Zynga Inc (ZNGA) Leaves Facebook Inc (FB) To ‘Get’ With Google Inc (GOOG)

Zynga Inc (NASDAQ:ZNGA)Zynga Inc (NASDAQ:ZNGA) had some trouble as of late: its total audience metrics came in low. The total monthly active user statistic came in at a staggering decline from 298 million down to 253 million. The decline in booking was rather sudden, as social gaming lost a lot of its appeal.

Zynga earning highlights

Demand for video gaming can be fairly seasonal, but that does not change the over-arching theme of declining social gaming demand. Zynga Inc (NASDAQ:ZNGA)’s daily active user metrics declined from 56 million to 52 million from the quarter earlier. The decline in daily active users was also followed by a decline in monthly unique users, which declined from 167 million to 150 million. Zynga’s growth has hit a clearly defined ceiling of 300 million monthly active users. This level of monthly active users may be impenetrable for quite a while as Zynga attempts to re-position itself into a more sustainable business model.

Zynga was able to record a $4.1 million profit versus the year earlier loss of $85.4 million.

Source: Zynga

Based on the above figure, a trend is emerging. Revenues are growing from the other online game categories. Look even closer and the more established video games like Farmville, Mafia Wars, FrontierVille, and CityVillle have had declining revenue growth. This may mean that Zynga Inc (NASDAQ:ZNGA) may not be able to rely on its fully matured gaming franchises and that it must continue to produce and sell more games in order to continue generating revenues and profits. Video game design and creation costs money, and it may become difficult for Zynga to sustain its current revenue model.

What is the go to strategy?

Zynga Inc (NASDAQ:ZNGA) remains focused on improving its bottom line and is also focused on becoming a separate gaming entity from Facebook Inc (NASDAQ:FB). Facebook Inc (NASDAQ:FB) is no longer compatible with Zynga, and likewise Zynga is no longer compatible with Facebook Inc (NASDAQ:FB). Zynga may have to re-direct its focus from social gaming to hardcore gaming. If that’s the case Zynga has some serious competition against the likes of Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ: ATVI)Zynga may not be able to simply tread into territory like that.

So Zynga is more focused on development and creation of games for mobile devices. Smart phones are the go-to market for literally any struggling software company, but more importantly Mark Pincus believes that social video gaming may be more successful in the mobile space. I certainly agree with that thesis because the hard-core video gamers would much rather play Madden NFL on the PSP or Nintendo’s DS Lite. That being the case, Zynga Inc (NASDAQ:ZNGA) may be able to carve out a successful niche for itself in the Apple and Android app stores.

Competitive environment gets sticky

Facebook Inc (NASDAQ:FB) gets the short end of the stick for now. Because Facebook does rely to a certain extent on Zynga’s success, Zynga’s increasing reliance on mobile video gaming may put a dent in Facebook’s advertising model. Zynga pays a lot of money to Facebook through licensing and advertising deals. On the bright side, the data clearly indicated that Zynga’s advertising revenues have seen continuous improvement (Zynga advertises within its video games). Assuming Zynga has been able to grow advertising revenues from its video games, than it is also fair to assume that Facebook Inc (NASDAQ:FB) has also been able to improve its own average revenue per user (ARPU) statistics. Facebook’s current ARPU is $5.32 per user worldwide.

Facebook may be able to surprise analysts as consumer click through-rates in social networking sites improve. Zynga’s advertising revenues have increased even as average users have declined; this is certainly encouraging for Facebook investors. Because Facebook investors should anticipate increases in the total number of monthly active users along with an increase in the total advertising revenue per user, which should improve Facebook’s total revenue and net income for the quarter. Analysts on a consensus basis anticipate Facebook to grow revenues by 36% year-over-year, with revenues at $1.44 billion for the quarter. It is likely that Facebook Inc (NASDAQ:FB) will be able to meet revenue targets based on the strong advertising figures Zynga Inc (NASDAQ:ZNGA) was able to post for the quarter.

Google Inc (NASDAQ:GOOG) could be the bigger winner in this recent engagement. Zynga is going to shift from computer to mobile. That change in competitive positioning means that Zynga will rely heavily on mobile application in order to generate revenues. According to a recent Reuters’ article,

App Annie, an analytics firm, showed Google’s app store revenues were 38.5 percent of Apple’s, a big gain from a year ago when it was worth just a tenth of Apple’s as its free Android mobile operating system helped it win nearly 70 percent of the global mobile market.

Google Inc (NASDAQ:GOOG)’s app store generated approximately $836 million in revenue in the first quarter. The growth in revenue was primarily driven by the improvement in market share globally. If anything, Zynga will heavily market its product on the Android platform as social gaming is highly compatible with low-end smartphones. Low-end smartphones are likely to run the Android operating system, and due to that, Google Inc (NASDAQ:GOOG) is likely to rake in a substantial amount in licensing, advertising, and profit sharing revenues with Zynga. Zynga will continue to pump out games onto the Facebook Inc (NASDAQ:FB) social network, but it is highly likely that Zynga will refocus all of its product distribution and marketing efforts onto the Google Play platform. Google Inc (NASDAQ:GOOG) offers greater market potential than the Apple App store, which may imply that Google’s revenues from its store could generate substantial net income and revenue growth going forward. Social gaming is better suited for mobile platforms anyway, and it seems that Google Inc (NASDAQ:GOOG)’s market is the best fit for Zynga Inc (NASDAQ:ZNGA)’s current business strategy.

Conclusion

Zynga will rely heavily upon mobile going forward. Zynga really has no choice but to pursue mobile gaming as it is the most compatible with its social gaming approach. That being the case, Zynga will have to invest aggressively to stay on top which is why Zynga gave some fairly weak guidance for the following quarter.

Zynga anticipates a $0.04 loss in the next quarter. Driven by rising costs in development for the mobile platform, it hopes to offset costs with the recent success of its Farmville 2 launch. Investors are taking on a lot of risk when buying the stock at these really low levels. Investors who buy the stock are buying the stock in the hope that the company’s foray into the mobile market is successful. That is yet to be known, but various research firms are anticipating Google to generate a substantial amount of revenue from the Google Inc (NASDAQ:GOOG) Play store, this may be a decent forward indicator for the success of Zynga in mobile apps going forward.

The article Zynga Ditches Facebook and Gets in Bed with Google originally appeared on Fool.com and is written by Alexander Cho.

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