After Layoffs, Zynga Hits Crossroad for Survival

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Zynga CEO Mark Pincus broke the news of massive layoffs at his social gaming company to his staff with a sober email: "Today is a hard day for Zynga and an emotional one for every employee of our company."

He also pointed out that the move to cut 520 jobs at the social gaming company, or 18 percent of its work force, was a dramatic break from its early fast-growth days.

"None of us ever expected to face a day like today, especially when so much of our culture has been about growth. But I think we all know this is necessary to move forward," Pincus said in the email Monday.

But just how will the maker of popular games like "Texas Hold 'Em Poker" and "FarmVille 2" move forward? Shares plummeted 12 percent after the announcement late Monday.

Zynga positioned the layoffs as a crucial step in its transition from making social games for the desktop to creating mobile games.

"The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multiplatform, which is where social games are going to be played," Pincus said.

(Read More: Zynga slashes work force by a fifth, shares dive)

The company said that the cuts would bring between $70 million and $80 million in annualized savings.

Many on Wall Street, however, remain uncertain about Zynga's future.

BMO Capital Markets analyst Edward Williams, for example, wrote in a research note that the magnitude of Zynga's reductions "indicate a faster-than-anticipated deterioration for Web-based social games, and possibly a more challenging transition ahead for the company as it shifts toward a more fragmented mobile gaming platform."

BMO is adjusting its estimates for this year and next year to reflect lower expectations for daily active users of Zynga's games.

Sources close to the company who asked to remain anonymous tell CNBC that before the layoffs, Zynga employees were put in a waiting room nicknamed a "death chamber," and that the "Draw Something 2" team—much of it acquired through the OMGPOP acquisition in March 2012—was let go.

Some senior executives at the New York office, including Farmville's CTO, were given the option to relocate from New York to San Francisco, these sources said. They added that the laid-off employees were given "generous" severance packages, and that their stock has vested.

A Zynga spokesman declined to comment, but directed inquiries to the press release and the email Pincus wrote to employees posted as a blog.

Despite Zynga's struggles, research firm eMarketer reports that the number of people in the U.S. who play games through social media is expected to rise nearly 6 percent this year, to 80.3 million people. That's just under half of U.S. social network users and about a quarter of the U.S. population.

But Pincus is right that casual gaming on mobile devices is growing far faster than desktop games. The number of people who play games on their phones is projected to grow 18.4 percent to 125.9 million this year, that's just over half of U.S. mobile phone users, according to eMarketer.

_ By CNBC's Julia Boorstin. Follow her on Twitter: @JBoorstin