Why Zynga is losing in the attention-deficit economy
What exactly is ailing Zynga? Not long ago, the company churned out hit after hit, quickly earning the pole position in the popular market of casual gaming. Yet less than six years after it was founded, the company seems locked in the downward spiral of ever-larger layoff rounds that typically afflicts older companies in stagnant industries.
Zynga said late Monday it's laying off 520 people, or 18 percent of its staff, and shuttering offices in New York, Los Angeles and Dallas. The announcement came after trading in Zynga shares was halted, a move that in turn followed an AllThingsD report of the job cuts, which are aimed at focusing the company more tightly on mobile games.
When trading resumed, investors weren't cheered by the cost-cutting. The stock fell 12 percent below $3 a share for the first time in nearly four months. Investors aren't thrilled with steep cuts when a company should be growing. And Zynga isn't growing. Today, the company said bookings this quarter would be weaker than many on Wall Street had been expecting.
In many respects, Zynga's trajectory look a lot like Groupon's. Both companies grew rapidly, then went public quickly: Zynga four years after it was founded, Groupon three years. Both saw revenue growth slow after posting loss after loss. Both are trading at a small fraction of their offering prices.
While there are substantial differences between Groupon's and Zynga's business models, there are similarities in the underlying reasons for the two companies' current troubles. Like Groupon, Zynga is having trouble maintaining the attention – let alone the loyalty - of fickle consumers. In fact, both have set up business models that are dependent on customers who often have the attention span of a gnat.
Over the past decade, the unprecedented access to products and media, the proliferation of startups, apps and sites, and the hyper-evolution of new ideas and innovations has cultivated a new mindset among consumers. Our attention is more in demand and more engaged than ever. We constantly crave the new because the new is always waiting just a little bit in the future for our attention to find it.
In the past year I've had a eerily similar conversation with a number of friends that goes something like this: I've stopped reading as many books because there is too much interesting content everyday on the Web, Or: I don't watch as many movies now because I don't have time left over to sit down for a whole film. Or: I am streaming so many new songs online now that I have pretty much stopped listening to albums on repeat.
Even the ideas we share and the things that we have conversations around have a shorter life span. News cycles have accelerated in recent years so that the folded newspaper outside your hotel room appears quaint. A decade ago, a meme like “All your base are belong to us” could be a running joke that lasted months. Now people get snippy about sharing, say, a popular Game of Thrones joke less than a day after it goes viral.
Unlike some critics, I don't think any of this is making us all stupid or having some other negative effect. It's a neutral change that requires us to think differently. It can leave us more distracted, yes, but it can also make us more informed. It is, however, also changing the way we consume media and buy things in general. And that has created an opportunity for companies like Zynga.
When Zynga went public, it boasted that it had advantages over incumbent gaming companies. Whereas the old console-based games were developed in a matter of years, Zynga games could be developed in a matter of months. Zynga had access to user data that would allow it to produce new games more likely to appeal to a mainstream audience.
For a number of reasons, it hasn't worked out that way. Electronic Arts has seen its stock rise 52 percent over the past year, while Zynga's is down 64. Zynga's pre-layoff revenue-per-employee ($419,000) is comparable to EA's ($408,000). Churning out games faster only shortens their life span because it encourages people to expect more hits more often. We get games more quickly, but it only makes us get bored more quickly.
Underscoring the short-but-sweet life cycles of casual games is Zynga's experience with OMGPOP, the company that produced last year's hit Draw Something. Zynga paid $180 million for OMGPOP a year ago, then took a $95 million writedown on the investment several months later. Now, VentureBeat says, some OMGPOP staffers are posting that many jobs have been cut and the New York office has closed.
Stocks of gaming companies have always been notoriously volatile because their income depends on capturing lightning in a bottle. Zynga tried to get around this by designing data-driven games, but it's losing its edge as top talent defects to start up their own gaming companies using lessons learned at their alma mater.
Meanwhile, hits remain unpredictable enough that the lightning is showing up in other bottles – like King, the maker of Candy Crush Saga, which has 400 employees and more users than Zynga. Casual and mobile games remain a gamble that is better suited to small, nimble startups rather than a publicly traded giant like Zynga.
Of course, Zynga's stock is still 43 percent above the low-point of $2.09 it reached last fall. That's largely because of the expectation that some states will look to online gambling as a source of revenue and the hope that Zynga, as a market leader, would be poised to benefit. But the same dynamics are likely to apply to gambling as gaming: fickle consumers, nimble competitors and no guarantee that Zynga will be the company producing the hits.
In the end, what Zynga, Groupon and other companies floundering in the attention-deficit economy are missing is what Facebook has: a compelling, network-driven platform that makes people feel like they need to return to it day after day. Amazon offers an older, even more successful example. When copycat e-commerce sites appeared, Amazon refocused its entire business model around the idea of building customers' loyalty.
Being first and growing fast isn't enough in a market where barriers to entry are low and consumers have little sense of loyalty. Or it isn't enough for very long. Success on the web isn't just about getting attention anymore. It's about holding on to it for good.