The Current Zynga Strategy Diamond Marketing Essay

Launched in 2007, Zynga has expanded its portfolio from exclusively Facebook API services to provide independent and multiplatform social gaming on personal computers, tablets and mobile devices (Zynga, p 1-2, 2013). However, less than a year after appearing on the stock exchange Zynga has fallen on hard times (Zynga, p 1, 2013). The challenge of satisfying evolving consumer needs and the microeconomic climate have severely impacted your bottom line. Your stock price has fallen over 70% and you have recorded net losses of nearly $53 million in Q3 2012 alone (Zynga, p 1, 2013). In order to stay relevant in today’s market and return Zynga to the social gaming pioneer it once was, you must employ radical changes.

I have identified four main challenges facing Zynga today. Firstly, Zynga is in the business of casual gaming with a social twist. But because casual games notoriously have the shortest life cycle it is hugely problematic that Zynga has neither innovated nor replicated successful games at the same rate that customers have grown tired of the available offerings. Secondly, Zynga does not have a sustainable source of revenue due to considerable customer churn. Cycling through customers and not generating repeat business is not a strategy for a ‘freemium’ company. Thirdly, while Zynga is moving towards a more independent business model, the business was built on and still largely depends on Facebook. The close association between your corporations – and your recent decision to sever ties with the social media giant – has been negatively affecting your bottom line. Lastly, the corporate culture in place at Zynga thrives on imitation. Rather than being forward thinking and innovative, Zynga has enjoyed enormous success by mimicking already popular games and reverse engineering them for a simpler, social experience.

Given these challenges I have developed a strategic recommendation to reinvent Zynga. Zynga must return to its original ambitions of being an independent social gaming giant and create a social gaming ecosystem unlike any other. By partnering with hardware manufacturers and developing a new operating system Zynga can not only reclaim its lost share of the social gaming market, but capture a population of consumers with unmet social gaming needs. With this innovative model, Zynga will once again demonstrate financial success.

Goals and Objectives:

The ultimate goal of my strategic recommendation is to revert Zynga’s declining financial status and decreasing Monthly Average Users (MUAs). The new business model will pursue the goals upon which the company was founded upon: Reach, Retention and Revenue; however, these goals may only be achieved if Zynga remains true its original ambitions and strives for stable growth built on its own success, rather than piggybacking off the growth of another corporation.

Contextual Analysis:

Mark, you created Zynga to address an unrealized consumer need: socially integrated gaming. But while you correctly predicted that consumers wanted an immersive and integrated social gaming experience, as they do with most other tech experiences, you failed in your execution. The original customer reach, retention and revenue model aided the explosive growth you enjoyed in the past, but it did not create a foundation for your company to be further built on. You were too consumed with rapidly growing the company and collecting profits to see that strategically Zynga would have benefited from a slower, more premeditated climb to success. Your original ambitions to build an independent company were correct, yet instead you chose to piggyback off of the success of Facebook to catapult yourself into overnight, mass-market penetration. Accordingly, there are four challenges facing Zynga.

Firstly, Zynga is in the business of casual gaming with a social twist. That is, simple games with uncomplicated, vibrant graphics and easy inputs and controls. Since casual games are not intimidating and easy to play, they appeal to a large audience (primarily [60%] a normally disinterested group of middle aged women). However, casual games notoriously have the shortest life cycle (Microsoft ). In fact, most estimates give casual games a 300 day life cycle (______). The gameplay in Zynga’s games is particularly known for its simplicity (_____). Look at Farmville as an example. A user’s constant diligence and effort will ultimately be rewarded if they maintain their crops and animals (unless they choose to buy virtual currency with real currency to speed up the game). It is evident that there is hardly any skill component involved in casual gaming. Accordingly, game fatigue occurs relatively quickly. Your frequent introduction of new games is evidence that you understand this trend; however, what you have not accounted for is that users become exhausted by the entire category of simple games. Once you have built a farm, city, mafia and castle using virtually indistinguishable principles, a similar game is less likely to be pleasing. This is especially true in a category of games that Zynga succeeds in: non goal-oriented games. That is games that have no definitive end or prize. It is hugely problematic that your company has neither innovated nor replicated successful games at the same rate that customers have grown tired of the available offerings. Cycling through customers and not generating repeat business is not a strategy.

Secondly, you have neither a stable, nor sustainable source of revenue due to the previously discussed customer churn. Zynga operates on a freemium, free-to-play model. That is, the vast majority of your customers play your games for free while only a small portion of users constitute paying customers. Financial analysis reveals that over 83% of your revenue is generated by less than 3% of your customers. As such, Zynga faces grave financial risks if you lose the attention and enthusiasm of your core 3% of paying customers.

