Can Zynga de-risk?

I may have been negative about Zynga recently – but for good reason. I suggested that the market was beginning to more accurately price in the risk associated with a creative enterprise that was displaying a lack of creativity. In an innovator’s market such as games development, the product pipeline is all-important, and analysts are increasingly sceptical about Zynga’s ability to serve up “blockbusters” in the future.

However, rumours suggest that the developer is trying to mitigate the creative risk to investors by opening up a new revenue stream. This is an exciting prospect for investors, and could bode well for the company. The early rumours on what exactly this new revenue stream will involve aren’t clear. But, taking what information is available, here are two possible decisions the company could make, and a quick thought on their ramifications:

Possibility 1: Zynga vertically-integrates and becomes a publisher for third-party applications (presumably games)

Possibility 2: Zynga incorporates promotions for third-party applications into their product offering (so adverts for other, non-Zynga applications in FarmVille, for example)

Of the two possibilities, the first seems the most strategically commendable, simply because the second possibility would seem to increase, rather than reduce, the creative pressure facing the Zynga product pipeline. The level of pressure the company faces to find a new “hit” title must be a function of their current products’ attrition rates. Simply put, the faster you are likely to lose users, the faster you need to find a winning product to keep them or bring them back. For this reason, offering Zynga players up to competitors through third-party marketing, a move that would be likely to increase attrition rates (assuming the marketing is gaming-specific, and given that Zynga games are not highly differentiated), would increase the risk that the company fails to find sufficient “hits” to maintain/build its user-base. Although the promotions will further monetise Zynga’s substantial network of users, it is unclear what the associated attritional effect might be.

The first possibility, that Zynga becomes a publisher itself and buys up the creative output of other developers, seems more reasonable. This route would not necessarily increase player attrition, and may have a positive impact on lifetime value. It would be interesting to see what games Zynga feel would complement their portfolio, and therefore which developer partnerships they would pursue. Particularly because, in the past (the cynic might argue), Zynga has looked to redevelop concepts directly from other games, re-releasing them themselves, without looking to partner with the responsible developers.

It is strange then, given that the first possible strategy for de-risking is more plausible than the second, that early reports suggest Zynga is taking the “promotion of third-party apps” route.

Through a new publishing program, due to begin in March, other game developers will be able to advertise their wares in Zynga

It seems a strange move, because intuitively, one would expect the incorporation of third-parties into Zynga-players’ networks to do both harm and good – and the levels of good one could reasonably anticipate are not high. Analysts should await more details with interest. Until then, I would be wary.

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