Why Zynga's Profits Plummeted
Gamasutra dropped a bombshell report on Monday that Zynga, just ahead of their planned IPO, had reported a 95% drop in their year-over-year profits from $27.2 million to $1.3 million. The social gaming juggernaut continued to lose momentum in all major categories: its total revenues grew only 15% last quarter versus 24% in the previous quarter. Its virtual goods sales and ad revenues were down 4% from the prior quarter, and their total daily active user count across all games also dropped 4% from 62 million to 59 million. Has Zynga lost the interest of its users, or are market trends eroding Zynga’s core revenue streams?
This question prompted lively debate amovsang the tech and gaming communities. GamePro reported that Zynga attributed its decline in profits to some factors that did not necessarily indicate trouble. For one, in 2011 Zynga did not launch a new game before Empires and Allies, which was launched March 31st, so they claim to have not yet fully realized the revenue from that game. Second, they blame higher than normal spending on hiring, acquisitions, and international growth. Third, supporters point to the loss of Zynga’s “free” viral marketing when Facebook enacted new policies to combat spam. And last but not least, there is Facebook’s decision to force all developers to adopt its Facebook Credits payments system and the associated 30% tax.
While all of these things could eat into Zynga’s profits, they don’t explain why their daily active user (DAU) numbers are starting to drop. A former Zynga employee responded to a Hacker News thread about this topic by highlighting the many market trends that are eating away at Zynga’s core business: massively successful Facebook games. The commentator believed that the decline of Facebook’s web traffic was a key component of this trend; however, this decline has since been challenged by multiple ratings agencies. Furthermore, many argue that the users that are leaving Facebook are the least engaged users, while Zynga’s hardcore daily players are certainly some of the most engaged.
The commentator also argues that Zynga’s games are higher quality than ever, and they are in the process of creating titles that appeal to midcore and hardcore audiences. Alongside these efforts, Zynga is going to great lengths to secure partnerships with major brands, including Lady Gaga, American Express, and Capital One. However, even with with all of the work that Zynga is putting into increasing the quality of their user experience, they have still sold less virtual goods and are losing their most valuable players. So what’s the missing piece of the puzzle?
Virtual rewards don’t engage and entice players like they used to.
And why should they? Players are paying real money for something with no actual value, and they can never get that money back. The gimmick has lost its novelty, especially as virtual goods have become a commodity across games of all skill levels and platforms. As games start to merge the virtual and physical worlds and become integrated with every aspect of our lives, why would users still be interested in a virtual sword that is literally worthless?
The future of gaming is in the real world, and the future of play is with real money. Providing a tangible reward for the real time, money, and effort that players put into a game will make games more engaging and fun. Players will find it much more appealing to be able to play for and win real-money that they can cash out, turning their favorite game into a lucrative hobby.