3 reasons why comparisons between Zynga and King are flawed


Freemium mobile gaming is a byzantine, poorly-understood vertical within the ecosystem of consumer technology. Few industry analysts or journalists possess the relevant knowledge to assess the health of companies operating under the freemium model  — not because they’re incompetent, but simply because freemium gaming only really became noteworthy from the perspective of large media outlets and investor advocates in the west (which is to say, it started generating large amounts of money) with the rise of Facebook’s gaming platform between 2008 and 2010. Because of this, the public consideration of freemium gaming companies tends to lean on parallels to legacy business models or historical benchmarks.

To complicate the issue of evaluating a freemium company’s health diagnostics, very few freemium gaming companies have experienced long-term success at scale. This makes predicting failure a low-risk proposition whenever a freemium company makes a large bet, grows quickly, or opens a new product track: since most freemium gaming initiatives fail, it logically follows that any given freemium gaming company’s initiative is likely to fail. Comparisons to past mis-steps can be made as quick and easily-digestible summaries of a freemium company’s proposed plans.

For these reasons, comparisons between King, the developer behind the global gaming phenomenon Candy Crush Saga that recently filed an S-1 to go public, and Zynga, another gaming company that launched an IPO in December 2011, are currently being made because both companies develop freemium games. And since Zynga is currently trading at around 40% of the debut price of its public shares, the temptation to predict a similar fate for King is understandably strong – but flawed.

To highlight just how misunderstood the freemium mobile gaming industry is, consider that, for the last few months, there seemed to be no consensus in the mainstream technology media that King was even pursuing an IPO.

From the ground, this uncertainty was baffling; King’s most popular title, Candy Crush Saga, has remained comfortably entrenched at the head of Apple’s top grossing charts for months, likely delivering millions of dollars in gross revenue per day to the company.

And in mid-May, King’s notoriously secretive and limelight averse CEO, Riccardo Zacconi, made a rare public revelation of operational data points that was obviously intended to shore up interest in a public listing. To those familiar with King as a company, this was interpreted as a concrete admission than an IPO was imminent: King’s CEO generally eschews public speaking engagements, interviews with journalists, and public disclosures of proprietary data. But to outsiders, King’s very public reveal was reported upon as a mere PR stunt.

While it’s true that Zynga’s IPO poisoned the well for prospective social gaming public offerings – and equally true that large institutional investors, to whom King’s banks will begin making overtures in short order, cannot possibly approach the analysis of every potential investment with the trained eye of an industry insider – comparisons between the two companies are invalid, for three reasons.

1) King’s management team and ownership structure is completely different from Zynga’s.

In the lead-up to Zynga’s IPO, the company’s then-CEO, Mark Pincus, held conspicuous ubiquity in technology press – conspicuous because profiles of the veteran executive were almost universally unfavorable, highlighting his aggressive management style and willingness to engage in less than savory tactics in the pursuit of revenue.

Pincus had the freedom to maintain such a high profile because the lines between Zynga and its CEO were blurred: at the time of its IPO, founder and then-CEO Mark Pincus owned 18.1% of the company, far more than any other individual employee (and about 50% more than the stake held by Zynga’s next-largest shareholder, Kleiner Perkins).

While little is known about King’s ownership structure (given that King filed a “confidential” S-1, as allowed by the JOBS act), the company was founded in 2003 (as Midasplayer International Holding Co.) by six former colleagues from a company called Spray that fell victim to the burst of the internet bubble in the early noughts. Apax Partners and Index Ventures invested $50MM into the company in 2005 to fund development of a web-based “skill game” platform.

That massive round of funding (and the investments that preceded it) as well as the size of the founding team likely means that King CEO Riccardo Zacconi’s ownership stake is far smaller than Pincus’ was at the time of Zynga’s IPO. With a more distributed locus of managerial power, King has built a more conservative and calculated business than Zynga was in December 2011.

Zynga’s strategic capriciousness surely contributed to the significant decline in the company’s enterprise value since it went public: as its competitive advantage on Facebook dwindled, the company has endlessly explored faddish rabbit holes without seemingly committing to any on a long-term basis. Such fickleness is only possible when a company is helmed by a messianic leader with unrivaled influence, which King does not appear to be.

2) King and Zynga employ critically opposing growth tactics.

