Zynga’s Job Cuts Another Sobering Dose of Reality

by Tom Taulli | June 4, 2013 11:49 am

“None of us ever expected to face a day like today, especially when so much of our culture has been about growth.”

The preceding was part of a letter written yesterday[1] by Zynga (ZNGA[2]) founder and CEO Mark Pincus to the company’s employees, informing them that he’d be slashing Zynga’s headcount by 520 people, or 18%.

The move is meant to jump-start Zynga, whose shareholders have faced many terrible days. After the stock’s move from $10 to $14 within the first few months of public trading, shares have traded down to a lowly $3.

The latest cuts also will involve the shuttering of the offices in New York, Los Angeles and Dallas, and actually mark Pincus’ second round of layoffs. The first — which came in the fall — was a mere 5%, but did include the closure of the Boston office.

Pincus is doing the right (albeit painful) thing, as the cost-cutting is expected to result in annual savings of $70 million to $80 million. However, it still won’t deal with the company’s biggest problem: a lack of game magic.

Zynga has seemingly lost the ability to publish hits, and its mobile strategy has been a disaster — something evident in Pincus’ blog post. He writes:

“The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played.”

He could point to only two “successes”: the FarmVille franchise and Running With Friends. But as he himself mentioned, Running With Friends might be a quality game, but it only has 22,700 players, which is pretty meager.

The only new content that has gotten traction is The County Fair — a weekly event for Zynga’s FarmVille 2. The County Fair, which started at the end of April, allows users to show off their progress and possibly win awards. Last month, it drew a whopping 39 million players.

The games business is tough, and mobile games appear to be even tougher. A title needs to be highly engaging to keep the attention of players, who tend to be more fickle on their phones than when on the desktop. It’s just the nature of the mobile experience, where a user is often interrupted.

A variety of other companies have been finding lots of success with mobile games, like Supercell and King. And the top-grossing apps on Apple‘s (AAPL[3]) App Store and Google‘s (GOOG[4]) Play are games, proving that users are willing to pay for mobile gaming … as long as the content is good enough.

Wall Street seems unwilling to wait for Zynga anymore — the company has shown little evidence that it has a handle on mobile games, or that it will figure it out soon.

The big focus is on the potential for real-money, online gambling. Zynga has a big advantage with its widely popular Zynga Poker game, and the company also has been experimenting in the European market, where online gambling is legal. But don’t expect to see online gambling in the U.S. soon; it could easily be a year or longer before the practice gains all the necessary legal clearance.

So, unless Zynga can crank out a hit or two on mobile, the stock price likely will continue stagnating.

Tom Taulli runs the InvestorPlace blog IPO Playbook[5]. He is also the author of High-Profit IPO Strategies[6]All About Commodities[7] and All About Short Selling[8]. Follow him on Twitter at @ttaulli[9]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. letter written yesterday: http://blogs.wsj.com/moneybeat/2013/06/03/zynga-ceos-letter-to-employees-we-all-know-this-is-necessary-to-move-forward/
  2. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  5. IPO Playbook: http://investorplace.com/ipo-playbook/
  6. High-Profit IPO Strategies: http://goo.gl/TXQsz
  7. All About Commodities: http://goo.gl/FfP8R
  8. All About Short Selling: http://goo.gl/t5Jzb
  9. @ttaulli: https://twitter.com/ttaulli

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