After a decade of rebuilding, mobile games giant Zynga has made a comeback. The company that once kept people glued to Facebook with FarmVille and sparked countless games of Words With Friends released an earnings report last week for its best second quarter ever.
However, the comeback could be short lived. Zynga’s stock dropped soon after the report also identified a softening mobile market, user privacy concerns and a loss of players as COVID-19 restrictions ease up. Still, according to CEO Frank Gibeau, the course that brought Zynga back from its death watch is one worth keeping.
Fall from Facebook
Zynga, founded in 2007, pioneered social gaming. At the height of its popularity, it comprised nearly a fifth of Facebook’s revenue with more than 300 million monthly active users. When it went public in December 2011, its market value soared to $10 billion, which was four times that of games industry veteran Electronic Arts (EA), makers of popular game franchises like FIFA and Madden NFL, according to data provided by Cowen senior analyst Doug Creutz.
However, less than a year after its IPO, the company’s value plunged. Zynga’s market value dropped to below $2 billion, and it languished for years at less than half of its previous value.
As smartphone ownership grew, games moved away from Facebook and Facebook moved away from games. The games industry rapidly shifted from social networks towards the burgeoning mobile market and Zynga failed to pivot fast enough. This left plenty of room for up-and-comers like Candy Crush Saga and Clash of Clans to rise.
“It was a company that prized marketing and analytics and hadn’t spent a lot of time on creativity, which worked when their competition was nascent,” said Creutz. “But once other publishers started to create quality content, Zynga’s game fell off pretty rapidly. They weren’t ready and the games they had on mobile weren’t very good.”
By the summer of 2013, the company had lost more than half of its monthly active users. Zynga founder and chair, Mark Pincus, stepped aside as CEO and brought in new leadership to gain traction in mobile. But the new CEO’s slate of unproven games and costly mistakes with the company’s biggest brands sent the company in the wrong direction, according to Pincus. He returned as CEO in 2015 and undertook a $100 million cost reduction program, laying off nearly a fifth of the workforce to restore focus on Zynga’s core franchises.
Pincus’s decision to bring in Gibeau, the former head of EA Mobile who took over as Zynga CEO in March 2016, paved the way for the longtime struggling company to rise again.
“I had just gone through the experience at EA where we went from heroes to zeroes to heroes again, so that was fresh in my mind,” Gibeau says to TIME. “We brought with us production techniques that we knew from EA and married it with the fantastic data science and product management that Zynga had. Their quantitative tools and capabilities were just mind boggling.”
It’s not easy for any company to craft success after years of failed attempts. But Gibeau brought strategic mobile experience that helped transform how and what Zynga delivers to players, and recruited EA colleagues including Bernard Kim, now Zynga President.
“It felt like a risky move as Zynga was still struggling to make the platform shift [to mobile], but Frank convinced me that they had passionate teams with smart people that just needed to be pointed in a different direction with some prioritization,” Kim says to TIME. “He actually hired me in the midst of a Words with Friends match.”
At the time, Zynga was focused on quantity, working on a large number of games and projects. Gibeau says his leadership team moved quickly to change the culture which had become obsessed with chasing the “new” to focusing on the “few.”
“They had all these different projects underway and were spreading the talent too thin, attacking on too many fronts; AR, VR, they were all over the place,” Gibeau says. “We brought ruthless prioritization—this is what stays, this is what goes—and led the march forward to grow revenues and audience.”
The team built out Zynga’s “forever franchises:” games meant to stand the test of time and generate $100 million in revenue a year. Today those franchises include Zynga Poker, Words With Friends, Empires & Puzzles and others.
“Everything in gaming is about long term engagement,” Gibeau says, explaining that Zynga aims to optimize games so players come back regularly.
The new direction also involved amplifying live services that provide the games with a steady stream of fresh content, new ways to play and incentives for players to spend money, like limited celebrity appearances.
