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Why Zynga’s Acquisition of Game Developer OMGPOP Makes Sense

After years of years of struggle, the creator of 'Draw Something' finds itself the subject of a deal worth a reported $200 million


Independent mobile-gaming company OMGPOP surpassed Zynga (NASDAQ:ZNGA) last week to become the leader in daily active users on Facebook. The Pictionary-esque app Draw Something was attracting 13 million Facebook users every day compared to 7.9 million for Zynga’s top offering, Cityville, according to AppData.

Rumors swirled on Monday that Zynga was pursuing purchase of the smaller game house, and on Wednesday Zynga announced that it in fact had struck a deal. Sources told All Things D that the price was $180 million, plus $30 million in employee-retention payments.

Draw Something’s strong Facebook performance belies the fact that the game can’t actually be played through the Facebook platform. It’s a mobile application for Apple (NASDAQ:AAPL) devices and those running Google’s (NASDAQ:GOOG) Android operating system, and it relies their touchscreen interface. The game does require players to login through Facebook Connect, which generates the usage metrics.

When it comes to canvas games that can be played directly through Facebook, Zynga is still tops. But the success of Draw Something is attributed largely to its simplicity. Players are provided a word — usually a pop-culture term — and are then challenged to draw an image that will prompt other players to correctly guess the word. Drawing skill is less important than getting the point across, though the game’s Facebook page displays detailed art submitted by players.

In-game purchases — the beating heart of mobile game monetization — include the ability to purchase more colors for drawing. There’s also a paid version of the app that stocks more features but is less popular than its free counterpart.

A predictable outcome

Zynga has a penchant for acquisitions so the OMGPOP rumors weren’t surprising, but the anticipated price range was higher than might’ve been expected. TechCrunch predicted a deal worth $150 million to $250 million. That’s a hefty payout for Zynga, considering it bought Words with Friends developer Newtoy for less than half the lower figure.

It also could be a risky deal considering that OMGPOP is mostly a one-hit wonder at this point. The company has existed for four years, born under the name iminlikewithyou, and failed to gain a solid hit with releases that included Facebook’s Cupcake Corner. There is the possibility of spinoffs, much in the way Scramble with Friends emerged from Words with Friends, although drawing games do seem less malleable than word games.

Zynga also could have pursued in-house development of a similar drawing game. Several current Zynga titles bear striking similarities to titles from other developers. Games are largely unprotected through U.S. copyrights so there might have been no legal challenges to a Draw Something-inspired game, though that approach can earn a company bad press.

A workable strategy

From a logistics standpoint, it made sense for Zynga to purchase OMGPOP. In-house development could have taken longer than the game’s popularity lasts. Users burned out on one drawing game aren’t likely to jump into another. The acquisition will now allow time for development of spinoff titles.

The game is near the top of the “top paid” and “top free” lists on Apple’s iTunes, and its in-game sales have been booming. Sources told All Things D’s Peter Kafka that OMGPOP has been netting about $250,000 a day after Apple takes its 30% cut.

Zynga has faced turbulence since its IPO offering late last year, but recent decisions have shown a clearer focus emerging. The company is expanding its casino-style games, inspired by the continued popularity of its Poker title, and launched a proprietary game platform. The platform foreshadows a potential break with Facebook in the future and provides a way for the company to host games from third parties such as Konami.

Zynga recently announced plans for a $400 million secondary offering that would extend the lockup period for initial investors in hopes of preventing a stock crash in the summer. Shares are currently trading $13.04, above the IPO price of $10 and in the middle of the 52-week range of $7.97 to $15.91.

Article printed from InvestorPlace Media,

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