Zynga Through The Lens Of Porter’s Five Forces

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Zynga’s (NASDAQ:ZNGA) business under-performed during 2014 owing to a drop in its user base, a surge in losses, and a lack of new major game launches. Its fourth quarterly results also came in disappointing, with weaker-than-expected sales growth and a soft outlook driving its share price over 15% lower since the earnings report. In this article, we stack up Zynga’s business against Porter’s Five Forces to assess where it could gain or lose going forward.

We think the industry dynamics are clearly unfavorable for Zynga, as many of the Porter Five Forces indicate a high level of threat. Although already intense, the competitive rivalry within the industry could further intensify in the future due to the low barriers to entry in the mobile gaming business. Coupled with high bargaining power for customers as their expectations continue to magnify, we think these factors will put an upward pressure on development and customer acquisition costs over the coming years. Suppliers of traffic, including Facebook, Google and Apple, can impact Zynga’s business by changing their terms of service unilaterally. In addition, the sheer number of mobile apps that keep emerging every day  can threaten Zynga’s business, as they compete for the time and money spent by Internet users.

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See our complete analysis for Zynga

Porter Five Force

Intensity

Competitive Rivalry Within The Industry High
Bargaining Power Of Customers High
Threat Of New Entrants High
Bargaining Power Of Suppliers High
Threat Of Substitute Products Low To Moderate

Competitive Rivalry Within The Industry — Zynga’s shift towards mobile users will further intensify competition

  • The gaming market is characterized by intense competition as game developers compete for players’ time, attention and discretionary spending. They compete on factors including quality of gaming content, user experience, brand recognition, as well as access to distribution channels.
  • The rapidly evolving mobile landscape increases the difficulty for game developers, owing to frequent game launches, quickly changing mobile platforms and introduction of new technologies.
  • Zynga competes with three types of players:  1) developers of web and mobile games; 2) other game developers, that develop games for PC’s and consoles; and,  3) other forms of entertainment and media that vie for users’ spare time and attention.  This last category includes casual entertainment, social networking, video and music, etc.
  • Since Zynga’s social games are generally free-to-play, the quality of user experience becomes essential for retaining and attracting new users.

Bargaining Power Of Customers The presence of a large number of gaming and entertainment options adds to bargaining power for customers

  • Gamers have the option to choose from a large number of gaming and entertainment options. In addition, they can play games on either consoles, desktops, or mobile devices.
  • Zynga’s monthly active user base came down by 31% in 2014 to 118 million; this indicates users could be gravitating towards non-Zynga games or other entertainment options. Since, the number of paying players constitutes a very small proportion (around 1%) of the total player base, we think it will be critical for Zynga to sustain and grow its user base in the future.
  • All these factors, point to very high bargaining power for customers.

Threat Of New Entrants — Low barriers to entry make this threat formidable

  • The low barriers to entry in the Internet business make it easy for new entrants to enter the gaming market.
  • Additionally, given the constantly evolving mobile gaming market, a large number of players keep entering the market with new offerings.
  • However, significant resources are required for marketing and to gain access to distribution channels. In addition, newer players lack the scale and network efforts that bigger players enjoy. This raises the barriers to entry to an extent.

Bargaining Power Of Suppliers Facebook has high bargaining leverage followed by Apple and Google

  • Zynga publishes its gaming content on Facebook as well as mobile platforms, including Android and iOS. Facebook and mobile platforms accounted for 51% and 44% of its revenues respectively in 2014. Hence, Zynga is reliant on FB, Apple and Google for a significant portion of its business, and any of these players could change their terms of operations unilaterally to the detriment of Zynga’s business.
  • Facebook holds significant bargaining leverage as it is uniquely positioned as the key source for distribution, marketing, promotion and payment platform for Zynga’s games. The social network holds high degree of discretion to alter its terms of service, fee structure and make other changes that could impact its business with Zynga. Payment and other fees (which includes gaming business) constitutes for less than 10% of Facebook’s overall revenues and hence, it is not dependent on Zynga for its revenues.
  • Facebook recently rolled out an advanced version of its developer platform and publishers are required to migrate to the new platform soon. Since Zynga has decided not to migrate ten of its existing games to this new platform, its FB-related business will further drop over the future.
  • Apple also made changes to its policies recently, as all new applications meant for its App Store must include 64-bit support now.

Threat Of Substitute Products Increased adoption of other entertainment apps could impact time spent by players on games

  • The mobile gaming market is forecast to grow at a stellar pace over the coming years — the global mobile gaming revenue is estimated to rise from $17.7 billion in 2013 to $28.2 billion in 2016, according to SuperData [1]. We think gaming will continue to be among the leading entertainment choices for Internet users across the world.
  • Having said that, the rising popularity of other entertainment apps, social networks and sites could impact the time and discretionary spending of players on gaming platforms.

We will publish our latest price estimate for Zynga’s stock early next week. Our current price estimate for Zynga stands at $2.83, implying a premium of about 18% to the market.

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Notes:
  1. Mobile games market, SuperData []