1. Zynga Needs a Comeback
Kevin Villagran
BSAD 489
Professor Jeff Decker
May 9th, 2015
2. Introduction
Zynga needs to renew itself by creating a culture that fosters disruptive innovation
and brings its technological, human, and non-profit resources together in order to survive.
Once it had tried to establish social responsibility so early in its life, while it needed to deal
with its huge growth, it started to lose market share a few years after. The main problem
for Zynga is that it shifted its corporate strategy too early.
Zynga’s History
Zynga was founded as a social game company. Its current mission is to change
the world through social gaming. Mikolaj Jan Piskorski and David Chen of Harvard
Business Review wrote that Zynga was founded in 2007 by Mark Pincus, a Harvard MBA
graduate. It first launched as Presidio Media. The first Zynga Game released, Texas Hold
‘em, now known as Zynga Poker, had 400,000 monthly active users, or MAUs, in just four
months. YoVille, a virtual world game set in an apartment, is just one of these games. It
had reached 8 million MAUs by one year after the acquisition. (P. 3) Pincus said in the
case that he wanted the games that were released to be “sustainable franchises that
generate at least a billion dollars in revenues in a very long time.” (p.1) It created games
that were recognizable versions of existing games. For example, Sea Wars, one of its first
3. games released, was an adaptation of Battleship. (P. 2) Hartman, Mead, Christmas, and
Werhane wrote that Mark Pincus, in 2009, was thinking of having a corporate social
strategy, but at the same time, he still had to deal with his pre existing strategy, create
highly profitable social games. (P. 1)
Farmville was what allowed Zynga to get the growth that it was looking for.
Piskorski and Smith’s case study on Zynga mentioned that Farmville was Zynga’s most
popular game. Farmville was released on June 2009 It had players use an avatar to farm
crops, plow land, and raise animals. Players would plant and harvest plants to get Farm
Coins and experience points in order to progress their account. It also allowed users to
buy FarmCoins and FarmCash in order to making things easier or progress at a faster
pace. There were also social features of the game, such as players able to invite non-
player friends on Facebook. Those who invited many people were rewarded with larger
farms. They could also help other players with their plants for better harvests. Many
players of Farmville were said to appreciate these social features. Players were also
allowed to post their achievements on their Facebook walls, which then opened it for
player growth. In 2010, Farmville reached 80 million MAUs; Facebook at the time had 400
Million MAUs. Farmville had expanded so much due to Facebook having heavy
advertising of the game as well as having the achievement post system. (P. 4-6)
Revenue was said to be an important goal for Zynga, to where it was considered to
be part of the culture. Piskorski and Smith of Harvard Business Review said that Virtual
goods sales became 90% by 2010. Farmville 2 was released in 2012, and had 40 million
MAUs by the end of the year. At the end of 2012, Zynga’s official announcement of
financial statements for 2012 showed that it had almost 1.3 billion in revenue, with a net
4. income loss of 209 million. According to Julianne Pepitone of CNN Money, Zynga had its
IPO in December 2011. The stock closed at around $11, off from Zynga’s estimate of
$17.20. Its market cap was $7 billion at the time. What one can find on Google Finance
on Zynga's stock is that in beginning in spring 2012, the stock dropped to around $2.5 per
share and has mostly stayed there since, with only a few ups and then downs. (Exhibit 1)
Dov Seidman of Forbes noted that Mark Pincus said, “So much of Zynga’s culture has
been growth.”
Facebook was an important part of Zynga’s huge growth. Zynga was heavily
dependent on Facebook. Forbes said that Zynga accounted for 12% of Facebook’s
revenue. This is very significant. Facebook eventually rewrote its algorithm for game
posts so that those who are not playing games would get less posts, as well as eventually
making the only currency able to be used to buy items in games Facebook credits. These
credits took a 30% cut of purchases to Facebook; this and the algorithm change made it
so that Zynga’s revenue started to decline. CNN Money said that Facebook revised a
contract so that Facebook cannot just exclusively be for Zynga. This lasts until this year.
