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The New Game Plan for Zynga Inc (ZNGA): Will it Work?

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Avid social gamers may know Zynga Inc (NASDAQ:ZNGA) for its smash hit games such as Farmville and Mafia Wars, but investors will always remember it as the company that set the recent trend for underperforming Internet IPOs. The company’s stock has been on the run lately and gained over 45% in the year so far. Let’s not forget, however, that the stock is still down 50% from its 52-week high of $6.79. Apart from the obvious fatigue surrounding its games, the company has also been stung by its partner-in-crime Facebook Inc (NASDAQ:FB) as it broke the exclusivity clause in its contract. Now Zynga Inc (NASDAQ:ZNGA) is on its own and looking to establish itself on its own terms. Let’s have a look at the future roadmap for the company.


Online gambling, anyone?

Zynga Inc (NASDAQ:ZNGA) had already been making money with the sale of virtual goods, so it is about time for the company to dabble in new endeavors to generate more real-life cash. The company recently launched an online gambling portal in the UK. While online gambling is still illegal in the United States, Zynga has set the ball rolling with its UK launch. The limited release will also enable the company to measure the feasibility of a larger scope for the project.

The UK online gambling scene is awash with competition, however, and Zynga Inc (NASDAQ:ZNGA) has not come up with any compelling selling point. The company’s online gambling portfolio includes online poker, blackjack, slot machines and other games. It will be expanding the portfolio to Facebook in the UK later this year.

The company’s US plans are still under a cloud, however. Various states such Nevada, New Jersey and Delaware are close to legalizing online gambling, but the time line for this is still hazy and Zynga needs it to happen sooner rather than later. Even if the company is able to start its US operations this year itself, it will take a minimum of two more years for the new venture to have any positive impact on the company’s bottom line.

The road is not smooth, even after the regulatory hurdles are cleared. Zynga Inc (NASDAQ:ZNGA) will have to compete with real-life big players such as Wynn Resorts, Limited (NASDAQ:WYNN) and Caesars Entertainment. Wynn Resorts, Limited (NASDAQ:WYNN) is rumored to be in talks with Zynga for a possible collaboration when online gambling is legalized. Despite its enviable standing in social gaming sector, Zynga lacks the infrastructure required for online gambling operations. While Wynn Resorts, Limited (NASDAQ:WYNN) can help Zynga with its existing operations, the Nevada-based company can draw synergies from Zynga’s massive user base at the same time. Wynn is currently witnessing a decline in its domestic business while its Macau operations pick up traction. The company recently reported its quarterly numbers, beating consensus estimates.

Once online gambling is legalized, however, expect the ring to be packed with other players, including Boyd Gaming and MGM Resorts International. Among such heavyweight movers and shakers, Zynga Inc (NASDAQ:ZNGA) is going to have a tough time carving out a niche.

Mass exodus of talent and users

While the company’s future hinges on the shaky ground of online gambling, Zynga is getting deserted by not only its employees but also by its users. In the last couple of months, the company saw the departure of a number of its top executives. But the more worrisome news was announced last month, as the company reported a 21% decline in its daily user activity in the previous quarter. Its revenue dipped 18% on year-over-year basis.

The company launched sequels to some of its successful titles to plug the outflow of users. It is now planning to ramp up its game launch cycle. About a month back, Zynga released second the iteration of its runaway success “Draw Something.” It also launched “Running with Friends,” trying to capitalize on the buzz created by “Temple Run.” So far, these two titles have generated only minimal attention. “Draw Something 2” topped out at no. 2 in the Apple App Store, and then faced a constant decline. While both the games are likely to add to Zynga’s bottom line, their lukewarm performance cast a shadow of doubt over the robustness of the gaming company’s upcoming titles.

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