Not surprising: Zynga overpaid for OMGPOP and the financials show it
Zynga found a budding new gaming market that it could exploit with addicting, yet fairly useless games, and it has grown into a hugely successful company. Unfortunately, that bubble may be bursting as Zynga has missed projections again on its quarterly financial statement. Zynga is the company behind "popular" (yet incredibly awful) games like FarmVille, and has been steadily moving into the mobile space with games like Words With Friends, and the not so casual game Horn.
Zynga is also a large part of Facebook's revenue stream, accounting for about 14% of Facebook's revenue in the first half of 2012. In fact, Facebook's stock dropped 3% right after Zynga made this announcement. Zynga has released its "preliminary financial results" well in advance of its official Q3 financial statement and that in itself is a red flag. Zynga is saying that the company has earned about $300 million Q3 this year, which is down from $332 million last quarter.
And, the bad decision to buy OMGPOP has also reared its head. Zynga bought the makers of Draw Something for $180 million, and then a completely predictable thing happened: people got bored with the game because the word bank never changed, so they stopped playing, and OMGPOP lost a lot of its value. In the financial results, Zynga took a write-down of $85 million to $95 million on the value of OMGPOP, more than half of what the company paid for it, meaning that was definitely a bad deal.
Analyst Michael Pachter blames the troubles on Zynga, saying, "They suck at forecasting. Nine weeks ago they thought they’d got [their estimates] down to as low as they could be and now they’re down another 20 percent, which means that their monetization is deteriorating faster than we thought."
Of course, we're of the mind that another big issue is that the casual gaming market is incredibly fickle, which is why people are called "casual gamers". People may get addicted to tending their crops for a short time, but it's incredibly hard to keep people engaged when a game is all grind and no payoff.