Monday, February 25, 2013

Zynga makes the most of fickle markets

A business that thrives on fads patronized by a fickle-minded market won't last long; not unless the business continues to fan the flames of interest to make the fad become a defining character of 21st century online gaming. That's basically what Zynga has done quite successfully since it started out in 2007.

After its first online game FarmVille that ushered in a novel dimension in social networking community, a succession of delightful online games that you can only play on the Facebook platform followed like Citiville, ChefsVille, Texas HoldEm Poker, Farmville2 and Bubble Safari, just to mention a few. From a virtual unknown, Zynga as of 2011 has become a $1.1 Billion online gaming company and growing, with more than 45 million daily active users with 265 million monthly active users - all that in just 4 years. Here are a few business lessons from Zynga that new companies can learn.

Lesson 1: Innovation and business expansion

In an effort to be everything to everyone, the Zynga business model cave in to the gaming needs of just about every market segment that now populates the social networking landscape. In order to keep social gamers happy, it has been the business strategy of the company to bring out ever so new and exciting games while indulging in a shopping spree to buy out small start-ups in online games development. It bought out Challenge Games and XPD games and launched FrontierVille. It expanded into Europe with the purchase of Dextrose Labs to become Zynga Germany, then bought Newtoy, Inc. All these were acquired in 2010 alone and by the end of that year, it had released CitiVille which surpassed Farmville as Zynga's most popular game at that time with more than 16 million active gamers playing it each day.

Lesson 2: But don't spread the business too thinly

While expansion is the next logical move after a successful showing in a market, it pays to be more cautious so that the business expands without spreading its resources too thinly. Sustaining business growth through acquisitions can be beneficial if the acquired companies contributed to the buttomline, However, Zynga has yet to show profitability after all the software developers it had acquired in 2010. Developers under its umbrella are always in constant communication with their players while, while laudable as a strategy to keep customers happy, have also stretched Zynga's resources too thinly in maintaining and enhancing these games. As of 2011, Zynga has about 2450 employees and growing. Sooner or later, at the rate it has lost market capitalization from a $10 per share high in 2011 to just $2 today, it would not be surprising for the company to shed some extra fat to remain agile in the market with more focus on the games that really matter to its markets.

Lesson 3: Focus on the potentially lucrative revenue source

There are clear indications that Zynga is narrowing its focus on high growth industries which includes mobile gaming but with more emphasis on its proven winning titles. The mobile business is a natural extension of the social networking phenomenon that has opened up mobile gaming opportunities for its winning game titles. If Zynga succeeds on growing its current games to the iOS and Android platforms using new revenue earning models, it is poised to see even higher business prospects for 2013 and beyond.

Lesson 4: Always be on the look for potential new business model

Zynga's Poker (formerly Texas HoldEm Poker)may be just another social online game, but it has the potential to create a new business horizon for Zynga. The game currently requires players to buy fake money using real money transacted online to extend the game's thrills. Once the US Congress passes its iGambling bill, it would only take Zynga to start using real money for its Poker game and overnight, the game enters the online gambling business that has been plagued with legal problems for its iGambling business. Zynga already announced in October 2012 a business partnership with an international gambling firm, Bwin Party Digital Entertainment, to start an online real-money gaming service in 2013 with the world's first online FarmVille-based slots game using real money. The alliance promises new and more lucrative revenue streams for Zynga.

Lesson 5: Hitch the business to a rising star

In 2007, Zynga made a fateful business decision to stake its future with then rising star Facebook. Only three years old at the time, Facebook was seeing significant fanbase growth by the millions every month ending up with its first 100 million users by end of 2008. Zynga saw the promise of social networking as Facebook provided the platform and the mechanism to spread the word about its games without incurring the usual advertising dollars. More importantly, there was the potential of ads going viral on a massive scale that could reach millions of potential gamers fast and easy. Zynga entered into a mutually beneficial business relationship with Facebook that enabled the fledgling online gamer to have first line access to technical information that allowed their online games to have the seamless fit with the evolving Facebook platform while giving them exclusive social media distribution. Indeed, if a business can find something like a rising star that can provide a unique competitive edge as what Facebook did to Zynga, such a star can shortcut the road to success with ease.

Lesson 6: Leverage on innovative technology

New technology is not enough; it's how you harness it to create a business advantage that matters. Zynga harnessed the cloud computing technology that was just starting in its early years. No one at Zynga knows beforehand that a new game would be successful, like CitiVille. when it was launched in 2010, so that investing on the server farms to support an optimistic capacity projection could easily go to waste. Knowing such unpredictability, Zynga used Amazon's EC2 cloud computing infrastructure as a rented service, paying only for the capacity used in newly launched games. Once it reached a predictable volume growth, Zynga brought the successful game in-house using its private cloud computing architecture. Had CitiVille flopped, Zynga could easily decommission the rented cloud computing service, and no investment would be wasted.


Once last word in these business lessons from Zynga is the fact is that Zynga faces uncertain future by putting all its eggs into one basket, as it were. In an attempt to correct this, Zynga has started diversifying its social networking presence with Google+ and other social networks. This may be a title late in coming. By the end of March this year, its contract with Facebook ends. Unless Zynga plans to renew this partnership, it could lose 80% of its revenue streams.

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