While Zynga’s Treasure Isle continued its ascent last week, adding over 4.2mm Monthly Active Users (MAUs) to pass 25mm total, and become the 4th biggest game on the Facebook platform (passing Mafia Wars and Petville) every other major Zynga title lost MAUs for the week.
Farmville had it largest weekly MAU decline, dropping 2.3mm users to finish with 78mm. Farmville is now 18% below its peak Daily Active Users (DAUs) of 32.5mm, as the behemoths best days appear to be behind it. Zynga’s Café World (-1.3mm MAUs) and Fishville (-1.0mm MAUs) also experienced big declines. Interestingly, Treasure Isle was the only Top 10 game on the Facebook platform to increase its total MAUs last week, but even its growth slowed dramatically when compared to the 6.7mm MAUs Treasure Island added the week before. As a result, Zynga’s total MAUs across all its properties declined by more then 3mm to finish the week at 248mm. The only other major winner this week was EA’s Hotel City, which gained 1.8mm users (to 13mm MAUs total) to help EA eke out a gain of 0.1mm MAUs for the week (to 58.6mm MAUs) as EA’s other tow major titles, Restaurant City (-0.4mm MAUs) and Pet City (-0.8mm MAU;s) both suffered declines. As we always point out in our weekly updates, we don’t put too much weight on what happens with MAUs in any one week, but it is always provides additional context.
The last few weeks have seen Zynga, and its CEO Mark Pincus, receive significant press, some good (e.g. Business Week and Details), some not so good (e.g. Valleywag), as Zynga ups its PR push. But at the least, the company is keeping itself front and center as interest in the Facebook ecosystem explodes.
Most importantly, while a down MAU week, and some bad press is notable, potential changes to come on Facebook portend some additional tough days down the road for Zynga. Everyone following Facebook is aware of the Facebook’s continued interest in cutting down on noise in the newsfeed and increasing revenue. This played out in Facebook’s elimination of application notifications which took effect on March 1. While many in social gaming feared the worst, the impact has proven to be pretty minimal to gaming companies (although dating sites which rey more on notifications were hurt). However, when the notification announcement was made, Facebook stated that they were also going to change how requests function. It appears now as though Facebook is going to make some major changes to the gift channels and how gift requests function. Facebook perceives that the Facebook channel is polluted by gift requests. While the pending changes aren’t exactly clear yet, the gift channels are a very major driver of traffic to social games. In fact, many game players struggle to navigate to games outside of the gift channels. So this change will likely force the game companies to spend an even greater percentage of revenue on advertising, which is of course is what Facebook wants. On one hand, Zynga, as the largest company in the space, has the most resources to pour in to advertising. On the other hand, companies like CrowdStar that have put more resources in to viral channels they control, like forums, may be better positioned to weather the change.
With the pending changes to requests, Zynga is likely going to advertise even more, and thus experience lower margins than the 40% long term margins we have modeled. While this may ultimately have a negative impact on our $5 billion valuation of Zynga, we sense the company is tracking ahead of the $529 million in 2010 revenue we forecasted. For the moment, we are maintaining our price target. We further understand that since our initial Zynga research report was published on April 6th, Zynga’s shares have risen about 50% in the private market, to a high of $14 in a meaningful transaction last week. However, the rising share price may not be great news to Zynga employees as the company considers limiting employees ability to sell their shares.
On a last, positive note, Zynga filed papers in Delaware two weeks ago authorizing the issuance of an additional 1.9 millions shares of Series B-2 Preferred Stock, at an issue price of $12.87 per share, implying a value of about $4 billion for the company based on the estimated 320 million shares outstanding. While no deal has been announced, the filing is typical of shares issued around a strategic partnership, with Softbank often mentioned as a good potential partner for Zynga in Japan.