In an attempt to restore the market’s confidence in the company, Zynga Inc (NASDAQ:ZNGA) recently confirmed the layoff of 18% of its workforce, or about 520 employees. The company says that this will result in $70 million to $80 million in annualized pre-tax savings. That’s good news for investors who had witnessed their shares drop 68% from the IPO price level.
Despite those savings, its guidance for second-quarter earnings calls for a loss between $39 million and $28.5 million. Zynga is a video-game creator that launched in 2007 and went public in 2011. If you’ve ever played Words with Friends or Farmville, you’ve used Zynga Inc (NASDAQ:ZNGA)’s products.
These virtual games can be really addictive. People love playing them. In fact, data-tracking website comScore reports more users play Zynga’s mobile games than the next five mobile game developers combined. But Zynga Inc (NASDAQ:ZNGA) has two great challenges. The first challenge is the company’s over-dependecy on Facebook Inc (NASDAQ:FB), the mighty social media platform. The slightest hint that Facebook might begin to develop its own mobile games is enough to send Zynga’s shares out of the window.
And there’s another challenge — you can play for free. You never actually have to spend a penny to play Zynga Inc (NASDAQ:ZNGA)’s games. Only 5% of Zynga users pay to play its games. It has 63 million daily active users but it still can’t turn in a profit. The company generated $1.3 billion in revenue and still hasn’t made a penny of profit. That’s a huge inherent risk with the company’s business model.
What’s working and what isn’t
One can learn a lot by looking at the social media frenzy that surrounded us back in 2011. Zynga wasn’t the only company that filed for an IPO back then. Pandora Media Inc (NYSE:P) is a free Internet radio website that also went public in 2011. Pandora Media Inc (NYSE:P) also shares the same business model challenge with Zynga Inc (NASDAQ:ZNGA). Pandora Media Inc (NYSE:P) lets you design your own radio station based on the music you like. The site has 175 million registered users. About 140 million have accessed it through phones and tablets. According to radio industry service provider Triton Digital, Pandora has a 70% market share of Internet radio.