Zynga also has a social objective as well. It created campaigns to raise
money for various non-profits. Laura P. Hartman wrote on the early initiatives of Zynga.
Zynga created a an intracompany sector called Zynga.org in 2009 to raise money for
nonprofits such as the San Francisco Society for the Prevention of Cruelty to Animals.
This was done by having a virtual social goods program where players could adopt a cat
or dog in the game YoVille, resulting in a 2$ donation to the SF SPCA. Zynga did this for
different non-profits as well, such as Water.org, a non-profit that provides clean drinking
water to developing communities. There are also campaigns for two non-profits for Haiti,
5. Fonkoze and FATEM; one is for microfinance and another for providing education and
school meals. (p 7-9)
Zynga has had some setbacks in the form of lawsuits and negative public relations.
According to Trefis Team of Forbes, Zynga had to deal with a class action lawsuit when
investors of Zynga shares sue Zynga for securities fraud in the third quarter of 2012.
Pikorski and Chen mentioned that Techcrunch published an article that said that users
were being tricked into lead generation scams. This is where an offer is made to a player
in order to get free game currency, but at the same time, they are being charged for an
item or offer that they had no knowledge of and never asked for. This Techcrunch article
leads to Zynga getting much bad press, which then affected revenues. Mark Pincus
reacted by saying that Zynga will try to remove bad offers from its games. (P. 9-10) CNN
Money’s Pepitone also mentioned that Pincus left Zynga in 2013 after layoffs of 5% of the
employees on October 2012 and 18% the month before his leave, an acquisition of
OMGPOP, maker of Draw Something, which ended up being costly due to the game’s
popularity becoming a fad. He was replaced by Don Mattrick, who had worked at
Microsoft and Blizzard before becoming CEO of Zynga.
Current Situation
Currently, Zynga is not keeping up with its current competition. Zynga’s financial
statements show that its revenue at the end of 2014 was around $690 thousand a 21%
loss from 2013’s $873 thousand, which is also a loss of 32% from around $1.2 billion in
2012. (Exhibit 2) It has also suffered from negative net income. It went up to
approximately $225 million in losses. (Exhibit 1) In 2014 The company had an average of
around 120 MAUs (Exhibit 6) It also maintained a payer conversion (when players bought
6. Zynga’s virtual goods) of less than two percent throughout 2014 and fourth quarter 2013.
(Exhibit 5)
King Digital, maker of Candy Crush Saga, was founded in 2003. In PR Newswire’s
findings of King Digital’s financial statements, It has $2.2 billion in revenue and $574
million in net income at the end of 2014, with 533 million MAUs. (Exhibit 4) Its most
popular games besides Candy Crush saga include: Bubble Witch Saga, Farm Heroes
Saga, and Pet Rescue Saga, among others These are also social games. According to
Anya George Tharakan and Subrat Patnik of Reuters, Zynga’s market share in March
2015 is down to $2.4 billion, whereas its biggest competitor, King Digital, was at $4.6
billion after becoming public more than a year ago.
Supercell is a private company founded in 2010, and based in Finland. Stuart
Dredge of The Guardian reported that Supercell posted that its EBITDA was 515 million
Euros, around $560 million in today's U.S. Dollar. Its revenues in 2013 were 519 million
Euros. Stuart mentioned that this was thanks to its biggest games, Clash of Clans, Hay
Day, and Boom Beach’s in-game purchases and advertising. These three games consist
of some of the top 10 games played on mobile. (Exhibit 7)
Zynga’s is placing emphasis onto the mobile games segment. New York Post’s
James Covert said that Zynga is going to release “New Words With Friends”, “Farmville:
Harvest Swap”, which are both older franchises, and “Dawn of Titans”, which is a new
game that will be released in 2015 thanks to Zynga’s acquisition of NaturalMotion. It will
feature polished 3D graphics that are supposed to make the huge battles between armies
epic; it also has quick, simple game play, according to Stuart Dredge of The Guardian.
7. Covert also noted that Zynga has managed to get 60 percent of its sales through mobile
devices. This is Zynga’s entry into the mobile action strategy category.
