Lessons to be learned

The biggest social-gaming company Zynga recently reached private capitalization of over $7 billion. To put that into perspective, that’s more than total cost of Electronic Arts, which produces and publishes bestselling games like Mass Effect, The Sims (oh), Dead Space (my favorite). The conventional wisdom should go like “EA is a nice big company, so it’s outright silly that Zynga costs more”. The truth is that EA is not doing well. EA has been losing money for last 3 years for a total of $2.2 billion.

Now I could compare Zynga to other gaming companies, like Activision Blizzard (they are doing very well) or Take Two (they are doing nice too), but that’s boring and isn’t really relevant. EA, Activision and Take Two are publicly traded companies. They have been around for some time (read: they are not growing like crazy). Zynga is assessed by investors by its money making power and most importantly its growth factor. Let’s review these in more details.

1. Zynga money making power

Zynga’s rumored revenue for 2010 is $850m. Let’s divide that by 12 and round up a little, because the revenue was likely to be growing month by month. Zynga has roughly 1500 employees. Their main expense is Facebook’s cut of 30% off revenue. Add infrastructure costs, advertising, and some overhead and we land with this table:

$15m of profit per month is great, but no one would pay $7b for this. So it must be Zynga’s growth that makes it so highly priced.

2. Zynga growth

Here is the dynamic of DAU (Daily Active Users( and MAU (Monthly Active Users) of top social gaming companies on Facebook:

Whenever a number decreased comparing to the previous value, I highlighted it by red. As you see, beginning of 2011 is red for everyone. This means that the number of people playing Zynga games is decreasing on Facebook. And just when I was writing, the latest MAU and DAU numbers were published, showing that Zynga’s MAU on Facebook shrank by roughly 30m during last month. Since Facebook is the biggest network and is responsible for the lion’s share of Zynga revenue, it is safe to assume that Zynga’s revenue is plunging, not growing.

How is that for a hot shot company? The social-gaming industry is over-invested, with too many games fighting for attention of the limited pool of people. The MAU and DAU of all major companies saw their fastest growth in 2009 and in the first half of 2010. These days are long gone. There is still a chance for small companies to make a breakthrough (and get acquired by Zynga). In the next post I will review one small company trying to make it despite bad odds.