Sunday, May 27, 2012

Zynga’s Purchase of Draw Something: Epic Fail or Shrewd Move?

For all the talk about the importance of mobile, one would think that Zynga’s purchase of OMGPOP would have been received more favorably. Unfortunately for Zynga, the $180M acquisition of the hit mobile game “Draw Something” sent shares tumbling and they haven’t recovered since.

The prevailing wisdom on Wall Street is the acquisition proved how tenuous Zynga’s monopoly on social gaming really is. If a company like OMGPOP can come from obscurity to displace Zynga it proves the low barrier of entry to the business. For the folks on Wall Street,
the worry is that Zynga will have to buy every one-hit wonder in order
to protect its market share.

Not helping matters for Zynga is the sharp decrease in Draw Something’s user base. Since making headlines for gaining 50 million downloads in 50 days, Draw Something’s DAUs (Daily Active Users) on Facebook has plummeted 30% in the last month, from 11M to 7.5MM. The sudden decrease suggests that Zynga paid for millions of users who have since vanished.

The more optimistic view notes that Draw Something is the digital derivative of Pictionary, a game which has been around since 1985. If Draw Something isn’t a one-hit wonder but instead turns out to be as timeless as Pictionary, Zynga’s purchase looks less panicky and more strategic. Zynga's COO John Schappert underscored the company's long term view: "We think of it as a game that's an evergreen franchise. It's a game that will live on for years."

This strategy of converting old school, iconic games into digital has worked out well for Zynga. The successful “Words with Friends” franchise is derived from Scrabble and “Texas Hold’em” is a poker game. The "Draw Something" purchase is a continuation of this strategy and suggests Zynga was willing to pay a premium to bolster its portfolio of proven game models.

Although the current social gaming landscape is fragmented, Zynga's strategy indicates it believes it will evolve to resemble the console gaming marketplace, where a handful of lasting franchises (Madden, Call of Duty) provide the bulk of revenue. As of this writing, Texas Hold’em, Draw Something, and Words with Friends are the top three Facebook apps. Whether or not they’ll remain there is the question that potential investors must consider. 

Monday, May 21, 2012

Second Screen App Viggle Seduces Consumers, Eyes Social TV Ad Dollars

An entire industry of “second screen apps” has sprung up in response to the fact that tablets, smart phones and laptops are now must have companions for watching TV. Yet, growth of these apps has sputtered as they struggle to persuade consumers to migrate away from the vibrant conversation already happening on Twitter.   

Viggle hopes to be the first breakout star of Social TV with a proposition to consumers that is as simple as it is seductive. Its promise of “Watch TV, Get Rewards” is an irresistible combination that makes Viggle seem poised to displace Get Glue, Miso and Into Now atop the Social TV food chain. 

Indeed, Viggle is enjoying “hockey stick” growth, adding 625,000 registered users for iOS since launching earlier this year. That growth will accelerate with the impending release of the Android version.

The Paradox of Growth
Yet, Viggle’s explosive growth presents a problem. As Viggle gains users, it also gains liability in the form of the rewards it must pay out. This “paradox of growth” is familiar to investors of Pandora which pays royalties on a per stream basis. Unlike most advertising supported businesses, Pandora and Viggle’s operating costs are inextricably linked to the size of their audience. The more people use the service, the more costs increase.  

The Price of Gift Cards Will Come Down
Thankfully, for the investors of Viggle, that’s where the comparison to Pandora ends. Where Pandora’s business model threatens to cannibalize existing revenue from the music industry, Viggle promises incremental revenue for its partners. Therefore, once Viggle achieves a national user base, it will likely be able to negotiate lower, wholesale prices with its gift card vendors. For example, a partner like Starbucks will welcome the foot traffic it gains from the massive distribution of gift cards – which are already paid for by Viggle. 

The cost of gift cards is a key component of Viggle’s business model since it relies on rewards to bring in the eyeballs which it then sells to advertisers. 

