What is the problem with Zynga?
Suppose you lived in the city, in an apartment building, and downstairs, a guy ran a sidewalk cafe. It is a very popular cafe, and people stop by all the time to sit and chat, read the paper, and gossip. The guy running the cafe is a bit of a jerk, sort of angry all the time, because the cafe is losing money. He can't figure out what people want to buy at the cafe, and while the place is always crowded, no one is buying much - as he doesn't have much for sale, at least not what people want to buy.
He put up ads on the walls in the cafe, but that doesn't generate a lot of revenue, and most of the ads are for weight-loss plans or insurance come-ons or home refinancing and other crap. The customers laugh at them - and him. He was hoping the local car dealer would advertise there, but since the other ads are for crap, no legitimate business wants to touch it. And besides, how much is an ad on a wall of a cafe worth? Not much!
Anyway, you develop this neat board game. It is kind of fun, sort of, and people like to play it. You go downstairs to the cafe and play it on a table, and before long, people are asking if they can buy a copy of it, and you start selling them at the cafe. Pretty soon, half the people in the cafe are playing your board game, and demanding different games. Unfortunately, you have no further ideas, so you just offer the same game with different colored playing pieces and boards in different shapes. People don't seem to notice, at least at first.
But the owner of the cafe notices. At first, he is happy that even more people are stopping at his cafe and staying there even longer - hours at a time! Problem is, they still aren't buying anything and the cost of running the place is pretty steep - what with rent and utilities and employees salaries and all. And he sees you, making lots of money, without having to pay any overhead!
So he approaches you and says he wants 50% of your business. And you are stuck in a quandary. You could try selling your board games in other places, but those places also want 50% of the cut. Or you could market it yourself, but that would cost more money. And while there are other cafes out there, that were once popular, people stopped going to them, for some reason (they were out of the way, the tables were too small, and the owners keep rearranging the furniture too often). So you reluctantly hand over 50% of your take to the cafe owner - who is still grumpy, as he is still losing money, even though the place is mobbed, every day.
Suddenly, your game business ain't what it used to be. And alarmingly, people are getting tired of your games, as they are all alike and kind of dumb, once you play them awhile. You desperately come out with new variations, with different shaped playing pieces, but no one seems to care. And the cafe owner is getting so ornery about losing money all the time, that he is starting to chase away customers with his angry tirades. And to counteract this, he keeps rearranging the furniture in the cafe, hoping to bring people back, but it just pisses off many more customers.
Your game business was going so well! Now it looks like it will all fall apart in a matter of months. What do you do?
Do an IPO, of course! Sell stock and cash in, before it is too late!
That, in a nutshell, sums up the problems for Zynga, the makers of Farmville and other idiotic games with simpering big-eyed characters who look like refugees from Precious Moments cards.
I wrote about Zynga before, when they were making noise about an IPO. Now, it looks as though they are prepared to do it, albeit for a market cap of "only" 9 Billion. Some folks think this is a good deal. Some folks are idiots - or are baiting you into buying the shares that all their insider friends will get at the IPO price and then sell to you for 50% more the first day. And you, Joe Retail Investor, will ride them down to $5 a share in no time, and put them on the shelf with your LinkedIn and Groupon shares (and the new GM shares) and other "great buys" you read about online or heard about on TeeVee.
IPOs are great for the insiders - they SUCK for you and me, who don't have reserved shares set aside at the offering price. But many folks get snookered into buying this shit based on the hoopla and hype, which is building up, even as we speak. The stock spikes, we buy, and then the stock goes down, once the hoopla dies down (and the "Wall Street Fat Cats" cash in).
Why, oh why, do average Joes think they can outsmart people far smarter than them - people with millions and billions to throw around, as well?
Well, they heard about it on TeeVee, on the Internet, and on the radio. They read an article about it in the paper. And they convinced themselves that buying the IPO stock is a swell idea, and moreover an original idea of their own, and that, moreover, no one else has thought of it!
The problem for Znyga is the same one for Groupon. The model can be copied very easily - and in fact, a lot of people are entering this "market space" very quickly. It is also fad-based, and fads are rarely the stuff of long-term economic growth.
By the way, how do I know it is fad-based? Well, basically everything on the Internet is pretty much a fad - with a story arc that is often measured in weeks or months. And the Internet is littered with the abandoned websites of what was once the talked-about new trend. See, e.g., MySpace.
Unless you have a long-term money-making model, with at least some barriers to entry, a fad will not endure. Sure, people flocked to Groupon. But coupons for discounted cupcakes get to be old hat pretty soon. And moreover, there are now zillions of such sites, now. Why go to Groupon, when you can go to Socialist Living or whatever it is called?
Games are very fad-based. We all enjoyed playing Tetris - for about a year. Pac-Mac was all the rage, for a while. The companies that sold these games made money and moved on. Video game marketers still do this - they know that "Lethal Car Theft XXXIV" will get boring to teens after a few months - and they need to sell a new game.
The problem for Zynga is that their games are all pretty much the same - and they are really just a variation on the "virtual pet" craze of the 1990s. Remember Pokemon? Remember those little key-fob pets you had to "feed" all the time, or they would die? Farmville is the same way - it is a time-bandit that requires you to go online to tend a virtual "farm" lest it die. And of course, you can sell people free upgrades to the virtual world, taking in real cash.
That sounds like a viable model, until you realize that they tried that in Second Life, and it petered out pretty quickly. Second Life, remember that? It is easy to forget these "latest and greatest" Internet fads, as they flame out into oblivion, like MySpace. At one time, everyone talked about Second Life, and every TeeVee show has a segment where they would go online to this brave new virtual world. And we were all supposed to go online, eventually, and even do our shopping and work there! For some odd reason, it never happened.
The odd reason being that it was just a fad. And fads die out.
But the real problem for Zynga is Facebook. They are 100% dependent on the whims of a young CEO who is not necessarily the most stable manager in the world. And from Facebook's perspective, they are doing all the heavy lifting, while companies like Zynga get all the glory - and money.
Zynga made a lot of cash selling virtual cows for hard currency. Facebook asked for, and got, 30% of this income stream, without having to even make threatening noises. What is to prevent Facebook from taking more and more, over time? After all, Zynga really has no other options.
The problem for "The Dot Com Boom and Bust, Part Deux (the reboot)" is that the young CEOs of these companies were only 10 or 11 years old during the last dot-com bust. And if you were around for that last one (and not still wetting your bed) you may recall how things got more and more heated up, with IPO prices soaring to the ceiling, and then crashing just as hard. Big blowout super bowl ads, followed by bankruptcy in less than 12 months. Pets.com was a warning sign.
But, of course, these companies will do amazing IPOs - Facebook being the big one - and the stock price will soar, and some naysayer, who no doubt is well-invested in Gold at $1700 an ounce - will tell me that I was wrong.
But wait for it. These things always turn around. Just like overpriced mini-mansions. And no one saw that coming, either, did they?
(Well, I did.)