Zynga Ready for Real Money Gaming or Trying to Hide Failures?

Last September I wrote about why I didn’t think Zynga would be a major player in real money poker. I cited several reasons and among them was that they weren’t serious about real money gaming. They had not hired a single name out of the online poker industry. I left the door open though and said that when we began to hear about Zynga making moves my opinion on their future in the real money gaming sector would change.

Several months later Zynga’s poker product manager confirmed that they had no aspirations to become a real money gaming platform.

And now, just a few months after they wrote off the real money gaming market, they’re making waves that they might have changed their mind and are actively looking for partners in the real money gaming space.

Many in the poker world are breathless at this but it’s not really that exciting. First off, you have to understand the situation Zynga is currently in. They just floated an IPO which flopped big time. The share price dropped 5% on the first day of trading and it hasn’t much recovered since then. Today the stock trades around $8.50 (down from the IPO price of $10).

Zynga is under pressure to report something positive to get the price back up. All of those institutional investors who bought Zynga stock aren’t happy with getting this turd dumped in their laps.

So how does Zynga go from saying they have no interest in real money gaming back in November of 2011 to saying that they are investigating partnerships just two months later?

In the past you’ve denied any plans of shifting to a real-money platform. Are you still sticking to that, even if it’s a few years down the road?

Zynga’s business model is free-to-play and we monetize the virtual goods. That’s our business model. We have no interest in going after the real-money space. We have been able to build a very nice business for ourselves with our heads down focusing on our existing business model.

–Zynga Poker General Manager Lo Toney via PokerNews

Part of it can be attributed to the fact that Zynga’s management has some issues. Just prior to Zynga’s IPO the media was full of reports about overworking employees, an alleged move to force early employees to give back stock options or be fired, accounting gimmicks, and that sources within Zynga confirmed that the company basically steals their ideas from their competitors.

Last year, for the first six months of 2010, Zynga amortized revenue from virtual goods using an expected useful life of 14 months. In other words, $5 of fertilizer a Farmville player bought anytime over the past 14 months would be spread over the next 14 months, so that Zynga booked about $0.36 of revenue per month.

But for the first six months of this year, Zynga shortened its amortization schedule to 11 months instead of 14 months. This means that, for every $5 of Farmville fertilizer sold, the company will book $0.45 of revenue per month for 11 months.

And that, in turn, means that Zynga’s reported revenue from these sales is considerably higher than it would have been had Zynga left its amortization schedule unchanged. (It also means that revenue in the 5th quarter will be lower, because all of the revenue from today’s sale will already have been exhausted).

So, how much revenue has Zynga’s accounting change contributed to the company this year?
$27 million!

Zynga has booked $522 million of revenue so far this year, so $27 million might not seem like a big change. But it’s big enough to wipe out the company’s $18 million of profit for the year.
In other words, had Zynga not changed its accounting, the company would have lost money for the first six months of 2011.

via Business Insider

There are also rumblings that Zynga’s core businesses are faltering. Recent comments by Sterne Agee analyst Arvind Bhatia seem to indicate that Zynga’s cost of acquisition far exceeds the lifetime value of the players they’re acquiring

Zynga’s marketing budget for the first nine months of 2011 was $120 million, which he said was almost entirely dedicated to acquiring new customers. “We also know that they had 3.4 million unique players in the September quarter, which is up from three million at the end of December 2010,” he explained. “In other words, they added 400,000 additional payers and they spent $120 million to acquire them.”

That’s $300 a head, yet each one spends an average of just $150 over the 12 to 15 months they stay with the company. You don’t have to be a rocket surgeon to see a pretty big whole in the equation. “That math won’t work for very long,” Bhatia said.

So, Zynga’s recent decision to look into real money gaming seems more of an attempt to divert attention away from other problems the company is experiencing. They’re trying to excite the market with news about possibly entering a multi-billion dollar market in order to take the focus off of the state of their existing business.

As All Things D puts it:

As with any new entrant in the space, Zynga will have to fulfill several requirements, meaning any major rollout is still months away.

The San Francisco-based social games maker will have to wade through a maze of state, national and international regulations. It will have to secure the correct licenses, and it also needs the right technology to make betting over the Internet secure.

For either of these last two requirements, a partnership or acquisition of an online gambling organization or other technology would make the most sense, instead of starting from scratch.

As I’ve said in the past, I’m not suggesting that Zynga can’t be a major player in real money gaming. What I am saying is that they’re not even close to being ready at the moment. Today’s announcement brings them a step closer to being ready but there’s still a lot of ground for them to cover before we can even begin to speculate how many virtual goods players would be willing to wager for real money.

If Zynga is really serious about entering the real money gaming markets a few things will likely happen. Consider any of the following the next step for Zynga:

1. Zynga acquires an existing online gaming operator

2. Zynga hires someone with real money gaming cred to head their real money initiatives

3. Zynga partners with a US land-based casino

Because without any of the above happening, Zynga is still not even remotely prepared to enter the space.