So, who’s going to buy Zynga?

(for the three people who haven’t heard yet, EA just bought PlayFish, for circa $400 million)

Three things I have to say on this:

  1. Mainstream games industry people question it’s value
  2. Yes, of course it was worth it
  3. What Would Zynga Do?

Mainstream games industry people question it’s value

I’ve seen a lot of people from the mainstream industry (i.e. consoles, PC games, handheld etc – eerything EXCEPT iPhone and Facebook) incredulous, unconvinced it was worth it. This was the case even with the rumoured $250 million valuation from a month ago (c.f. Nicholas Lovell’s post on that).

There’s also some discussion over at TheChaosEngine (private forum for professionals in the games industry) on the same topic, with similar levels of scepticism about the value.

The main reference points are traditional games companies and their sale prices. That’s where this goes wrong – and it’s symptomatic of something that hampers the games industry: a lack of understanding of the business side of games. For most people in the industry, this doesn’t matter – they’re making games, not selling or funding them. But for the people managing games companies, far too many of them need to get an MBA and learn the essentials of sales, marketing, revenue, and shareholder-value – and how that applies to their own day-jobs.

Yes, of course it was worth it

Reproducing some of what I’ve already written on TCE, since it’s non-public:

There’s three things driving the valuation of PF:

  1. A solid business, in business-terms (c.f. Nicholas Lovell’s “6 reasons why Playfish is a steal at $400m”)
  2. Quality content-producer, in games / media terms
  3. Consistent success, in comparitive terms

Playfish is in the top 3 companies dominating the Social Games sector. They are the ONLY one of those companies that set out to dominate the SG sector – the other two happened purely by accident. PF was architected to take over this sector, and is succeeding at it.

From a game-design perspective, the entire business model for Zynga and SGN has been “keep bailing!”, and they’ve so far bailed faster than they were sinking (where “bailing” means “using marketing and sales ability to make up for severe product deficiency”). That might sound like I’m being derogatory – but compare it to all the “worthy” games companies who bailed *slower* than they were sinking; at the end of the day, who’s the smart one?

But good sales/marketing strategies are easy to dissect and clone, in a way that good content is not.

Part of the demand for PF is that a lot of people look at it and say: this is SGN/Zynga, except they make good games. Yes, they’re not 1st – but any idiot could take PF’s current position, throw $50m of marketing budget at it, and easily surpass Zynga. They will own this market, sooner or later – PF is fundamentally strong where Z is fundamentally fragile. (although Z’s “fragile” is still an order of magnitude stronger than most traditional games companies).

Just to be clear: I have a lot of respect for Zynga and SGN, they’ve achieved a heck of a lot. But they’re sharks. They’ve always been sharks. Comparing to modern standards of game-design, they’ve never had great product. Instead, they’ve been extremely canny, aggressive, vicious, and cash-driven – and they’ve shown how successful and profitable you can be with those things. If someone had asked “how well can you do with a weak content company if you’re exceptional on the business-side?” then these companies boldly step forth and demonstrate that the answer is: “very well indeed”.

But this is a new, novel market. Maybe there’s nothing special about PlayFish?

Well, apart from thriving in a new market against some of the toughest competition in the world, look at the comparitives. Compare PF with – say – Kongregate. That was founded by the ex TD of Pogo after years at Pogo/EA, and was expected to recreate the success of Pogo and expand on it (hundreds of millions of dollars revenue). They’ve fallen a long, long way short. PF was founded years later and is now doing perhaps 20 times the revenue (just guessing based on Kong’s last funding round and how long ago it was).

PF’s success *looks like* it’s “probably” no accident. IIRC (and I haven’t checked, I’m going from memory here, so I might be very wrong) this is the same management team that built and later floated GluMobile. Putting that into perspective:

  1. these guys have ridden the wave of an emerging market to create on of the big successes
  2. these guys started from nothing and ended up with an IPO
  3. these guys then started all over again, from scratch, in a new market … and succeeded AGAIN.
  4. …and they did it very quickly

What Would Zynga Do?

This, then, is the million-dollar question: who’s going to buy Zynga?

Zynga have followed a strategy of buying-or-burying every small competitor who came along. As I noted above, despite being rich, hugely successful, and growing fast, they have some internal fragility that PF has never had. Where PF *could*, in theory, get more aggressive, Zynga is already barrelling along flat-out on that front. Where PF has a good reptuation they can trade on, Zynga has a poor one that’s not worth much now PF is part of EA.

If it had been a smaller company that bought PF, maybe – maybe – Zynga could have afforded to try a reverse-takeover to hoist themselves up, and hold on to their top spot in Social Games.

