Lessons from Zynga’s continued struggles

According to a new piece by the Wall Street Journal, Zynga’s board has called in a management guru to help CEO Mark Pincus handle the turbulent ride the company has been on since its IPO last year. While a management coach is a good idea given the CEO’s inexperience, I’m not confident that a more focused Pincus will resolve the company’s problems. After all, those problems are many and not all of his doing.

So what are the lessons to be learned from watching Zynga and other social-gaming players over the past few years? Here are a few:

Social gaming has extremely low retention rates

Social games is a difficult sector, given the low stick rates. One estimate is that casual game retention rates are only about 38 percent after one month and only 14 percent within 6 months. Stickiness for social games is likely even lower, given the low switching costs.

The EA model might not work for social

While Zynga may not look exactly like EA, its management has taken an acquisition-model approach similar to the gaming behemoth‘s: Over the past few years it has been highly active as it has looked to both acquire new hits and shore up its weaknesses.

The goal of Zynga’s acquisition spree was to scale up and amass a large number of daily and monthly average users, which it certainly has. But the race for users has come at a price: a disparate mix of studios and a resulting high cost structure, despite flat revenue growth.

The Facebook problem

The history between Zynga, the longtime leader in social games, and Facebook is well-documented. But the problem for Zynga can be boiled down to one issue: not owning the main platform most consumers play its games on. Zynga, like all social-game companies, is at the mercy of Facebook, unlike other casual game makers such as Popcap, Big Fish, and Rovio. Those companies have a more direct relationship with the consumer and aren’t reliant on the vagaries of the Facebook’s feed algorithms.

What should Zynga do?

David Card has some good suggestions about what Zynga and other social game players should do, including managing its portfolio better, diversifying revenue streams, and continuing to build its own platform. I agree with all of them.

But in modeling its future direction, I’d suggest the company take a page from another game wunderkind: Rovio. Yes, Rovio is a one-hit wonder, but its ability to continually extend itself with new iterations of the Angry Birds franchise as well its pursuit of other screens such as consoles and connected TVs show how far a company can ride a winner.

Rovio’s narrower focus also has bottom-line benefits, which include a much lower cost structure. By focusing on certain titles and maximizing the leverage of these select few, Rovio has avoided the costly studio-structure model sucking the profitability out of Zynga.

Indications are that Zynga is on a path to narrow its title mix, grow its mobile business, and continue to invest in its winners, all good signs. However, a continued danger lies in the company’s predisposition toward growth by acquisition, which hasn’t shown any sign of improving profitability. If Zynga can focus on building its own current franchises, extending them to more platforms, and experimenting with new revenue models, there’s a chance the company — and its newly coached CEO — can save itself from its current trajectory.