Would you rather be Zynga or EA?

  By David Darling – Kwalee CEO

The media is awash with negative Zynga stories following the news that the world’s leading social games company lost 40% of its share value and posted a quarterly net loss of $22.8 million. At the end of this article on Eurogamer, a researcher from the Gartner Group – Michael Gartenberg- commented on the future of Zynga’s in-app fortunes, saying: ”At the end of the day, though, virtual goods might not be a viable business strategy. People eventually stop spending money in virtual goods and want to spend that money on real goods.”

There are two things to address here. Firstly, I don’t understand why so many people seem to have such a downer on Zynga. It’s an amazing company that’s managed to work out how to give consumers exactly what they want at price points they are happy to pay (or not): the Holy Grail in social gaming.

Yes it made a loss last quarter, but its turnover climbed 19% to $332 million, its monthly active users increased by 17% to 306 million, its daily active users rose by 23% to 72 million and, most importantly, its monthly unique payers (MUPs) increased 17% to 4.1 million. The company also launched Bubble Safari in the same period, which is now the number one arcade game on Facebook, The Ville, the number two game behind Zynga Poker, and scored a year on year 170% growth in ad revenues.

After 30 years of trading EA’s market cap is $3.6 billion whereas after only 5 years, Zynga’s market cap is $2.2 billion. In addition, we can see that Zynga have had an astonishing 5773% growth in revenue in the last 4 years, while EA’s revenue has shown no growth in the same period.

Zynga vs EA

EA have also experienced a share price crash in recent weeks, losing 40% of their value since the start of 2012 [Source]. Analysts believe this is closely related to the poor performance of Star Wars: The Old Republic, a game which cost EA millions to develop over several years. EA have been losing users of this game since launch, whereas Zynga have continued to gain users in games which were created for a fraction of the cost.

Zynga has become very big, very quickly, which means it has a huge capital base and lots of shareholders. It is also a company that has so far operated solely within the social media space, and that, too, has brought problems as, when it comes to games, Facebook has now peaked and social media use generally is fragmenting.

Zynga needs to rapidly broaden their IP base and monetize that IP over a wider range of platforms. Which is exactly what it is doing and is also exactly why it’s lost money: growth and transition is expensive business. Zynga will not be going out of business any time soon and neither will in-app payments, which brings me on to my second point.

I think Michael Gartenberg is wrong. In-app payments are a win-win for consumers and developers. They allow consumers to become more engaged with games, to try before they buy, to spend as much or as little as they wish. It’s also a great business model for developers because it allows us to have a much broader exposure to consumers, well in excess of what we could ever have achieved with the release of a boxed game through retail.

So I ask again, who would you rather be right now?

Update:

In an interesting twist to this debate, EA have sued Zynga, claiming that The Ville is a rip-off or a clone of The Sims Social. EA have even accused Zynga of headhunting their executives in order to make the cloned game as similar as possible. They’re hoping to set a precedent with this case, stopping Zynga from cloning other studios’ games in the future, implying that the social game maker regularly uses this practice in its development. Zynga replied with an accusation of their own, suggesting that EA actually copied an earlier Zynga title, CityVille, when they made The Sims Social. [source]

Industry analyst Michael Pachter had some interesting comments on this story [source], saying that the case could go on for years, costing both sides a great deal of money with no easy resolution in sight. The timing of the suit is very interesting too. For both companies, particularly EA, it has deflected attention away from their rapidly falling share price and other business issues.

Do you play The Sims Social or The Ville? Who do you think is in the right in this legal battle?

  By David Darling – Kwalee CEO