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Zynga Inc (ZNGA) Might or Might Not Turn Around, so You Should Consider Alternatives

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When I think of Zynga Inc (NASDAQ:ZNGA), I think of the The Allstate Corporation (NYSE:ALL) slogan, “You’re in good hands.” Mark Pincus (CEO of Zynga) got demoted in favor of a top level entertainment executive from Microsoft. The man that’s going to be replacing Mark Pincus as CEO is Don Mattrick.


Can Zynga be turned around?

This is going to be the toughest challenge for Don Mattrick in his executive career. Let’s start with a basic look at the annual financial statement to get a first-hand look at how bad things are.

Source: Zynga

The company saw exponential growth in revenue between 2008 and 2012. However, the biggest challenge for the company has been finding a break-even point. Currently, the company has lost money in almost every fiscal year with the exception of 2010.

Source: Statista

The company went from reporting exponential growth in sales to now declining sales. The Farmville gaming platform has gone through every stage of the product life-cycle (growth, maturity, and decline). The company’s video games will have gone through the product life cycle in just three years. This isn’t very long for a gaming franchise. For example,  Electronic Arts Inc. (NASDAQ:EA) Madden NFL is on its 25th iteration. The company has been able to milk the franchise since 1988. So if anything, the problem with Zynga Inc (NASDAQ:ZNGA) right now is the lack of staying power for its video games.

How the business may change

Don Mattrick worked as a top executive at both Electronic Arts and Microsoft’s gaming segment. The new CEO has had a track record of creating gaming franchises that have staying power, examples include The Sims, Halo, and Madden NFL. In other words, it is possible that the CEO will focus on higher quality paid for content in the mobile space rather than the freemium model that Zynga currently uses.

Chances are high that the number of games that are currently in development will be reduced. Instead, it is likely that Don Mattrick will focus on creating an exclusive gaming franchise for mobile devices. The game has to be refined, and must be a game that can attract mainstream appeal without being reminiscent of a typical Zynga Inc (NASDAQ:ZNGA) video game.

A reasonable goal would be 5 million downloads or more. I come up with the 5 million figure because Take-Two Interactive Software, Inc. (NASDAQ:TTWO) (video game studio) tends to measure success in a video gaming franchise based on whether or not it can sell 5 million copies.

Gartner projects that smartphone shipments will grow to 1.2 billion in 2016. Gartner also estimates that the tablet market with grow to 375 million shipments by 2016. In total, Zynga’s addressable market is 1.6 billion people by 2016. Assuming that is the case, then it is highly probable that Mattrick’s first job will be to capture the mainstream appeal of hundreds of millions of gamers, and generate a higher amount of revenue per user. Currently, the company generates $0.05 in revenue per user per day.

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