Zynga's weak pivot to mobile, loss of casual gamers turns serious

By Malathi Nayak and Gerry Shih

SAN FRANCISCO, Oct 6 (Reuters) - Zynga Inc'sinexorable decline over the past six months, capped by a sharpreduction in its 2012 outlook on Thursday, has sharpenedinterest in what Chief Executive Mark Pincus will do next.

Wall Street's excitement over a game publisher once countedamong the stars of the new social Internet has cooled since itsDecember initial public offering. On Friday, analysts slashedtheir price targets on a stock that dived as much as 22 percent,to $2.21 - more than three-quarters off its $10 debut.

The fate of the company now rests with Pincus, the46-year-old co-founder who controls a majority voting stake.Analysts say he needs to downsize its current 3,000-strongglobal workforce and come up with a hit that can captivate thegrowing number of players now moving to mobile devices, whereits presence is relatively weak.

Zynga did launch several such games this year, including"The Ville" and "ChefVille," and is working on several more. OnThursday, Pincus emphasized to employees in a company-wide memothat Zynga would be "continuing to invest in its mobile gamesbusiness."

But he warned that the company will make "targeted costreductions," which analysts interpreted to mean layoffs asPincus shifts Zynga away from the "casual" Facebook games, like"FarmVille," that were the company's bread-and-butter for years.

"They have banked on the casual gaming segment, and toreadjust the business to more core gaming, some casual headsprobably have to roll," said P.J. McNealy, CEO of Digital WorldResearch.

The transition will be jarring for a company that movedearly to build a formidable business almost completely on top ofFacebook's burgeoning platform. "FarmVille," "FrontierVille,""Zynga Poker," "Mafia Wars" and "CityVille" took off primarilyas Facebook games on personal computers. They accounted for 83percent of total revenue last year.

Zynga has not been able to reverse the tide of usersabandoning its previously lucrative Web-based games forofferings on smartphones or games from competing publishers.

Monthly-paying players rose to 4.1 million in the secondquarter from 3.5 million. That number would have declined had itnot been for new players attracted to "Draw Something," whichZynga purchased in March. The company said on Thursday it willwrite off about half the game's $183 million price tag.

One saving grace for Pincus may be Zynga's large cashholdings, which amount to roughly $1.6 billion and will staveoff any talk of bankruptcy. And Zynga's revenues, whileshrinking, remain substantial.

"This is an expectation game," McNealy said. "If people arelooking for a possible turnaround in three months it's probablyunlikely. If people are looking at the next 12 to 18 months,then it's possible."


Pincus' attempt to revive his company has been undermined byan accelerating employee exodus.

On Friday, the two creators of "Words with Friends," one ofZynga's most popular mobile games, announced that they haddeparted, following more than a dozen key employees who haveleft in the past six months.

"The departures underscore our skepticism about ZNGA and itsability to address the challenges it faces as it pivots towardsmobile and its in-house gaming platforms," Brian Pitz fromJefferies & Co wrote in a research note on Friday. "Yesterday,CEO Mark Pincus asked employees to not lose sight of the biggerpicture, but this may not be enough."

Besides betting big on mobile, Pincus hopes to capturegrowth in online gambling games, an effort that could take yearsto pay off. It could take 18 to 24 months for U.S. authoritiesto legalize it, McNealy said.

Zynga Poker, where players win virtual currency as opposedto real cash, is the world's largest online poker game. The gameconstituted 18 percent of Zynga's $332.4 million revenue lastquarter, behind "FarmVille," which brought in about 29 percent.

Zynga plans to seek out overseas markets such as the UnitedKingdom and France, where online gambling is partially legal.Pincus told analysts on an earnings call last quarter that thesefirst real-money gaming products would launch in the first halfof 2013.


Some on Wall Street now speculate about the possibletakeover of a company whose stock has fallen more than 80percent from its high earlier this year.

For most of Friday, Zynga traded below the company's bookvalue of $2.30 a share according to Thomson Reuters data - thesum value of its assets including real estate holdings androughly $1.6 billion in cash.

Tom Taulli, an editor at IPOPlaybook.com, said the names ofpotential acquirers being bandied about have included Amazon, Yahoo and Activision , the gamepublisher that has a small presence on Facebook andsmartphones, two platforms where Zynga has invested heavily.

Even at such a discount, analysts warn that Zynga, valued at$1.88 billion, may not be a natural acquisition target forinteractive media companies, given the uncertainty about Zynga'sbusiness and the mixed results of major social gaming dealsgenerally.

Last July, Electronic Arts acquired PopCap Games for$650 million in cash plus stock but recently laid off employeesand shuttered a PopCap studio. And analysts have continued tosecond-guess Walt Disney Co's $763 million deal forPlaydom in 2010.

"Disney and EA have a pretty sour taste in their mouth,"said Richard Greenfield, an analyst at BTIG. "Everyone who hastried to make a purchases in this sector is losing money."

Sterne Agee analyst Arvind Bhatia said most acquirers wouldprobably wait a while longer to see how Zynga fares.

"In a situation where you have fundamental problems and thebusiness is deteriorating, it's going to be tough" to negotiatea sale, Bhatia said. "What's needed is swift action toright-size the company."

(Editing by Prudence Crowther)

((Gerry.Shih@thomsonreuters.com)(+1 415 515 1698))