References:PWC Global entertainment and media outlook 2012-2016NCSoft IR Report Nov 2012
Turning the Tables for Zynga IM661 Entertainment Industry Analysis – KAIST Business School Team: Inseok Kim, Noksil Kwon, Anggriawan Sugianto
Turning the Tables for ZyngaOutline1. Environment2. Company Profile3. Problem4. Alternative Solutions5. Recommendation turn the tables • (idiomatic) To reverse a situation, such that the advantage has shifted to the party which was previously disadvantaged.
Game Industry 1980 2010 1990 1970 2000 BoomArcade & Console Crisis DDR Wii, Kinect, Arcade: Live move Space Famicom Galaxy Invader Boom Distribution, Subscription, Ad, Freemium, Social PC & Web Web Space Game War Boom Tetris, N-Gage SnakeMobile & Handy Nintendo DS Touch Screen iPhone, App
Zynga Inc.From 2007 to 2012 Founded in 2007, Trading on NASDAQ since 2011, Acquired around 25 companies including video game maker, board game company and online poker tracker company, Opened over 18 satellite offices and international studios in Japan, China, German, U.K. and India, Operating 27 games of arcade, casino, simulation genres.1400 1400 100% 90%1200 1200 80%1000 1000 70% Ad. 60% 800 DAU 800 Pokers 50% Inter. 600 MAU 600 Others 40% US MUU 400 400 Ville 30% 20% 200 200 10% 0 0 0% 2011 2012 2011 2012 2011 2012 Users Revenues Revenues by Geography
SymptomsBearish Stock Price• Dec 16, 2011: IPO at $10• Mar 2012: Highest price ever at $14.5 (+45%, 2 month after IPO)• Nov 2012: Lowest price ever at $2.09 (-79%, 11 month after IPO)• Mar 2013: $3.42 (still -65.8% since IPO)Employment Termination• Feb 2013: Zynga closes 4 offices: New York, Baltimore, Austin (TX), McKinney (TX) – All four of the offices had recently lost their leaders, and many were associated with big flops for the struggling maker of social games.• Dan Porter, GM of Zynga NY (and ex OMGPOP CEO) felt its employees are not happy – Ex-engineers also felt dissatisfied with company direction• Mass layoff in several offices, while executives and creative talents have already resigned beforeOut of Competition• Zynga closed PetVille, Mafia Wars 2 and nine other games• Zynga‟s games even are not listed in the top-10 most profitable mobile games (2013)
CausesOver-reliance to Facebook• “Mutual” relationship• 12% of Facebook‟s revenue (2011) came from partnership with Zynga – It was $445 million of $3.71 billion in sale – Payment: Facebook takes 30% virtual goods transaction – Advertising: Zynga spent on Facebook advertising • Zynga users also increase Facebook pageview Good for Facebook advertisers• 94% of Zynga‟s revenue (2011) came from Facebook – Facebook accounted for 81% of Zynga‟s accounts receivableUnprofitable Users• Zynga relies on a small percentage of users for nearly all of its revenue (whales) – Less than 10% of users spend money – Less than 1% of users are responsible for between 25-50% of the company‟s revenue
External Factors Opportunity ThreatGame Industry Facebook’s Growth• Game industry is growing fast, especially in • Zynga and Facebook revised their long- online multiplayer games and social/casual term partnership by changing their games. agreement.• Zynga has the resource to develop more • Now Facebook is free to develop their own games. games.Online Gambling Competition• The future of online gambling seems good • Barrier to entry for social network-based for Zynga‟s current financial games in general is relatively low. situation, although it‟s not good for their • This situation can distract Zynga‟s potential reputation. new users to other options.Mobile Games Mobile Games• Mobile game industry is growing fast. • Zynga has limited killer apps in mobile• Zynga‟s games are well-matched with games compared to the competitors. mobile and Zynga has resources to develop.
Key Question How should Zynga grow its businessto turn the table and regain its credibility from the shareholders ?
Alt1: Farm! New Location Ville! Zynga should expand its business to Asia market, especially China• Based on Q4/2012 report, 59% of Zynga‟s revenue came from US market, while the remaining 41% were from International market.• Meanwhile, there is a significant growth in online/mobile video games industry in Asia, especially in China. The growth of online/mobile game in China is 266% larger than in US.• Therefore, business expansion to Asia/China market is a great alternative. Strategy 2007–2011 growth in online/mobilePARTNERSHIP WITH RENREN video games (US$ millions) Russia 687• Renren is one of the biggest social networking services in China, with United States 1286 162 millions of registered users (2012). Japan 1376• Renren is strong in MMORPG & casual gaming, but not in social South Korea 1750 gaming. China 4707• Why Zynga-Renren partnership is beneficial to both: 0 1000 2000 3000 4000 5000 1. Zynga can expand its user base to Asia, especially China as the biggest market, and generate more revenue. Online Game Market (US$ billions) 2. By enhancing their game portal with Zynga‟s successful 35 1 2 games, Renren can increase its MAU rate. (it was just 26.5% in 30 1 2 4 2011). 25 1 4 4 3 1 4 20 1 3 3 3 11 15 1Additional Strategy 1 2 3 9 0 1 7• Build the localized version of Zynga’s game platform: zynga.cn 10 2 3 6 2• Build partnership with local game developers to distribute their games 5 3 4 10 11 7 8 into Zynga‟s platform, or do acquisitions of local game company. 4 5 0• Fork existing Zynga games into local language 2009 2010 2011 2012 (E) 2013 (E) 2014 (E) China Korea Europe N. America Japan Others