Viggle Incentivizes Consumers to Watch Commercials
For advertisers, Viggle is proof that Social TV can enhance an existing TV media buy. For example, an advertiser can sponsor a TV show on air and on Viggle. Viggle can then create a quiz based on the content of an ad scheduled to appear during the show. Since consumers earn points toward a reward if they get the quiz question correct, they are incentivized to pay attention to the spot. 

In a week where news of the Hopper has stricken fear in the heart of the industry, Viggle’s ability to incentivize consumers to watch TV ads will be embraced by media buyers and sellers alike. Pretty soon, Viggle's purple "V" logo might start to pop up on TV screens just like the ubiquitous Twitter and Facebook logo.

Sunday, May 13, 2012

Why Advertisers Should Be Afraid of the Facebook IPO

When it comes to investing, Wall Street is not satisfied with the Facebook of today, the bulls want to know where the growth will come tomorrow!

The sense of urgency around Facebook’s search for new revenue streams is driven by the perception that “Sponsored Stories” and “Facebook Ads”, the two products behind the current business, won’t satisfy Wall Street’s insatiable appetite for growth. Even if Wall Street is pigeon holing sponsored stories as yesterday’s growth story, the folks on Madison Avenue know that Facebook may not be done with that cash cow quite yet.

As every digital marketer knows, a Facebook page only reaches 16% of its intended audience during a month. Where does that 16% number come from? Facebook would likely maintain that it’s the result of the EdgeRank algorithm designed to keep the newsfeed uncluttered and relevant.

At the moment, the 16% rule applies to all content published on Facebook, meaning brand pages as well as personal ones.

That pitifully small number makes Sponsored Stories a must for any company serious about using Facebook as a marketing vehicle.

What’s to stop Facebook from assigning content posted from brand pages a lesser weight in the algorithm? The answer is nothing. As Josh Constine of TechCrunch points out, “The fact is that Facebook controls the news feed like an editor-in-chief controls a newspaper’s front page. It decides what kinds of content its users see.”

If Facebook lowered the organic reach of brand page content from 16% to 15% many advertisers would have to increase their marketing budgets to maintain the same level of aggregate reach. In this age of precise reporting and advanced analytics, there are countless businesses that know exactly what the ROI of their Facebook page is. Lessen their “organic” reach on Facebook and they will see a corresponding drop in business. To compensate for that drop, advertisers would have no choice but to plus up their ad spend.

Take a step away from the impatient climate of Wall Street and there are plenty of potential growth opportunities for Facebook: international, mobile, research and Facebook Credits to name a few. The problem is that it will take time for Facebook to turn those opportunities into scalable businesses. In the world of quarterly earnings, Wall Street is unlikely to wait around. 

Lucky for Facebook, it has its hand on a lever that can instantly create growth. As the pressure of being a public company mounts, tweaking EdgeRank is something Facebook will have to consider. To investors, that’s good news, for advertisers, not so much.  

Monday, May 7, 2012

Zynga Launches Its Own Gaming Platform, Lessens Dependency on Facebook

What do you call a meeting between Zynga CEO Mark Pincus and Facebook Founder Mark Zuckerberg? "Words with Frenemies."

A previous post on Overheard pointed to Zynga’s dependency on Facebook as a reason why Zynga’s stock had been punished by Wall Street. Yet, ever since Facebook revealed that Zynga constitutes an astounding 15% of the social network’s revenue, the question has been who needs who more?

It would appear that Zynga needs Facebook more, after all, Facebook provides the platform that Zynga operates on. Yet, that point of view underestimates the pressure on Facebook to show impressive finances as it goes public. Zynga gives Facebook a generous 30% cut of all of its virtual goods revenue. Plus, Zynga’s games drive billions of page views on Facebook – which translates into an enormous chunk of ad revenue. As Facebook’s IPO nears, it must look to nurture the virtual cash cow that is Zynga. 

Meanwhile, Zynga has been taking steps to lessen its dependency on Facebook – heavily investing in as an independent gaming platform. Unlike Facebook, is dedicated to a gaming ecosystem – making it an attractive platform for aspiring developers to find an audience. From a business perspective, Zynga aims to strike rev-share deals with these third party game developers, calling the venture Zynga Platform Partners. Zynga hopes the site will emerge as a sort of app store, except exclusively focused on gaming. Since launching in March, has seen an impressive uptick in traffic – reaching 2.8 million MAUs (monthly active users).

