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Is It Game Over for Zynga?


November 25 2012

If you follow trends in social networking you know that all is not well at Zynga, the world's leading social games developer. The company is the force behind a long list of Facebook games, including CityVille and FarmVille, and it went public in December of 2011. The stock has since lost over 70 percent of its value, layoffs and office closures abound, and senior executives have been leaving in droves.

Zynga's success story could be described as a game development fairy tale with sinister twist. It was just over 5 years ago that they launched their first game, Zynga Poker (formerly Texas Hold'Em Poker). By April 2009 they were the top app developer on Facebook with an audience of 40 million monthly active users. To say that they promoted their game ruthlessly in the early years is an understatement. There was little to stop developers from exploiting the messaging mechanics on Facebook in those days, so games quickly began incentivizing players to send invitations to their friends. Game-related spam subsequently spread across the network, and Facebook finally had to put new rules in place to get it under control.

Acquiring other developers has also been a large part of Zynga's strategy. The purchase of YoVille led to the creation of FarmVille, which was the first game on Facebook to reach 10 million daily users. XPD Media, Challenge Games, Conduit Labs, Bonfire Studios, and many others have been acquired since.

It has been a lucrative formula, and Zynga is still on track to earn around $150 million in 2012. The company has recently partnered with bwin.party to offer real-money gambling games in the U.K., which could be very profitable. It's becoming clear that they can't just sit back and rely on one-time cash-cows FarmVille and CityVille, which are fading fast. Nor did they have much luck with The Ville, arguably a clone of The Sims Social from EA.

Zynga's fate is closely tied to the fate of social games in general, and I wouldn't call them a sure bet. In the incredibly vast world of video games, social games don't rate very highly. You won't see college kids standing in line all night and paying $60 to play the latest iteration of ChefVille. In fact, the entire genre is largely scorned by more serious video game hobbyists (who are, admittedly, not Zynga's target audience).

The sad truth is that 85 percent of people that try a social game do not return after the first day. And, of those that stay longer, only a small fraction spend money on the game. The statistics are open to interpretation, but they raise serious questions about the long term viability of social games and the underlying business model. The truth is, a lot of titles in this space are very little like games and more like carefully engineered marketing schemes derived from exhaustive studies of user metrics. As time goes on, these mechanics become transparent and players start to feel like they're the ones getting played.

In my estimation social gaming will have to improve dramatically to continue to grow. Zynga has the capital, and possibly the talent, to do that, but there are significant risks involved. Eventually they're going to have to develop a game that appeals to people who know something about games, and they seem to be aware of that as they've already begun to expand their "mid-core" offerings. Essentially, they will have to go from being a marketing company to being a gaming company and start making games that they themselves want to play. While it may sound simple, it's a major shift from the approach that brought them this far.

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