The video games industry is shifting. Oscar Raymundo mentioned that one
of the six reasons that the video games industry will be disrupted is that mobile revenues
in the video game industry will soon be able to surpass the revenue from console games.
Other reasons include virtual reality or social casinos, Esports, and twitch. Zynga.org had
managed to raise 17 million dollars.
Zynga officially announced its first-quarter 2015 financial results, but it also
announced a cost reduction plan to generate pre-tax savings of $100 million by reducing
its workforce by 18%, or 364 people. Pincus said, “We need to create an empowered,
entrepreneurial culture that fosters more creativity and innovation…”. This was a hard but
necessary decision and I believe that this plan puts us in a long term road to success”.
Zynga’s stock jumped seven percent to $2.8 a share on May 7, 2015 according to
Google Finance. It was also mentioned that Pincus is not just the CEO, but also the
Chairman of the Board.
Recommendations For the Future
Zynga is in a position to have a renewal of its original corporate strategy. Collis and
Montgomery, who wrote corporate strategy, said “...the task, therefore, is primarily
concerned with leaders reviving a culture of excitement and innovation and an
expectation of superior individual and business performance.” (p 246) The main
resources that maintained its previous corporate advantage, its close relationship with
Facebook, and sustainable franchises, especially Farmville, are now obsolete. Its “culture
of growth” is not leading it into a good path. Having both revenue and non-profit divisions
8. slowed down needed growth, and Its organization needs to become more efficient and
engaged with its vision. These are the primary reasons why Zynga’s 2014 revenue is
around 690 million, which is only around half of what they had gotten in 2012. Also, the
last time it had gotten positive net income was in 2010. Pincus needs to take the initiative
and make it so that the company revives its former corporate strategy. He would also
need to understand that he cannot revive Zynga alone, and that he will need help from his
employees. Ronald Heifetz and Donald Laurie, who wrote, The Work of Leadership,
noted that leaders need to look at their companies at multiple levels, identify adaptive
challenges, let employees solve problems on their own while maintaining a calm
environment, and let those who want to object do so without fear. This is how Pincus can
take the initiative and change the company for the better. Pincus needs to let the
employees experiment by themselves to create new ideas or projects that take advantage
not just of its acquisition of Naturalmotion and the mobile market, but also of other
disruptive technologies, such as the streaming website Twitch.TV, for example.
Zynga needs to have disruptive innovation. Zynga’s corporate strategy
concentrated on growth. Zynga’s operating margin for 2014 is around negative 35.5%.
This means that it is not getting enough revenue in order to cover its expenses. Only
through disruptive innovation can Zynga come up with new games or services that will
result in more revenue. Pincus had the company be stuck with franchises that would
eventually be outdated. In order to keep this growth it needed to do disruptive innovation
as opposed to derivative innovation. Zynga had been concentrated on derivative
innovation because it had been releasing games based on similar franchises and the
same kinds of mechanics the whole time, It just recently stated releases to bring Farmville
9. and Empires and Allies games for mobile; these have already been released as
franchises years ago. Zynga already has decent delivery skills, which, according to Dyer,
Gregersen, and Christensen, who wrote The Innovator’s DNA include, “analyzing,
planning detail oriented-implementing, and disciplined executing ”.
