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. 

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