Zynga, Cloud Pioneer, Must Fix Revenue Woes

Zynga CEO Pincus reducing staff by more than 500 in bid to bring costs more in line with revenues; stock price drops again.
Zynga has been forced to slash more than 500 employees from its workforce, about one-fifth of the total and its largest layoff to date, after projecting weak bookings for the second quarter.

The moves indicated that Zynga, once a leading light of the social networking craze, has not yet found its footing in converting online games that bring people together into a revenue stream. In addition to cutting staff, Zynga will close some offices, Monday's briefing of Wall Street analysts indicated.

At one time, Zynga was a major generator of Facebook traffic, but the two negotiated an agreement where Facebook received 30% of the credits that Zynga players purchased when playing games like Mafia Wars and Farmville on Facebook. That was disclosed as Zynga approached its IPO in July of 2011.

In order to produce a more independent revenue stream, Zynga closed down some games that had gotten their start on Facebook and redirected development toward producing mobile games that wouldn't be dependent on Facebook as their host platform. But so far, nothing has allowed Zynga to turn the corner toward sustained profitability.

[ Want to learn related moves Zynga has made? See Zynga Regroups In Quest For Profit. ]

The announcement of layoffs to Wall Street analysts Monday was an attempt to bring costs into line with those revenues. The report on second-quarter bookings and an accompanying forecast prompted Michael Pachter, analyst at Wedbush Securities, an investment wealth management firm, to tell Reuters, "I admire them for aligning costs with revenue." But investors "thought (Zynga) was already guiding to a low number that they would sail over. It's come in even lighter."

"Are they in a state of persistent revenue declines? One quarter doesn't tell the story, but we need to hear what else they're doing," Pachter said.

Observers thought Zynga was on a new tack last January, when CEO Mark Pincus announced that 13 "older" games would be discontinued and 5% of the staff laid off. Those moves promised to put more resources back in the Zynga fold as it reduced its dependence on both Facebook and running part of its infrastructure on Amazon Web Services.

Zynga shares closed at $3.40 Friday, then dropped on the bookings news to close at $2.99 Monday, a 12% drop. The company began laying off employees Monday afternoon and Pincus issued a company-wide memo that said the San Francisco firm continued to struggle to achieve revenue in mobile games.

"The scale that served us so well in building and delivering the leading social gaming service on the Web is now making it hard to successfully lead across mobile and multi-platform, which is where social games are going to be played," wrote Pincus, according to Reuters.

The series of cuts contrast starkly with Zynga in early 2012, when it paid $183 million to acquire game studio OMGPOP, which became its New York studio, and total headcount ballooned to nearly 3,000.

Zynga has lost 70% of its market value since its 2011 debut as a public company. Pincus founded the company in 2007 and still maintains majority control.

Trading was briefly suspended twice on Monday afternoon, and the stock drop marked Zynga's largest single-day loss since July 26, when it badly missed its projected earnings. Shares declined 37%.

Zynga pioneered use of hybrid cloud computing, relying early in its existence on Amazon's infrastructure for 80% of its compute power, then establishing what former Zynga cloud architect Allan Leinwand called its Z Cloud, a set of its own data centers that it managed as a unit. They were located close to Amazon and Facebook facilities, linked through an Equinix hub.

Leinwand said Zynga found that Z Cloud facilities, custom-designed to Zynga's needs, were three times more efficient than general purpose infrastructure. With the Z Cloud, Zynga flipped its dependence to 80% on its own facilities and 20% on Amazon by mid-2012.

Zynga's role as a cloud pioneer was profiled in the InformationWeek story, "Zynga's Unusual Cloud Strategy Is Key To Success." On the July 1, 2011, magazine cover, the story was touted as "Lessons From Farmville."

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