They also mentioned that “innovative companies consciously allocate a
significantly greater proportion of people and resources to platform and breakthrough
projects.” (p. 226) Zynga will have to look at the factors that can possibly disrupt the video
games industry, such as social casinos, or e-sports. Pincus would have to change Zynga
into a company that has innovation in its culture. (p.168- 169) According to Dyer,
Gregersen, and Christensen said that the world’s most innovative companies make it so
that its people, processes, and philosophies put innovation first. Pincus can allow his
employees, and himself, to develop the innovation skills mentioned in the Innovator’s
DNA. This would lead to clan control; Collis and Montgomery mentioned, “This type of
control may eliminate agency problems inside organizations if subordinates have deeply
internalized the goals of the organization.” (p162) Collis and Montgomery also mentioned
that control is needed to make sure a company can keep its corporate direction and
performance. (P. 160)
In order to be able to create disruptive innovation, Zynga would first have to find
other windows of opportunity. It ended up with with negative $225 million in net income
because even though it was pursuing growth, the company was not finding good growth
opportunities. This is because it lost its major partnership with Facebook, which it had
heavy dependence on, and it entered the mobile market late, while using many of its
outdated franchises to enter. Peter Drucker wrote in his book Management, “analyzing
10. windows of opportunity requires a systematic policy of looking, every six to twelve
months, for changes that might be opportunities...” (p. 398) Drucker mentions that there
are seven source areas of windows of opportunity. Some of these include changes in
industry or market structures, Unexpected successes and failures of the company itself
and its competitors, and new knowledge. (P. 398-401) Zynga will have to be on the
lookout for any of these sources in order to then find opportunities that will allow it to
innovate and disrupt the video games industry.
Zynga needs to also change its goals for its business. Drucker wrote that the
purpose of a business is to create a customer, not to maximize profit (p. 98) There are
many other objectives, including marketing, innovation, human resources, financial
resources, physical resources, productivity, social responsibility, and profit requirements.
(P. 105) Zynga needs to currently focus on many of the goals in order to form a new
corporate strategy. This is because it will have to find new windows of opportunity and
form new growth platforms keeping these objectives in mind. Important objectives for
Zynga will be achieving profit requirements, innovation and human resources. For
example, Zynga’s profit margin in 2014 is around negative 33%. Working towards goals
such as innovation and profit requirements will help to reach financial stability, and
therefore growth. These objectives are what will allow Zynga to create disruptive or
platform innovations that would allow it to therefore also give value to its customers as
opposed to just making revenue. Pincus is starting to work on profit requirements due to
cutting the company’s workforce.
Zynga only had less than two percent of all players buy its virtual products
throughout 2014. (Exhibit 5) Zynga will need to bring more value to its customers. For
11. innovation, Pincus can also recognize that the company can use both of its technological,
human, and its non-profit resources in order to achieve a corporate advantage. Collis and
Montgomery mention internal consistency with questions such as, “Are the elements of
the firm’s corporate strategy aligned with one another? Do they form a coherent
whole?”He also has one important question for corporate strategy, “Is value creation from
that corporate advantage?” (p.202-204) Zynga needs to come up with an innovation that
includes each of its technological, human, and non-profit resources used together. Once it
combines these resources. Zynga would then have to deliver value to its customers.
Peter Drucker said in his book Management, “The last of the innovative strategies
delivers what is ‘value’ to the customer rather than what is ‘product' to the manufacturer“
(p. 395) An example of doing this for the company would be by using a pricing strategy
that allocates a small percentage of any purchase made by players to a non-profit cause
of their choice. This would allow Zynga to focus on its employees experimenting, creating
projects using its Naturalmotion acquisition based on finding windows of opportunity.
Zynga should also make sure that the quality of the game experience is not compromised
by advertisements or other problems. As long as it can bring disruptive innovation and
quality games, Zynga will be able to bring profit, funds for its nonprofit partners, and value
to its customers.
Conclusion
Zynga has put itself in a hard position. It is ultimately up to Pincus to determine the
firm’s direction. If Pincus knows that he cannot turn around the company alone and starts
an innovative culture that helps the company’s employees learn discovery skills while
12. keeping their good delivery skills, and pursue disruptive innovation while looking for new
windows of opportunity, Zynga will have a much better chance of staying afloat.
Exhibit 1: Zynga’s stock since IPO
Source: Google Finance
13. Exhibit 2: Graph of Zynga’s revenue, net income, and profit margin 2010-2014 (Revenue
and net income in millions)
18. Source: Zynga’s Quarter 4 earnings slides for 2011-2014
Exhibit 7: Top apps of Google Play and iOS combined- January 2015
19.
20. Source: King, Long. "King Digital Intensifies Its Strategy Games Campaign." Seeking
Alpha, 27 Feb. 2015. Web. 09 May 20
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