Can Mid-Core Gaming Stabilize Zynga’s Revenues?

ZNGA: Zynga logo

The casual gaming market drove Zynga’s (NASDAQ:ZNGA) user base to an impressive 300 million monthly active users and gave the company its dominant position in the social gaming market. But as the company’s results have shown, a large base of casual gamers can be difficult to monetize. In-game purchases tend to be volatile and depend heavily on engagement levels of the game. Zynga generates most of its revenue from in-game virtual goods sales and advertising on multiple platforms like Facebook, Google+, iOS, Android and others. To solve this issue, the company has now acquired a mobile game studio, November Software, to develop mid-core mobile games in a bid to turn the company around and build a less-volatile revenue stream. [1]

Check out our complete analysis of Zynga

What Is A Mid-Core Game?

There are essentially three types of games: casual game, core game and mid-core games.

A casual game is a game which is easy to play and does not involve complicated plot lines and characters. These are simple games aimed at users who want to spend some time and blow off steam. These games are usually less engaging and the user can drop off anytime as the games tend to be repetitive. The popular way to monetize is to allow free play but charge for upgrades and in-game merchandise if the user finds the game interesting enough to pay for upgrades. It is also monetized through ads.

Zynga is the clear leader in casual games and the company released two successful games recently: FarmVille 2 and ChefVille. These became the biggest drivers for its user base as daily active users (DAUs) increased 10% y-o-y from 54 million to 60 million users while monthly active users (MAUs) increased 37% y-o-y from 227 million to 311 million. These games are relatively inexpensive to develop and have quick turn-around times. These can be delivered on multiple platforms such as browsers, mobiles and tablets and have a very large potential user base.

A core game takes a longer time to develop with higher cost and has very high user engagement. These games have rich graphics and extensive plot lines and takes hours of play to finish and involves many hours of dedicated play by the gamer. These games are usually monetized by charging the user an upfront fee for an instance of the game and may also involve subscription fees to play on multiplayer platforms. Companies such as Electronic Arts (NASDAQ:EA) cater to this area of gaming and successful titles have a loyal user base and revenues tend to be less volatile. The potential user base is much smaller compared to casual games.

A mid-core game tries to combine the engagement level of a core game with the shallow 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.

Can Mid-Core Games Arrest The Drop In Zynga’s Paying Users?

According to the company’s latest filing, average daily bookings per average DAU (ABPU) decreased from $0.058 to $0.047 y-o-y, which is a drop of 19%, while monthly unique payers (MUPs) decreased from 4.1 million to 3.0 million, which is a drop of 28% q-o-q, largely driven by Draw Something. These results reflect the weakness of certain games and include an estimated impairment charge between $85 million and $95 million related to intangible assets acquired in connection with the purchase of game maker OMGPOP.

A mid-core game is designed to keep engagement levels high and if the company is successful in pulling this off, we could see an uptrend in these numbers.

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What Are The Implications Of Focusing On The Mobile Market?

One of the biggest reasons why Zynga has such a large user base is that it associated early with Facebook and leveraged its exponential user growth. So far, its mobile gaming initiative has not fared too well, with the company already taking an impairment charge related to the acquisition of OMGPOP, a company it acquired early this year.

The mobile gaming market has a different set of challenges and Zynga does not enjoy an anchor like Facebook on the mobile platform. It has tied up with Nokia to provide some of its popular titles as default games in its smartphones and feature phones, but the company has a steep slope to climb before it can compete with titles such as Rovio’s Angry Birds.

The mid-core gaming market is worth $2 billion in the US and the EU and can be a significant growth driver for Zynga if its efforts to capture market share. [2]

Outlook For The Rest Of 2012

Raising its lower end of the estimates, Zynga guided that bookings will be in the range of $1.09 billion to $1.1 billion while adjusted EBITDA will be in the range of $152 million to $162 million for 2012. Full year non-GAAP EPS is expected to be in the range of $0.02 to $0.03, based on a full year share count of approximately 830 million shares. We expect that reducing costs and concentrating on its top games will help its results in the next few quarters.

We have a $ 3.19 Trefis price estimate for Zynga, which stands significantly above its market price. We expect Zynga’s new platform and gaming network and online gambling initiatives to account for much of its future earnings potential.

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  1. Zynga Buys November Software for ‘Mid-Core’ Mobile Gaming,, November 9, 2012 []
  2. Mid-Core Gaming Market Size,, April 2012 []