Zynga recently launched Zynga.com, to much fanfare and apparent approval by Wall Street. Shares rose 10% on the announcement, and settled at about that heading into the weekend – a big move considering there was no other news on the company. This is a huge step, and it was inevitable because now-public Zynga needs to increase revenues somehow to drive that share price up. There seem to be three major conclusions people have drawn from Zynga.com regarding Zynga’s ability to generate revenue going forward. Let’s break them down and see what’s likely and unlikely to play out:
Users on Zynga.com will generate more revenue from virtual good sales than users on Facebook
Initially this looks like a giant amount of potential revenue: Facebook’s IPO docs revealed that they get about $400 million from Zynga’s virtual goods sales, for doing pretty much nothing besides making the Credits system available. If Zynga could get all that back by moving off Facebook, it would increase revenue by 25-30%, a huge number. But one point that is being overlooked in casual discussion of this story is Zynga’s continued commitment to Facebook Credits, even off-Facebook. Zynga committed to using Facebook credits in a 5-year deal they made with the social network back in Fall of 2010. No criticism whatsoever of that deal – it likely played a key role in moving Zynga from strongly positioned to dominant market leader on Facebook, but now comes the downside for Zynga. Any work they put into moving users over to Zynga.com is in some regard wasted, because Facebook still gets the same cut of the revenue until 2015. As it pertains to the stock price, that 30% increase in revenue from virtual goods will definitely be significant down the road, but discounting those cash flows to today, and being unsure what percentage of users will be transitioned to Zynga.com anyway, this alone shouldn’t account for much of the stock’s movement. So in summary, while this user migration will help revenue from virtual goods eventually, Zynga won’t really see those benefits for 3.5 years.
Zynga will generate ad revenue from Zynga.com
This one has some merit and is what I would be looking at if I was a stockholder (I’m not as of writing, in case that was unclear). Let’s do some back of the napkin calculations: Facebook sees roughly 89% of it’s revenue from ads, or about $3.2 billion. Yep, that’s a lot of money, but Facebook also has 845 million users, around 500 million who return daily (DAU). That’s roughly $6.5 per year/per DAU, or $3.8 per year/per monthly active user. Zynga, by contrast, has about 59 million DAU. Let’s assume Zynga.com can get 25% of those users (~15 million) to visit their platform each day, and can generate ad revenue at the average of Facebook’s two rates, or $5.15 per user – that would generate about $76 million in revenue over the course of a year for Zynga. That’s probably a solid target for next year for Zynga, but in context it isn’t a lot of money for the company, which raked in revenue of about $300 million last quarter. So while Zynga.com might get to the point where it’s generating $76 million in ad revenue in a year, that amount is only 6% of the company’s annual revenue. Definitely a revenue stream to go after, but probably not something that should drive the stock price up 10%.
Zynga.com will turn Zynga into a game publisher
This one is admittedly tough to gauge, because there are two huge questions which will need to be answered that get in the way of accurately valuing this revenue stream: 1. Will developers trust Zynga? 2. What benefits can Zynga offer a developer that Facebook can’t?
Zynga has been accused of cloning other developer’s games throughout their short history, and developers may consequently be hesitant to support Zynga’s platform, or may not trust Zynga with their user data. On the other hand, a dedicated social network comprised of virtual good purchasers may offer developers some advantages over Facebook’s network. The advantage for Zynga is that they can take some cut of the revenue other developers generate. Sounds nice, but what company could buy in enough to generate significant revenue for Zynga in the first place? It’s unlikely EA will be jumping to join Zynga, as EA has emerged as their primary rival. Of the top 15 games on Facebook, excluding Zynga and EA, Wooga has about 10 million DAU, King.com has about 6 million, Tetris has 3.7 million, and a foreign title (no offense foreign title lovers!) has 2.5 million. That’s a combined ~23 million DAU. If ALL of those games jumped on to Zynga.com and took 25% of their users, that would only be about 4 million users. That’s nice, but Zynga has SIX games with more users than that each, and Zynga would only be taking a small cut of whatever revenue those users generated (plus some ad revenue!). That’s chump change for Zynga. So while publishing other games may be a revenue stream someday down the line, it’s probably not going to be a very large one anytime soon.
In summary, Zynga’s new platform is an important step for social games, and with relatively flat user numbers the company is feeling pressure to develop new revenue streams – but none of the revenue streams alone seem significant, at least until the Facebook deal expires in 2015.
(And on the other side of the gaming planet, Journey comes out in 2 days)
danielmarkmiller.net 