Thirdly, while Zynga is moving towards a more independent business model, your business was built on and still largely depends on Facebook (Zynga 10-K, 2013). In 2012 86% of Zynga’s revenue was from Facebook API services and revenues were down 20% from the prior year, while Facebook reported a 40% increase in gaming profit (Zynga, p , 2013) (Zynga 10-K, 2013). Note this discrepancy. Although the social nature of your games requires the use of a social network platform, Facebook is a social media monopolist. As such, you are buying and using services providing by a monopolist. This has severe financial implications for Zynga. When a company does not make considerable profits, it is not in Facebook’s interest to charge a high transaction fee. Instead, Facebook encourages use of its services by maintaining low fees since the application’s use increases the usage of Facebook’s platform. However, if the company becomes financially successful, as Zynga did, Facebook begins to charge higher transaction fees. This is standard microeconomics and a problem plaguing Zynga. Facebook is capitalizing on your success by taking over 30% of each transaction your games attract (Zynga, p , 2013).

Additionally, the close association between your corporation and Facebook, as well as your recent decision to sever ties with the social media giant has been – and will continue – negatively affecting your bottom line. While costumers may recognize your games, your corporate brand has been dissolved and shadowed by Facebook. You should not have so closely associated Zynga with Facebook and so heavily relied on Facebook to grow your company. While Facebook will always have game developers to replace you, you will not always have the customer awareness you enjoyed on while using Facebook’s API services. You are competing in an industry where you are highly replaceable and are at the mercy of your customers in your fight to stay relevant (Exhibit A).

Lastly, the corporate culture in place at Zynga thrives on imitation. Zynga is present in the rapidly evolving industry of gaming in which technology is critical. Such an industry requires companies to be at the forefront of change and lead innovation. Normally companies employ sizeable R&D teams that look to new game development (in your case to combat game fatigue and customer churn) as well as new distribution channels (in your case to combat the dependence on Facebook). You did genuinely pioneer social gaming, but that is where you stopped. While copying competitor games worked in the short term, it is not a sustainable strategy. You must refocus on innovation. Furthermore, this attitude blinded you to the importance of the smartphone as a new gaming platform. Only recently have you realized the potential of mobile games. Rather than being forward thinking and innovative, Zynga has enjoyed enormous success by mimicking already popular games and reverse engineering them for a simpler, social experience.

Strategic Options & Alternatives:

With regard to customer acquisition and retention, Pincus wondered whether Zynga should invest to improve its viral distribution model, or if the company needed to encourage users to connect with strangers who also happen to be Zynga game players.

One of the unmet needs social media sites address is the desire to meet new people. Consumers enjoy being around like minded individuals and tend to seek out and gravitate to those who share similar interests and values. In most cases an individual has a set amount of friends in their social network that closely share their values, but not necessarily enough to satisfy their social needs. As such, it is in Zynga’s best interest to encourage users to connect with strangers who also enjoy social gaming. Consumers would be attracted to the idea that they would be introduced to those most like them satisfying their social need.

Furthermore, for Zynga the viral avenue is slowly disappearing since Facebook has amended its algorithm to limit game post viability to those who are not signed up for the Zynga services. Additionally, depending on a viral distribution model implies that there is a large enough customer base to promote to. Zynga’s creation of an independent platform is a positive and progressive step, but you must remember that you will not have the same customer base that Facebook has, and it certainly will not attract 1 billion users overnight.

With regard to product, Pincus debated whether he should invest primarily in evolving existing successful casual games, or if he should invest to expand Zynga into other markets, such as real money gambling and “mid-core gaming.”

Zynga should invest in other markets. Social games have a very short life cycle and are becoming increasingly more expensive for Zynga to create and maintain. As such, Zynga should focus on investing and developing games that are more interactive, slightly more complex and retain customers for longer periods of time such as gambling games and ‘mid-core’ games as these markets theoretically address the problems facing Zynga.

With regard to corporate strategy, Pincus had to decide whether Zynga should continue to focus on being a content producer, or if it should focus on becoming a platform for hosting its own and 3rd party developers’ games.

Zynga should not limit itself on content development as its only competency. You should begin building a platform or operating system or even venturing into hardware manufacturing in order to release yourself from the fetters of Facebook. In truth, this is the hardest strategy because it has the highest risk, but if properly implemented, it would also reap the great ROI as well as serve as the most long term option.