Until recently, but especially at around the time of its IPO, Zynga’s operational strategy involved rapid headcount growth, often through acquisitions. Prior to December 2011, Zynga acquired the following companies:

  • YoVille (2008, coincided with $29 series B investment)
  • MyMiniLife (2009)
  • Serious Business (2010)
  • XPD Media (2010, established Zynga’s presence in China)
  • Challenge Games (2010, established Zynga’s presence in Austin. Austin office later shuttered)
  • Conduit Labs (2010, established Zynga’s presence in Boston. Boston office later shuttered)
  • Dextrose (2010, German-based HTML5 game enginge developer. Established Zynga’s presence in Europe. German office later shuttered)
  • Bonfire Labs (2010, established Zynga’s presence in Dallas. Dallas office later shuttered)
  • NewToy (2010, NewToy was the developer behind Words with Friends. Zynga paid $53MM for NewToy, which was based in McKinney, Texas and folded into the Dallas studio through layoffs. The Dallas studio was later shuttered)
  • Flock (2011, Flock was a “social web browser”)
  • Area/Code (2011, established Zynga’s presence in New York. Multiple New York were offices later consolidated through layoffs after Zynga’s acquisition of OMGPOP and then closed altogether, although a small advertising and sales office remains open in New York)
  • Floodgate Entertainment (2011, folded into Zynga’s Boston office, which was later shuttered)
  • JamLegend (2011, JamLegend made a free-to-play, web-based music game and was folded into Zynga’s San Francisco office)
  • Wonderland Software (2011, established Zynga’s presence in the UK. UK office later shuttered)
  • DNA Games (2011)
  • Sapus Media (2011, the two-man company that developed cocos2d, a 2d mobile game engine)
  • Five Mobile (2011, established Zynga’s presence in Canada)
  • Astro Ape Studios (2011, folded into New York office, which was later shuttered)
  • HipLogic (2011, HipLogic was an Android development studio)

Many of the studios acquired during Zynga’s three-year acquisition spree were later shuttered – mostly in Zynga’s recent culling of 18% of its workforce.

King, on the other hand, has only publicly announced one acquisition in its 10 year history: that of Fabrication Games, which was a Stockholm, Sweden-based mobile games developer with just 12 employees. As of June 2013, King employed a mere 400 people across offices in London, Stockholm, Malmö, Barcelona, Bucharest, and Tokyo (notably, not San Francisco).

3) King’s mobile launch pipeline is bolstered by a massive portfolio of existing web titles.

King’s development approach  – which involves vetting new titles, developed by 3-person teams, through the 10 million users of its King.com platform before launching on mobile – allows the company to maintain a portfolio of properties without investing heavily in marketing when testing the viability of new games.

Additionally, without developing new IP, King could likely fill its mobile release schedule for at least the next year or two from the huge bank of approximately 150 games that are already operational on its web platform. This represents a substantial distinction between December 2011 Zynga and King: Zynga was forced to acquire teams and IP (like Zynga’s acquisition in March 2012 of OMGPOP, the developer behind the, at the time, fast-growing Draw Something) to keep releases regular, while King can select the best-performing titles from its existing portfolio to port to mobile platforms.

This presents another important difference between the two companies: rather than operating a portfolio of titles across multiple platforms, Zynga commits the bulk of its development resources to a single platform at a time. Much has been written about Zynga’s dependence on Facebook and its resultant late shift to mobile, but even acknowledging the company’s recent recognition of the primacy of mobile, it can be said that Zynga appears to still be too narrowly focused on a single platform (iOS). Zynga has 60 apps in the App Store compared to its 26 in Google Play.

While Android doesn’t yet match the monetizaton of iOS, it is the key entry point into Asian markets, which Zynga doesn’t appear to courting. Compare this to King, which launched Candy Crush Saga on Android earlier this year, announced a partnership deal with KakaoTalk in South Korea earlier this month, and has begun announcing new mobile titles for multi-platform launch (as opposed to iOS exclusives), and King clearly is more committed to diversifying its user base in terms of both geography and platform adoption than Zynga.

This diversification is a matter of strategic risk distribution: rather than bet on hits (as Zynga did with its $180MM acquisition in 2012 of OMGPOP), King manages a portfolio of titles, across an array of platforms, to diversify its revenue streams. And while it’s probably true that Candy Crush Saga will represent the vast majority of King’s 2013 revenue, the company was profitable before that game’s release.

The fundamental differences between King’s and Zynga’s profiles don’t necessarily dictate that King’s fate as a public company won’t mirror that of Zynga’s; King’s reported $5BN IPO valuation likely requires the permanent presence within its product portfolio of at least one hit within the realm of Candy Crush Saga’s success, which is impossible to predict.

A more relevant comparison to King than Zynga is GungHo, which also operates a massively successful freemium mobile game, Puzzle & Dragons, and which has experienced incredible share price volatility as that game’s growth has slowed.

King’s business model, ownership structure, and future product roadmap will be subject to considerable scrutiny over the next few months. Comparisons to Zynga are merely a distraction; December 2011 Zynga and King look nothing like each other, and Zynga’s post-IPO performance has little in common with a potential publicly-listed King.