Until very recently, Zynga was synonymous with stagnation — an ossified fossil, cemented inertly in place and viewed as a relic of a bygone era. The story of Zynga’s initial ascent — how it manufactured growth for its Facebook canvas games through viral messaging — is well known and cited frequently as a case study against dependency on an external platforms: Zynga’s stock debuted at near $10 per share when it IPOd in 2011, rose to more than $14 per share (giving the company a market capitalization of nearly $15BN), and subsequently plunged into the $2 range in 2012, where it remained through the middle of 2017.
Zynga experienced so much structural change during that roughly five year period that it’s easy for any historical assessment of the company to get mired in the details: its acquisition of NaturalMotion, executive turnover, failed launches like Dawn of Titans and Empires & Allies, etc. But those developments are largely irrelevant now: the current incarnation of Zynga, led by former EA executive Frank Gibeau, has executed against an incredible corporate turnaround strategy that should serve as a blueprint for reviving a moribund company in a dynamic, extraordinarily competitive industry. Since Gibeau joined the company in early 2016, Zynga’s stock price has more than tripled, with mobile bookings growing to 96% of total bookings of $387MM in Q4 2019, compared to $139MM in Q1 2016 (the first earnings report at which Frank Gibeau presided).
How did Zynga manage to execute such a successful turnaround? Its general strategy seems to rely on three central tenets:
- Acquire top-line revenue growth by paying premia for proven titles with ample upside: With Gram Games (Merge Dragons!) and Small Giant Games (Empires and Puzzles), Zynga acquired proven properties with upward momentum at premia and funded their user acquisition to deliver immense top-line revenue growth;
- Devolve publishing power to satellite studios: rather than centralizing critical operational functions like user acquisition and live operations, Zynga’s acquired studios manage these capabilities themselves, with minimal distance from the game teams;
- Focus existing publishing capabilities on growing forever franchises and its social casino business: Zynga has consolidated its first-party development into its existing live portfolio and the social casino category, fully exploiting its institutional knowledge and avoiding costly, distracting experimentation outside of the areas in which it has demonstrable competitive advantage.
Much attention has been paid to the fact that Zynga has retrenched around its forever franchises, but the broader context around that decision is important:
- Large organizations are worse at innovating than smaller, more nimble start-ups;
- Mobile gaming is a hits-driven industry;
- Growth through performance user acquisition increasingly relies on deep knowledge of a game’s economy;
- “Platform technology” has mostly been commodified and can’t deliver many operational efficiencies to satellite / acquired studios;
- Hit games on growth trajectories tend to remain on those growth trajectories: when cash is not a constraint, it’s a better strategy to pay a premium for a proven hit game than to buy an unproven game at a discount.
Zynga has oriented its corporate strategy around these five themes to deliver incredible results during its turnaround phase but especially over the past two years, as Gram Games’ Merge Dragons! and Small Giant Games’ Empires & Puzzles have driven consistent Top Grossing results, with Zynga and its satellite studios layering new successful titles into the portfolio and optimizing legacy titles. Zynga now has an incredibly impressive mobile portfolio: consider the Top Grossing charts for Zynga titles for the last 90 days, filtering out all titles without a Top 500 position as of mid-April.
Zynga’s strategy bucks conventional wisdom around growing revenues for a mobile gaming studio, which generally prescribes 1) centralizing shared services (such as UA, analytics, live ops, etc.) into a single infrastructure onto which acquired games can be integrated, 2) building value through M&A by acquiring companies cheaply and unlocking efficiencies through the application of the aforementioned technologies and services (eg. finding a game studio that is underperforming because its user acquisition team and tools are inferior), and 3) expanding first party game production across as many genres as possible. Zynga has reversed its fortunes over the past few years by doing the opposite of each of these things.
Two mistakes that seemingly every major mobile gaming studio has made at some point are believing that 1) all game genres are created equal, and that success in one genre predicts success in another, and 2) their centralized tools and platforms are much more valuable than they actually are and can unlock tremendous value when games from acquired developers are integrated into them.
Diversifying a gaming portfolio is very difficult to do without without any sort of external influence: the amount of genre-specific institutional knowledge required to build and operate a hit game is immense. Companies like Zynga and Playtika are proving that the best way to diversify a portfolio outside of a core competency is through M&A — and to pay a premium for exceptional companies that have already proven traction. This is what Zynga has done over the past few years, and the results are irrefutably astounding.
Disclaimer: I hold Zynga stock