Strategic Recommendation:

Successful tech companies are those that do not just create products, services or experiences, but rather immerse their users into complete, closed ecosystems. Google, Amazon and Apple are three examples of lucrative companies that have enjoyed stable growth throughout the past decade of tumultuous technological uncertainty. They have fully integrated their consumers by enticing them to choose a digital lifestyle that is almost controlled by their gadgets and software. For instance, Google has vertically and horizontally integrated to provide social services (Google+) and created not one, but two platforms (Android and Chrome) available on a multitude of devices (computers, tablets, smartphones) to engage consumers on all levels. Apple has done the same with its iPhones, Macs and iPads and its OS. Amazon has the Kindle and Amazon Prime.

In each company, consumer hardware is fully integrated with the other products and the platform/software addresses both known and unmet social needs. This occurs while the hardware and software provide the standard professional and personal solutions expected of computing devices. Even Facebook, your rival is making its foray into software and hardware integration with the release of its operating system: Home. Like Google, Apple and Amazon, Facebook will now have its own ecosystem to lock its users into.

Creating an ecosystem employs the “walled-garden” concept where a company locks a consumer into its product by providing all the services necessary to address the consumer needs and effectively locks a consumer into the product. Zynga should follow lead and focus on creating a social gaming ecosystem with high walls (barriers to entry) by leaving the consumer facing high switching costs. The best way to create this ecosystem is by developing your own, independent platform and operating system and partnering with hardware manufacturers to deliver integrated devices to fanatical gamers.

Implementation Plan

Zynga should begin to secede from Facebook in a gradual 3 year plan. Each year you should refrain from renewing 1/3 of the games on the Facebook API service. Zynga should begin with the weakest performing games and gradually the best games to retain maximum customer awareness through the succession process. The goal will be to not only retain current Facebook customers and move them to Zynga.com, but also to generate enough buzz to secure to customers directly through Zynga.com. By slowly transitioning existing Facebook users to Zynga.com the customer base of your social network will grow and attract new users.

Year One: Zynga should reach out to hardware manufacturers – HTC is a great candidate – to negotiate a contract and develop a smart phone and tablet adapted for Zynga games. Simultaneously, Zynga should begin developing the OS and gaming platform for the device. It is also important to reach out to retailers and wireless companies to secure subsidy contracts for the new device. It is also necessary for Zynga to pursue marketing and promotional partnerships with both the device manufacturer(s) and the wireless carrier(s) in order to split the cost of an aggressive marketing campaign.

Year Two: During Q1 and Q2, Zynga should begin production and continue the marketing campaign. Zynga should also focus on developing a robust network of games to be deployed on its device. It would benefit Zynga to allow third party developer rights to innovate games for Zynga. In Q3 Zynga should begin selling the device.

Year Three: Zynga should focus on a 10 month life cycle for its devices to stay relevant to consumers. As such, R&D and production of the generation two Zynga device should take place during the middle of Q1 2016 and conclude at the end of Q2 2016. Sales of the gen 2 device should begin at the beginning of Q3 2016.

Exhibit 1: Porter’s Five Forces:

Competitive Rivalry

High

Zynga, Wooga, 5 Minutes, Playfish, Playdom, Kabam, Crowdstar, EA, among others.

Power of Buyers

Moderate to High

Customers dictate the content and their needs change daily. Because there are so many alternate companies providing the same/similar services, game providers have to adapt to retain customers.

Power of Suppliers

Moderate to High

While there are many game hosting platforms, few garner the attention of mass amounts of users. As such, the power of the supplier fluctuates based on its user base.

Threat of New Entrants

Very High

The cost and time required to develop a social game is very low (single-digit millions and months) relative to the cost of developing a more traditional graphic-intense console game (tens of millions and years). This lower cost allows much smaller game developers to try their hand at developing the next big hit and has resulted in a proliferation of new competitors.

Substitute Products

Very High

There are not only identical products out there by competitors, but also there are many substitute products: hardcore games, board games, tv, blogs, anything people use to pass the time.

Exhibit 2: Current Zynga Strategy Diamond

Arenas

Casual gaming

Vehicles

exclusivity contracts, social platforms (mainly Facebook), early stages of their own social platform.

Differentiators

highly integrated social features.

Economic Logic

freemium business model. 97% of consumers receive free services while 3% of consumers pay to advance quickly through game and receive premium services.

Monetization relies on 3 revenue streams, affiliate offers, virtual goods sales and advertizing

Staging

biweekly game updates. Release new games every ____.