Behind Mark Pincus's Bid to Save Zynga

Mr. Gordon said Zynga had failed to prioritize mobile development and found that its online games didn’t easily translate to smartphones’ smaller screens. “Mobile turned out to be more different than anyone expected, in terms of monetization and also user experience,” he said.

Zynga has done pretty well with mobile, all things considered. They were just very late to the game. I think with these latest moves Mark Pincus is starting to right the ship correctly though.

Glu Mobile and other app developers betting on iPhone 5 gamers to score big

Glu, and lots of other app developers.

I’ve written previously that we can expect app developers to quickly adapt to the iPhone 5. The game developers that will win on iOS in Q3 and Q4 will be the ones like Glu that can take advantage of the higher CPU and graphics for better gameplay.

Facebook Stock Price Target Cuts

Shares of Facebook (FB) are coming under pressure … as the stock receives a raft of cuts in price target, with BMO Capital, Stifel Nicolaus, and Merrill Lynch all offering targets in a range of $23 to as low as $15.

Merrill Lynch’s Justin Post, cutting his target to $23 from $35, writes “Facebook has multiple lock-up expirations over the next year (see Table 1) and recent selling activity on the August lock-up suggests to us the risk of future selling pressure. The biggest lock up date is 11/14 (40% of shares eligible for sale), and we wouldn’t expect stock to see buying momentum until December.”

As I was saying…

Again, while I do think Facebook will be a good stock in the long run (and Zynga for that matter — remember don’t count out the grasshopper), right now it is just very painful. The short interest and so many shares flooding the market means their share prices will stay down. As Post says above, you’re better off waiting for better prices until at least December. If not next summer.

Don’t Count Out The Grasshopper

Over the weekend Adam Rifkin had an interesting post on Facebook and Zynga, where he compared them to the characters in Aesop’s fable of The Ant and the Grasshopper.

Rifkin points out that Facebook right now is similar to the Ant — in it for the long haul, cautiously spending, and storing their cash hoard for the future when times may not be so good. On the other hand, Zynga is the Grasshopper — living in the now, enjoying the times, spending lots on acquisitions, and cashing out investors wherever possible.

While good to think through Adam’s points, I do think this is being a bit too simplistic. Not to say that Zynga hasn’t made mistakes. They certainly have. Pincus’ own sale in the secondary offering being the top one. (Although I’d argue since he some much personal wealth tied up, it would have been irrational for him not to. Still, investors don’t like to see it.) Their acquisition of OMGPOP is also questionable. Time will tell if that studio comes out with more hits.

But I know from firsthand experience at a Mark Pincus interview that Pincus does have the long-term view. He wants Zynga to become an “Internet Treasure” and I think they are well on their way to becoming that.

Here are a few things that the Grasshopper has going for it:

Delivering Hits — While gaming is a hits based business, Zynga seems to have found the formula to deliver on those hits fairly routinely. They have huge network effects with the “With Friends” franchise and other games from which they can drive installs for their newer games. So Zynga consistently gets new games into the top 10 with relative ease and not too much marketing spend.

Crossing Generational Gaps — Zynga has also done a better job at crossing generational gaps than lots of companies (e.g. think playing Matching with Friends with your Mom). I think there will eventually be huge value in that.

Online Gambling Prospects — Once online gambling becomes legal (which it eventually will because governments are losing too much money) Zynga will have a huge cash cow in the form of Zynga Poker and Zynga Slots.

Social gaming is going to be around a long time. As much as people argue about Zynga games being a waste of time (“shouldn’t we be learning to code or reading instead?”), the fact is people love playing games. In 10, 50 and 100 years, people will still enjoy playing games with their friends. I’m not sure about 50 or 100 years, but right now Zynga is in a good position to lead the social gaming charge for at least the foreseeable future.

All that is to say, don’t count out the Grasshopper. I think he still has a few things going for him.

Facebook's 2nd Quarter Earnings

Today Facebook reported its second quarter financial results, including revenues of $1.18 billion, and earnings per share of $0.12. Analysts had expected revenues of $1.15 billion, and non-GAAP earnings per share of $0.12. Ad revenue was expected to be $921 million. For the quarter, the company reported ad revenue of $922 million, beating that expectation by a hair.

All in all, matched expectations but not a blow out. The Street doesn’t like it either, Facebook’s stock is down 8% in after hours. Although not as bad as Zynga’s results yesterday (down 40%).

But right now, both of these stocks seem very painful to own. The short interest on them is so high that the fluctuations on them are wild each way.