Zynga was careful not to attract the ire of Facebook and is using Facebook Credits as the currency of Not that Facebook is too worried: Zynga reaches an eye-popping 272 million MAUs on Facebook, rendering immaterial for now. Facebook's leverage is more in focus when you consider that Facebook provides gamers with a connection to their friends and family – you know, the whole “social” part of social gaming. “Words with Strangers” doesn’t exactly have the same appeal. Still, Zuckerberg and team will be wary of Zynga cornering the burgeoning social gaming space.
At the moment, both Zynga and Facebook are content to remain “frenemys” but Zynga is definitely taking steps to find incremental revenue streams. In addition to the launch of, Zynga is aggressively pursuing mobile and gambling. We’ll take a look at those in a later post. 

See More 

Thursday, May 3, 2012

Three Ways Netflix Can Run Ads Without Causing a User Revolt

Whether or not to run advertising is surely a hot topic in the Netflix boardroom. On one hand, Netflix risks death by social media if they begin running Hulu-esque pre-roll. On the other hand, incorporating useful ad supported features is a tempting way to offset some of the rising costs of content licensing.

We’ll leave the final decision to Reed Hastings. But, if Netflix were to incorporate advertising, here are the three ways to do it without causing (another) user revolt. 

In Theatres Now Channel
The Netflix streaming interface sorts its content into genres, why not a “In Theatres Now” genre? Film distributors would gladly pay for prominent placement in the channel and people love movie previews. This addresses a need that is not really met by YouTube, IMDB or Moviefone especially since these online destinations have not truly migrated to TV screens yet. Netflix could become the go-to destination to watch previews while you’re on the couch and in front of your big screen. That sounds like an entertaining and relaxing way to help pick what flick to see on your date night out. 

Even better, Netflix can put on its biz dev hat and let users pay for movie tickets within the "In Theatres Now" interface. To do so would require a rev-share deal with a ticket broker like Moviefone or Fandango, but Netflix already has customers’ billing information and email addresses so payment and fulfillment are already in place.

Themed Playlists
Most people welcome the onslaught of Christmas themed movies during the holiday season. That’s why year after year, TV networks show us the same movies again and again. Instead of a Christmas Story on repeat, Netflix could aggregate dozens of Christmas movies in a themed channel – an improvement over the TV model. A sponsorship of this channel during the shopping season would make a compelling proposition to Wal-mart or Target.  

Pimp Out the Red Envelopes
At $600 million per year, Netflix is the U.S. Postal Service’s best customer. To offset those charges, Netflix could begin selling targeted advertising as an insert within the Red Envelope.  As late as Q4, Netflix still had 10 million DVD by mail subscribers, that dwarfs the distribution of most national magazines and newspapers.  

More on Netflix:

Tuesday, May 1, 2012

Is It Time For Netflix To Incorporate Advertising?

It’s not easy to be Netflix. Increased competition, rising costs of licensing fees and a stock that’s lost 66% of its value since the summer have the company’s once golden reputation reeling. 

To incorporate advertising at this point seems like an invitation to disaster. Netflix’s ad free streaming environment is as much as part of the company’s identity as the iconic red envelopes. With a lot less of those red envelopes going out in the mail, to jeopardize the streaming experience is to risk the future of the business.

Yet, Netflix has another user experience problem to address – its spotty library of content. The only way to bolster the library is to pay up, and that’s increasingly expensive. For example, in 2008 Netflix paid Starz $30 million to stream titles from Sony Pictures and Disney. That same deal in 2012 came with a price tag rumored to be around $300 million. Netflix simply could not afford that 1,000% price increase and let the deal expire. As a result, dozens of premium titles like The Social Network and Spiderman are no longer in its library. 

The company has made some tough decisions this year to raise cash in order to bolster its library. In the summer, it infuriated customers with a sharp rate increase. In the fall, it “taxed” shareholders by issuing more stock. Will the low hanging fruit of advertising be the next untapped revenue stream?