Can Zynga’s New CEO Solve Its Problems?

Zynga’s (NASDAQ:ZNGA) stock has gained around 20% over the last few days after the company announced that it has hired Don Mattrick as the new CEO. Mattrick has a great track record in heading Microsoft’s (NASDAQ:MSFT) Xbox division as well as Electronic Arts (NASDAQ:EA), but can he pull Zynga out of trouble?

The company’s real problem lies in the nature of its business rather than its leadership which suggests that unless it fundamentally changes itself, the problems might persist. What it needs is better games, innovation, more sustainable ways of monetizing games as well as higher focus on core gamers. But that doesn’t mean that the new leadership will not bring anything to the table. We believe that Don Mattrick will offer fresh perspective and help the company in managing its costs better. Let’s take a closer look at Zynga’s problems and how the new CEO might help.

Check out our complete analysis of Zynga

What’s Zynga’s Real Problem?

Zynga operates in social gaming space and its products (games) are directed at casual gamers. The nature of the business is such that the customers tend to be fickle, and it becomes necessary to launch new games frequently to compensate for the decline in the user base of previously successful games. This is not an easy task and requires great deal of innovation and effort. Zynga’s recent quarterly results suggest that the company is really struggling and its new games haven’t attracted a lot of users.

Zynga’s revenues declined by about 18% compared to the the first quarter of 2012 due to lower number of monthly active users (MAU) and a decline in monetization. The company’s overall MAU stood at 253 million down from 292 million for the same quarter last year. Even a sequential comparison showed a strong decline in these metrics as Zynga’s previously successful franchises lost users. The competition in the social gaming market has increased substantially and Zynga’s strained relations with Facebook isn’t helping. The company plans to shut down four of its games in the second quarter, including The Ville, Empires & Allies, Dream Zoo and Zynga City on Tencent. We also note that Zynga hasn’t been able to fully leverage the mobile growth and majority of its revenues still come from desktop platform, which is a cause of worry.

The company now intends to direct its efforts and funds towards mid-core games, real-money gaming and franchises that have demonstrated success in the recent quarters, including Farmville 2, Draw Something and “With Friends” branded games.

How Can The New CEO Help?

Social gaming is a volatile space and the new CEO Don Mattrick doesn’t have that kind of experience. However, we still believe that he can complement Zynga’s efforts of turning around its business. Mr. Mattrick has plenty of experience working with some of the best console games, which are essentially aimed at core gamers. Given that now Zynga is planning to focus more on mid-core games which tend to be more engaging, his experience can help. A mid-core game tries to combine the engagement level of a core game with the learning curve of a casual game, to provide an engaging gaming experience to a larger user base. This can potentially allow for retention of a large user base while promoting in-game purchases as the games are designed to be more engaging and users are likely to pay to upgrade, rather than drop off once the free-play scenarios are completed. Zynga recently launched Battlezone, which marks its foray into action RPG (role playing game).

A research study conducted by Harvard Business School professor Noam Wasserman suggests that more often than not, founders tend to step down as CEOs, as the organization grows and becomes more complex. This can be attributed to a mismatch between their skills and a CEO’s broader responsibilities of managing marketing teams, selling the product and building an efficient organization for product support. In that sense, a new CEO would be a welcome change for Zynga and can help in better cost management and possibly, stimulate innovation which seems to be lacking.

Our price estimate for Zynga stands at around $3.50, implying a slight premium to the market price.

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