Strong words with friends

The gaming community find Zynga outrageous. And that outrage is having a real effect on Zynga’s market value – even though you might not realise it.

We’ve all read plenty recently about how Zynga have been copying long-lived, well-loved gaming concepts, and translating them (imperfectly) into social gaming experiences. This has outraged gamers, who see this as bare-faced plagiarism.

Zynga’s “Words with Friends” take on Scrabble has been widely discussed (I don’t see any reason in going further into that here – the Zynga title is clearly a redeployment of the same concepts/game mechanics, with little attempt made at disguising that fact), and this is certainly not the only instance of their appropriation of another developer’s creativity. Although the “rise above it” approach has been taken by some parties who are likely to make significant material losses as a result of weak intellectual property protection, the “in the know” community of gamers has sounded out at what has happened (and may well continue to happen) as Zynga release social clones of popular titles.

The gaming community’s irritation hinges on two associated, but distinct, questions that they want to see answered:

Question one: How is it possible that a company can re-sell another company’s game without facing copyright litigation?

Question two: How have customers given them so much money to do it?

I am not going to look at answers to either question now. The first question hinges on difficult-to-justify legal arguments from those companies Zynga wrongs. The second hinges on consumer knowledge and Zynga relationships with established networks (predominantly Facebook). Neither question is likely to yield answers that would please frustrated gamers.

However, the sentiment behind gamers’ outrage (the sense of outrage at what is plagiarism) is having a financial impact on Zynga and will affect the stock’s price in the future. Analysts have picked up on the vein of frustration at Zynga’s lack of innovation, and have interpreted it in a way that has materially affect Zynga’s market value.

The reaction to Zynga’s first earnings report after their IPO was a good indication of The Street’s scepticism about the company’s ability to create lasting value. The earnings report showed a loss of $435m, which casual observers might view as the reason for the stock sell-off which ensued on Wednesday. But the report also highlighted an existing $510m expense for reimbursement of employees with stock. This expense is normal in the context of the IPO, and ignoring its  effect, and factoring in serious “first mover” spending on growth (substantial hiring and spending on zCloud servers), the earnings looked very healthy indeed. So why the cough in price (from which the stock has not recovered)?

Substantial price drop after earnings are announced; very little recovery following Goldman presentation

Essentially, analysts are pricing two causes for concern into the company’s stock:

The first is Zynga’s reported “over-reliance” on Facebook. And while it is important to recognise that Facebook-related revenues constitute Zynga’s primary income, this seems low-risk. The future Facebook IPO aside (it is unclear at the moment exactly how this will affect Zynga’s core business), there is little reason to expect a huge amount of disruption to this revenue stream.

The second is Zynga’s requirement for future “hit” games. The next FarmVille. The next Words with Friends. The next… well – what? Analysts are increasingly aware that to justify the big investments Zynga is making on software, servers and staff, the creative concepts that draw players in and convince them to spend dollars have to be generated. And this is where Wall Street analysts have stopped believing in the Zynga story.

And the gaming community has a part to play here – in making it clear to investors that the Zynga business model is creatively bankrupt. While gamers may feel that they are taking a moral stand against a plagiarist, they are actually guiding investors away from a company which is unlikely to successfully build on an already suspicious creative portfolio.

Gamers in their ire are showing The Street that however healthy the earnings might seem, a bet on Zynga creatives is not a safe one.

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One comment

  1. Pingback: Can Zynga de-risk? « Games R Srs Bsns

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