I do think that both of these companies will be around for a long time. The goal, as Mark Pincus said in his PandoMonthly talk, is to become an Internet treasure (defined by lasting decades) and I think both of these companies are well on their way to becoming that. But right now, both of these stocks seem very painful to own. The short interest on them is so high that the fluctuations on them are wild each way.

p.s. my favorite stat in the numbers: “Facebook’s mobile users now stand at 543 million, up 67 percent from last year.” Just incredible.

Mark Pincus and the role of Game Mechanics in Startups

I was talking with a friend over the weekend about Zynga’s filing for IPO. We were discussing Zynga’s impressive business model but the conversation quickly shifted to Mark Pincus and the impact that he has had on the startup world. Pincus is an idol to many startup entrepreneurs and for good reason. He has likely been the single biggest source of inspiration behind the role of game mechanics in software.

Game mechanics in startups, also known as gamification, is the notion that game elements such as points or levels can be used in software to increase engagement and elicit a desired response from a user. These game elements make applications much more engaging and addicting. (The best recent example I can think of is Turntable.fm’s successful social engagement loop.) Every entrepreneur should think long and hard about game mechanics and feedback loops if they want to make software that people keep coming back to over and over again.

Here are three must-reads for entrepreneurs wanting to learn more about the role of game mechanics in startups: 

So feedback loops work. Why? Why does putting our own data in front of us somehow compel us to act? … Feedback loops are how we learn, whether we call it trial and error or course correction. In so many areas of life, we succeed when we have some sense of where we stand and some evaluation of our progress. Indeed, we tend to crave this sort of information; it’s something we viscerally want to know, good or bad. As Stanford’s Bandura put it, “People are proactive, aspiring organisms.” Feedback taps into those aspirations.

  • And last but not least, Stanford Entrepreneurship Corner’s video from 2009 with both Mark Pincus and Bing Gordon. It’s an oldie but is still one of the most insightful lectures I have seen.

Zynga’s IPO Filing: Analyzing the S-1

Zynga_ipo

In the year of Internet IPOs, social gaming juggernaut Zynga finally filed for its IPO today. So we finally get to get a good look at its financials. And they are strong … to quite strong. 

Here’s a quick snapshot:

  • Total 2010 Revenues: $597mm
  • First Quarter 2011 Revenues: $235mm 
  • Cash and Cash Equivalents: $996mm
  • Operating cash flow: $103mm
Zynga_ipo_financials

Revenues have grown at an incredible pace, up 392% last year alone. Nearly 95% of the company’s revenue comes from selling virtual goods, which has increased 127% between Q1 2010 and Q1 2011. The profit margins on these virtual goods is good at 28% but not as high as some were forcasting (~40-50%). Turns out that there is still a lot of R&D, sales and overhead costs that go into making highly addicting, successful games. 

All this adds up to good things for the most important numbers for investors, profits: 

  • Total 2010 Net Income: $90mm
  • First Quarter 2011 Net Income: $12mm

They also have a TON of cash stockpiled up, to the tune of almost $1 billion. As Dustin Curtis noted, if Zynga’s revenue dropped to zero right now and their costs remained constant, the company would not go bankrupt until June, 2012. In short, they have enough cash on hand that they don’t really need to go public right now. I think they are absolutely right to take advantage of the hot IPO market though. 

Certainly there are risks. Zynga is quick to acknowledge the importance of Facebook to its business model, saying that it generates “substantially all of our revenue and players through the Facebook platform.” Indeed, Facebook is mentioned over 204 times through Zynga’s S-1. 

Here are some other numbers that stood out to me:

  • 62 million - Daily Active Users
  • 236 million - Monthly Active Users
  • 38,000 - virtual item are created every second
  • 2 billion - minutes a day spent on Zynga games

My favorite part of the S-1 though was when Zynga founder and CEO Mark Pincus leads the prospectus off with a personal letter, which I think is a great touch:

At Zynga, we feel a personal connection to our games through our friends and family. I love that my brother in-law, who has five kids and no free time, religiously plays our game Words with Friends…. My kids decided a few months ago that peek-a-boo was their favorite game. While it’s unlikely we can improve upon this classic, I look forward to playing Zynga games with them very soon. When they enter high school there’s no doubt that they’ll search on Google, they’ll share with their friends on Facebook and they’ll probably do a lot of shopping on Amazon. And I’m planning for Zynga to be there when they want to play.

via sec.gov

By the way, have I mentioned that I really love S-1s? You can talk all you want, but the GAAP numbers don’t lie. Everything is laid out for all to see. Know of any other interesting analyses of their S-1? Feel free to email any I might be missing. Just shoot me a note or comment below.

Also: The Groupon, Angie’s List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard