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“Unleashed” Zynga shows steady progress July 2, 2012

Posted by David Card in Uncategorized.
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The leader in social games hosted a “Zynga Unleashed” event last week where it showed a few new games and sketched in a little more of its platform, mobile and publishing network strategies. Market reaction amounted to a dismal, collective “meh.”

It’s been less than nine months since Zynga started to hint at the strategy that would launch its next stage of growth and reduce some of its dependency on Facebook. Last October Zynga began to talk about its grand vision of “Project Z” and “Zynga Direct,” and, in fact, the company is showing steady progress in implementing that vision. Third-party developers and Zynga competitors would be wise not to discount Zynga’s momentum. Last week, Zynga discussed its:

  • zCloud infrastructure. Zynga has built its own truly scalable infrastructure that it invites third-party game studios to use, both for core technologies and cross-title promotions. Zynga teased the idea of a new API for more backend services to come.
  • “Zynga with Friends” network. The infrastructure will support multiplayer game play and social communications across Facebook, mobile and web-based games. Zynga added three new developer studios for a total of nine on its platform.
  • Mobile distribution. Not only is Zynga becoming a web-based game publisher/distributor, but it aims to do the same on mobile devices. Atari joined four other game companies in signing on.
  • New titles. Zynga expanded its own portfolio of games across a handful of genres. There weren’t any obvious blockbusters, but Zynga showed a teaser trailer for a much-enhanced Farmville 2.

Adding growth opportunities

Together, these initiatives show how Zynga is slowly but surely building out its business and adding growth opportunities. It’s still tightly wedded to Facebook for audience growth and payments infrastructure. But it has started to show traffic growth on Zynga.com. More important, Zynga is trying to ensure that it doesn’t have to count on Facebook as a mobile distribution platform. That’s a good thing, as most observers, including Facebook itself, see mobile as one of the social network’s biggest challenges.

Zynga didn’t re-invent the games business. What it did was build a billion-dollar company off of existing consumer behavior at the expense of portals (MSN and Yahoo in particular) and other game companies. There has been a stable casual games audience – middle aged and female – since the dawn of the consumer web. That same 25 percent of U.S. online adults play social or casual games regularly, according to GigaOM Pro’s Q1 consumer survey. Zynga has mastered the narrow premium piece of that market, and is well-positioned to continue to dominate the virtual goods market GigaOM Pro forecasts to reach $4.3 billion in 2016, and even use it to tap into different “currencies,” like barter and ad-viewing.

Smoothing out impact of hits

Like most entertainment businesses, social games are driven by hits. By becoming a distributor and publisher of games from other studios, Zynga can flesh out its portfolio with potential big hits. It’s nearly impossible to predict blockbusters; disciplined companies manage a portfolio and franchise the winners. Franchise-related merchandise will likely pay off better than TV spinoffs.

Zynga is actually more like a TV network than a TV studio, though the analogy of fine-tuning titles rather than depending on opening weekend blowouts is apt. Like Zynga, the big broadcast networks have “owned and operated” studios and stations, with affiliates to expand distribution. Zynga hasn’t gotten that reciprocal distribution yet. And another thing it hasn’t pulled off – that the networks excel at – is to sell advertising effectively. In fact, Zynga is actually showing on its web games some ads that were sold by Facebook – the first hint of a Facebook ad network everyone has been expecting. Right now, Zynga’s not being aggressive in building out an ad platform (richer formats, sponsorships, targeting), but it could do so, or acquire some key parts. That’s more likely than Zynga getting into gambling, with all its regulatory headaches.

Question of the week

Where are Zynga’s best growth opportunities?
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