Alt1: Farm! New Location Ville! Zynga should expand its business to Asia market, especially China PARTNERSHIP WITH RENREN Benefits CostsChina Internet growth Cultural difference• Increasing Internet usage & online game market • Cultural discount for non-casual games• Increasing spend on gaming industry • Language barrier• Growth in mobile Internet users • Adaptation on various Chinese App-storesFuture prospect Regulation issue• China‟s population is over 1.3 billion, the largest in the • Anti-addiction or fatigue system government program world • Low intellectual property right enforcementLock-in Effect High competition• Social games with social networking service can grab • Native-China companies & big foreign companies the users consistentlyCompetitionTencent‟s QQ game portal, Shanda, Netease, The9, ChangYou, Weibo Games, Rovio
Alt2: Farm! New Education Ville! Zynga should develop & publish social educational games Strategy Characteristics Of Zynga gamesB2B PARTNERSHIP WITH AMAZON • Social • Games with friends• Bundle Zynga games with Digital Textbooks • Educational• Using educational characteristics of Zynga • Construction and Management Simulation games, cooperate with Amazon and plant Zynga‟s (Farmville, CityVille) games on Digital Textbooks or service them through • Mathematic Puzzle Digital Textbook platform „Whispercast‟ (Drop7) • Linguistic Puzzle (Words with Friends)Backgrounds of Digital Textbooks• Estimated revenues of Digital Textbooks: $1.1 billion by 2014, $2.5 billion by 2017• The number of US students under 18: 55 million• Government policy: Bring digital textbooks to all US students by 2017• Main participants of device and platform: Apple, Amazon
Alt2: Farm! New Education Ville! Zynga should develop & publish social educational games B2B PARTNERSHIP WITH AMAZON Benefits CostsTake advantages of characteristics High development cost• Using social interaction from all around the world users • Modify existing games to educational games to classmates • Develop more various types of games• Utilizing the educational aspects of games• Adopting window effects Company brand imageFollow changes of environment • Improve company image to become education-friendly• Proliferation of Digital Textbooks• US government announced to bring digital textbooks to all US students by 2017 and Amazon launched Competitive advantage „Whispercast‟ as a platform. • Amazon is less competitive than Apple in digitalGet stable revenue stream textbook market• Hardly changeable curriculumsTake Prior occupation of the Market• Target the new market of digital textbooks and new industry of gamificationCompetitionApple‟s iBooks textbooks for iPad
Alt3: Farm! New Monetization Ville! Zynga should enhance its business in mobile platform• Sales of Smartphones overtake those of PCs since 2011.• More Facebook users connect the service via the mobile. However, FB doesn‟t provide mobile game platform and Zynga‟s high reliance on FB may affect its growth negatively.• In mobile area, freemium (in-app-purchase) model is growing fast. ! StrategyACQUISITION OF WHATSAPP• Zynga can secure additional revenue stream in mobile gaming area through WhatsApp.• Mobile is the most fast growing and WhatsApp is the largest Mobile Messaging Service.What about WhatsApp?• World largest Social Network Messaging service with over 300M Src:Gartner,2012 active users• However, revenue model is limited to subscription ($0.99/year with 1 year free, other OS) and pay-per-download($0.99, iOS) for messaging App• Recently they announce that WhatsApp for iOS will change to subscription with 1 year free for improving their revenue stream• Many competitors with other values are existing: Vibe, LINE, Facebook Messenger, MessageMe, KakaoTalk
Alt3: Farm! New Monetization Ville! Zynga should enhance its business in mobile platform ACQUISITION OF WHATSAPP Benefits CostsZynga’s game is well matched with Mobile WhatsApp has been focusing only on messaging• Zynga‟s specialty is casual and social games which are service popular game genre for mobile • Currently WhatsApp want to keep their service simple• Zynga already launched several popular games and and clean they can re-utilize for converting to new mobile platform • WhatsApp API which is necessary for developingWhatsApp is the largest mobile messaging games for WhatsApp Platform are not ready• Zynga can secure a number of gamers in a short period of time through the WhatsApp usersFreemium gaming market is growing fast WhatsApp may be overvalued• Freemium game and In-app purchase revenue • Many companies, except Zynga, have eyes on generating (39% 65%, AppStore) WhatsApp• Zynga‟s games are basically free-to-play and in-app- purchase model. So they don‟t have to change their No Killer contents for mobile, Zynga may need revenue model new promotion and marketing investmentZynga can get a game promoting tool and can givenetworking tool for usersCompetitionKakaoTalk, LINE Messenger
Recommendation: Farm! New Location Ville! Zynga should expand its business to Asia market, especially China• Asia is the largest video game market at $24 bn. in 2011, and projected to grow 10.3% on CAGR to $40 bn. in 2016.• Three of the top four video game markets in the world are in Asia: China, Japan, Korea.• Online & wireless games, which are part of Zynga‟s core competences, contributes a larger share of total spending in Asia than in other regions.• Partnership with RENREN will give Zynga new large user base as well as new revenue source from China market. Competitive Analysis Alt 1 Alt 2 Alt 3 Number of Users Number of Users H ML MH Brand Profit Margin per Profit Margin per User ML MH M Awareness User Game Quality M MH M Cost Efficiency H MH M Brand Awareness MH ML H Cost Efficiency Game Quality Avg. Score (L=1, ML=2, M=3, MH=4, H=5) 3.8 3.2 3.6 Alt-1 Alt-2 Alt-3 Quantitative Analysis Qualitative Analysis Future ConsiderationZynga will have > 162 million NEW Partnership with Renren is the most • Partnership or acquisitions ofpotential users efficient alternative in term of local game companies development since it can be started 40 million (est. active users) * $10 soon by just forking and translating • Localized version of Zynga game(avg. revenue per user) * 0.7 existing games. portal: zynga.cn(sharing) = $280 million