Meanwhile, Zynga continued to lose users. Last quarter, Zynga's daily active users fell 26%, year over year, to 29 million, and monthly active users fell 30%, to 130 million.
Mattrick's turnaround plan is to launch more sports games -- which isn't surprising considering that he helped engineer a $400 million deal between Microsoft and the NFL last May. Mattrick believes that a new Tiger Woods title and new NFL games could save Zynga. But in my opinion, it's a Hail Mary pass with no receiver in the end zone.
Why Tiger Woods and the NFL won't matter
The first problem with Mattrick's strategy is that it turns Zynga away from creating non-licensed games. Mark Porter, Zynga's general manager in New York, once admitted that many of Zynga's games were clones of older games. But at least those games didn't require additional license fees. Now, Zynga is ready to pay the NFL and Tiger Woods licensing fees for additional brand recognition. That's a shaky strategy when the company's top line is declining and the bottom line remains deep in the red. It also tells investors that Zynga has simply run out of ideas.
The second problem is that the market for mobile sports games is completely dominated by Electronic Arts (NASDAQ:EA). EA already offers Madden NFL 25 and Tiger Woods PGA Tour 12 for mobile devices, along with plenty of other golf, soccer, and racing titles. These sports games are the heart of EA's mobile business, which generated $123 million in revenue last quarter -- an 11% increase from the previous year. EA's mobile games also have 140 million monthly active users -- 10 million more than Zynga.
Zynga's first NFL title will be NFL Showdown, a manager-style game where players fill out their rosters with real players from NFL teams. Subsequent games will be developed by Zynga's studio in Orlando by several designers who helped develop EA's Tiger Woods PGA Tour titles. While these games might be better received than Zynga's other fading franchises, most gamers simply don't need more than one mobile NFL or Tiger Woods game on their smartphones.
Zynga should have spent that money securing under-the-radar IPs that no one noticed instead. Glu Mobile, for example, recently reported a 51% year-over-year jump in revenue thanks to Kim Kardashian: Hollywood -- a hit mobile game that initially required a huge leap of faith from the company.
That's not all, folks
In addition to NFL and Tiger Woods games, Zynga hopes that licensing Time Warner's Warner Bros.' Looney Tunes characters for a new game can help it diversify its portfolio. Unfortunately, the upcoming project is also terribly unoriginal -- it's another endless running game similar to Temple Run, Subway Surfers, and Despicable Me: Minion Rush.
When we look back at Zynga under former CEO Mark Pincus, at least the non-licensed clones were more inspired. FarmVille cloned the Chinese game Happy Farm, Dream Heights cloned Tiny Tower, and Mafia Wars cloned Mob Wars. But when Zynga released those games, few U.S. gamers had actually played Happy Farm, Tiny Tower, or Mob Wars, since they were foreign or indie titles.
A Foolish final thought
Through its NFL, Tiger Woods, and Warner Bros. partnerships, Zynga will pay license fees to clone well-known games in saturated markets when it needs to develop original, addictive titles. This strategy doesn't make any sense, and will simply cause Zynga's losses to widen in the future.
Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft. 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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