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The Silver Lining in Zynga's Decline


By many measures Zynga’s downward spin continues apace. On Thursday the company reported that the number of people who play its games each month had dropped by more than half over the past year, and the number of people who pay for those games had fallen even faster. It also announced it would lay off 15 percent of its workforce. Yet investors found something to like. In large part this stemmed from the company’s acquisition of NaturalMotion, a maker of several popular smartphone games—a sign that Zynga’s new chief executive, Don Mattrick, is preparing a serious push into mobile gaming.

Zynga (ZNGA) never quite figured out smartphones, and that has contributed in no small part to its decline. NaturalMotion has proven adept on mobile; the company has made three of the current 100 top-grossing iOS games in the U.S., as opposed to just one for Zynga. NaturalMotion has done so with about 260 employees, fewer than the 314 Zynga says it is laying off.

NaturalMotion provides a model for Zynga to tailor its game development, according to Giordano Contestabile, an investor in independent game developers. Most mobile gaming companies come up with many ideas, letting most of them fall to the wayside in early stages. Zynga hasn’t been so agile. “Pretty much everyone that’s succeeding in mobile works with 10 to 30-[person] teams,” Contestabile said in an e-mail. “A lot of Zynga teams are still in the 100-plus range, which was OK for Facebook (FB), but doesn’t cut it on mobile.”

In part, investors have been looking for any sign that Zynga will emerge from its current funk. The number of people who pay monthly for its games dropped to 1.3 million, down from 1.6 million last quarter. “There’s only so long you can lose 300,000 users per quarter; that gives you a one-year runway,” says Anthony Wible, an analyst at Janney Montgomery Scott. “What they did yesterday is buy themselves time.” On Friday, Wible upgraded his rating on Zynga from “sell” to “neutral.”

NaturalMotion’s technical expertise in mobile should be able to help Zynga upgrade its own games as it searches for new titles that can gain traction, Wible says. The risk is that NaturalMotion won’t ever find a smartphone game as popular as Clumsy Ninja or CSR Racing. Never is the adage about past performance and future results as true as it is in smartphone games.

Brustein is a writer for Businessweek.com in New York.

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