As the company’s fortune began to turn, Zynga spent billions of dollars on buying new studios. To fill its content pipeline, it gobbled up hit-making developers around the world, including studios in Turkey, Finland and China. It also added games based on Hollywood blockbusters like Harry Potter: Puzzles & Spells. This month, it completed a $250 million acquisition of the San Francisco ad network Chartboost with more than 700 million monthly active users. Combined with its 205 million monthly active users in Zynga’s games, the company is now approaching a billion players.
This quality over quantity “prioritization,” a focus on live services, consolidation of studios and creating a dependable pipeline of new content for games have all become fairly commonplace in the games industry over the past five years. So called “live games,” including Fortnite, Apex Legends and Call of Duty: Warzone, offer a regular calendar of new content and unlockable customizations like costumes and player skins. There is a reason for this trend.
“[Gibeau’s] numbers are really kind of remarkable, but it’s not the strategy, everyone does live services, it’s the execution: keeping players engaged and continuously building up the challenge so they strive to be better,” said Wedbush senior analyst Michael Pachter.
One example of this execution is Words With Friends. Though it launched 12 years ago, Zynga’s recent earnings reported that the game had its best quarter ever, attributed to the addition of a quick play solo challenge mode and a battle pass similar to Fortnite and CoD: Warzone.
The success of this strategy has only encouraged Zynga to explore more into what’s working in other games. Gibeau said that Zynga is actively looking at the “hottest category of games” that include Fortnite, Minecraft and Roblox as inspiration for new games and new markets to tap.
A lot of Zynga’s comeback strategy seems fairly recognizable when tracing the emerging trends in popular games. However, Gibeau insists that Zynga’s recent success is on its own terms.
“We’re not replicating anybody’s business plan,” he says. “We’re our own company, taking what’s hot in the marketplace and doubling down to innovate on new things.”
Keeping the momentum on shaky ground
As Zynga’s market cap crossed $13 billion in February, it has seemingly come full circle, and reemerged as one of the largest mobile game companies in the West, next to Playrix, Playtika and Activision. However, as Zynga has previously discovered, the games industry is constantly changing.
During last week’s earning call, Gibeau acknowledged that the easing of pandemic restrictions meant people were also easing themselves away from mobile games, particularly players that joined earlier this year.
“[Players] seem to have been less committed to the games. They have been in the games for a less period of time.” he said on the call. “…And as the COVID restrictions started to lift, we saw people starting to play less or obviously had other things to do. The economy has opened up. And that was an area where we started to see the weakness.”
Read more: The 10 Best Video Games of 2020
This admission, and a softer outlook for the rest of the year, seems to have gotten in the way of Zynga’s record breaking earnings news. Even as the company beat estimates, the stock took a nearly instant hit, dropping almost 20%, and its market value plunged.
Investment analysts pinpoint the drop in value to the shedding of players who jumped into games during the pandemic. But analysts also cite expanding privacy protections on platforms like Apple’s iPhone. These new rules could affect how advertisers can track users, and potentially disrupt Zynga’s business model.
But Gibeau plans to stay the course. For now, Zynga will continue with investments in live services, acquisitions, cross platform technologies and new games, including the upcoming FarmVille 3 and Star Wars: Hunters.
He doesn’t see a lot of doom and gloom in the swift retreat of Zynga’s stock price following the earnings report. Rather, he’s looking towards the horizon.
“Any given day in the marketplace, you’re going to be up, you’re going to be down, you can’t as a CEO look at it on a daily basis,” Gibeau says. “I got that advice from other CEOs to pay attention to the long term growth, your company, fundamentals, and that’s what we’re doing. We look to what the game company is going to look like in five years time, not five days from now.”
- How the Biden Administration Lost Its Way
- Hanya Yanagihara Is Never Going to Read Your Mean Tweets
- Inside Finland's Plan to End All Waste by 2050
- Chloe Kim Is Ready to Win Olympic Gold Again—On Her Own Terms
- Asia Has Kept COVID-19 at Bay for 2 Years. Omicron Could Change That
- Investors Are Sinking Real Money Into Virtual Real Estate, With No Guarantees
- The Man Putin Fears