Why Zynga is Shedding Users
Social gaming company Zynga had an outstanding 2011, leading to a well-hyped IPO in December. But Zynga's biggest risk was always an over-reliance on Facebook, with most of its revenue and users coming from the social network.
Context & Ripple Effects
Social gaming has been a Facebook-dependent business since its recession-era breakout — the genre that scored during the downturn grew up entirely inside someone else's walled garden, and no company embodied that more than Zynga, which rode that wave to a well-hyped IPO in December 2011.
The dependence was flagged as Zynga's biggest risk before the offering, and it has since bitten twice: the stock fell after Facebook's own public debut in May 2012 made the two companies' fates legible in market terms, and now confirmed user losses following the 2011 peak are eroding the player base itself. Business Insider had argued back in January that a mobile push was the billion-dollar opportunity that could save the company — a thesis this user exodus makes more urgent.
First-order effects
- Zynga's monthly active users are declining from their 2011 peak just six months after the IPO, shrinking the audience behind most of the company's revenue at precisely the moment public-market investors are scrutinizing growth.
- The post-Facebook-IPO stock slide now has a fundamental explanation attached: investors can see that Zynga's valuation was priced off a user base that was already contracting.
Second-order effects
- Facebook's parallel moves — including testing Facebook Exchange, a real-time bidding ad system that targets cookie-marked visitors on third-party sites — show the platform building revenue streams beyond game payments, reducing its own reliance on the virtual-goods economy that Zynga dominates.
- Zynga is pushed harder toward the mobile diversification analysts identified in January, because every quarter spent dependent on Facebook's shrinking game traffic compounds the valuation problem.
Third-order effects
- If the pattern holds, the social-gaming model of building hit businesses on a single rented platform gives way to multi-platform distribution, with mobile — where no single gatekeeper controls discovery — as the escape route.
- Platform-dependence becomes a standard diligence question for consumer internet IPOs: Zynga's case establishes that a dominant distribution partner is a concentration risk to be priced, not a moat.
The trend: Consumer gaming companies built atop a single social platform are being forced to diversify toward mobile and owned audiences as platform traffic and platform goodwill both prove finite.