But EA/PF is too complementary a pairing; together, they’re too effective for Zynga to get away with that. Zynga *might* have hoped, with a different competitor, that acquisition by EA would lead to a breaking-up of the company’s value. EA has done this many a time to other acquisitions: small companies vanish when eaten by big ones. But as I noted above (and as Nicholas referred to when claiming that PF’s team could “turn around the tanker” that is EA), PF’s team have enough experience and personal wealth that it is very unlikely they’d disappear inside EA. They *might* retire (despite the golden handcuffs, many EA acquisitions have lead to de-facto retirement of their founders) – but PF is so young as a company that I doubt they’re tired of it just yet.

Looking back at Zynga, this seems to be a company that sees itself as the Alpha Male. I can’t believe they’d settle for second place. So, Zynga needs to be bought. And, unlike PF, Zynga may actually benefit from being dominated by their acquirer (try and wipe out some of that bad reputation; perhaps fundamentally alter the internals of the business, make it into a good content-generator? Where PF is adding Zynga-esque marketing and sales ability, could Zynga add PF-esque content-creation/content-quality ability?).

Who?

I’ve no idea :).

But, looking around, Zynga has greatly underperformed on iPhone. There are a lot of media and consumer giants around that expect to have no problems making lots of money on iPhone. Maybe that would make a good deal, someone already exploring, or set to explore, iPhone, who doesn’t need Zynga, but who could expand Zynga on to iPhone in a huge way. That could even let Zynga save some face in the deal (“there’s nothing about our business approach we wanted to change, it’s just that this was an opportunity to dominate TWO platforms instead of ONE”).

3 thoughts on “So, who’s going to buy Zynga?

  1. Daniel James

    Yo! A couple of quibbles;

    – SGN is more or less out of the picture with respect to social games, they pretty much ceded the game to Zynga about a year ago, toddling off to ‘do’ iPhone and now other wacky stuff like connected toys.

    – Playfish’s success is no accident and the team is very talented. They didn’t exactly lead the Glu Mobile IPO — they founded Macrospace (a profitable 30 person European mobile company), which merged with Sorrent (the larger and VC funded party) to form Glu. The Glu IPO was not a win; the stock has gone from ~$12 down to ~$1 and most insiders probably did not have a lot of opportunity to sell before it descended. I’m sure people made money, but it wasn’t a fiesta — you only have to read Glu’s filing statements to see why. I’m sure the cash nature of the EA transaction has something to do with this formative experience!

    – I think it’s a little mean to compare Kongregate with Playfish — Kong plays in the open internets, which as we all know, has been a significantly harder place to acquire customers than Facebook. The true value of what they’ve created remains to be seen, and could last a lot longer than the social gaming ‘bubble’ (equally it might not). PF did a very smart thing, which was to start a new company right at the beginning of a new and very attractive platform. Those of us (and I’m sticking up for Kong because we’ve done worse than them with Whirled) who pursued destination-site strategies over the last two years have been at a disadvantage — one, of course, of our own making. In fact we’re a much better comparison against PF — instead of riding FB’s wave we built our own social network (and a bunch of games on top of it) and struggled to make that succeed. Bzzt.

    – I have trouble seeing how iPhone is comparable or makes a lot of sense as a ‘missing piece’ when you’re talking about a Zynga acquisition. Zynga has a title with more monthly active users than there are (afiak) iPhones. I’d hazard a guess that their revenue numbers are at least an order of magnitude over what any iPhone publisher is making. I’d rather say that iPhone (as a games platform) has underperformed, and Zynga has arguably wisely abandoned it, perhaps temporarily, in favor of focusing on the FB platform which has much better prospects for customer acquisition (I have no idea about monetization comparables).

    Yours, pickily.

    – Daniel

  2. Andrew Crystall

    Zynga’s..er… less than stellar record on corperate governance (I’m being nice here. Really) is going to preclude the major players from touching it with a bargepole, imo…

  3. adam Post author

    @Daniel

    Thanks. This wasn’t a researched article, just quick thoughts … hence the lack of detail and the inaccuracies – thanks a lot for correcting that. Especially for the clearer info on Glu.

    re: Glu IPO success/fail – granted, but think the key issue for me is that so few mainstream games companies ever IPO at all. IMHO there’s a big value-add to having a mgmt team that’s been through that experience – good or bad.

    (incidentally – and again I haven’t gone back to check the details of what happened – how much of Glu’s downfall was exacerbated by the loss of guys to PF? How much by the surge of the iPhone? My vague memory was that they were doing OK until iPhone kicked in)

    re: Kong – I’m a huge fan of Kong too, and an active user (although I stopped having time to play when I hit about level 30). I wasn’t looking for a “fair” comparison, I was looking for an illustrative example.

    In this case, I wanted something to show how PF hasn’t fallen into the chasm between:
    – good team, good idea, good market
    and
    – sustained, fast, revenue-growth

    IMHO, Kong was *superficially* similar, in a market where there are few direct examples to pick from.

Leave a Reply

Your email address will not be published. Required fields are marked *