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Treasure Island

The negative impact on social gaming providers from Faceboo’s changes in notifications and requests imposed in March finally seemed to have slowed in June, with total monthly active users (MAUs) of the top 10 game developers dropping by a little over 1% from May levels to 415mm in June month-to-date, after falling 9% in May.

We were very interested to read Mark Zuckerberg’s thoughts on the changes in a recent interview on Inside Facebook where he said that:

“There are two ways that apps get usage that really define the character of the application. One way is viral distribution – spreading to new people. The other is re-engagement. Early on, the viral strength was so much, but there were really no channels for re-engagement. So people were using viral channels to reengage people, and you basically had apps that were growing very quickly, and their best way to get a good user count was to get new users and churn through them. That really optimizes for apps that are very viral instead of apps that are high quality and that people want to reengage. So we intentionally weakened the viral channels recently, and intentionally strengthened re-engagement with emails, so that there will be better apps. It’s going to be a long process, but I think it’s going reasonably well.

One of the things we did recently was re-balance around games. A lot of users like playing games, but a lot of users just hate games, and that made it a big challenge, because people who like playing games wanted to post updates about their farm or frontier or whatever to their stream. They want all their friends to see their updates, and they want to get all their friends’ updates, but people who don’t care about games want no updates. So we did some re-balancing so that if you aren’t a game player you’re getting less updates.”

As a result of this “re-balancing,” since reaching their peak in mid-April, as the Facebook changes were being implemented, total MAUs have fallen over 11%, with virtually every developer seeing a significant fall off:

This large drop off comes amid the emergence of several new hits for the social gaming providers.  Most notable, Zynga’s Treasure Island was the fastest growing game in the history of Facebook, reaching over 20 million MAUs in just three weeks.  However, the entire life cycle of games appears to be compressing, as Treasure Isle peaked just seven weeks after its introduction, and over the subsequent six weeks, Treasure Island has lost over 20% of its MAUs, including a 2mm MAU loss just last week.

Treasure Island hasn’t been Zynga’s only new hit.  More recent, Zynga introduced Frontierville, which has already surpassed 11 million MAUs after just three weeks, but these new hits haven’t come close to offsetting the losses among all the other Zynga games:

It’s interesting to note that the game with the best staying power is Texas Hold’ Em, a classic poker game that was likely the easiest for Zynga to build, and is the most basic of all of Zynga’s games.

The social gaming providers are hopefully finally at the point where things will level off from the Facebook changes, such that growth can begin anew.  We’ll keep you posted.

Lou Kerner owns 50% of this social media site, SecondShares.com, and owns shares of Facebook (private company) and is employed by Wedbush Securities (www.wedbush.com). Wedbush Securities is a registered broker-dealer and member NYSE/FINRA/SIPC. Wedbush Securities makes a market in the publicly-traded securities mentioned herein and its Equity Research Department provides research coverage of Electronic Arts. The information is neither intended to be a complete record or analysis nor a solicitation of an offer to buy or sell any security mentioned herein. This information is obtained from internal and external sources, which is believed to be reliable; however, no guarantee of its accuracy can be made. Additional information is available upon request.

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Zynga’s total Monthly Active Users (MAUs) declined last week for a third straight week, and the pace of MAU decline continued to accelerate, with a total decline of 5.9 million MAUs, or 2.4% of Zynga’s massive total user base, which now stands at 238 million.  The MAU loss grew from the previous week’s drop of 4.2 million MAUs, and the loss of 3.1 million users the week ending May 1st.  Treasure Island remained the only major Zynga title to add users last week, although the 900,000 net adds was modest compared to the 6.7 million it added week just three weeks ago.     With 238mm MAUs, Zynga is now down over 5% from peak MAU levels reached mid-April.

Farmville, Zynga’s biggest game, was also Zynga’s biggest MAU loser last week, declining by 2.3mm MAUs last week, to stand at 75.5mm, and is now down by 7.7 million MAUs, or 9%, from its peak in early April.   However, Fishville is Zynga’s biggest decliner in terms of numbers of MAUs lost from its peak MAU count, having dropped by 9.6 million MAUs, or 37% from its peak of 26.2 million MAUs reached last December.   While Treasure Island still growing, Zynga’s seven other major titles are all below their peak MAU counts.  The chart below highlights the MAU decline from peak levels of Zynga’s major hits other than Treasure Island:

It’s critical to recognize that MAU declines are not unique to Zynga, as every major game developer but Mindjolt lost MAUs last week.  In addition, every one of the 11 major Facebook game developers we follow is off from their peak MAU levels reached over the last few months.  The MAU loss from peak levels range from Playdom’s modest 1.7% drop (due to the recent growth of Big City Life) to Mindjolt’s staggering 37% drop.  In fact the average MAU loss of 11% of the top 11 developers from peak levels is more than twice Zynga’s 5.2% total MAU decline from its peak.  As a result, Zynga has continued to grow its MAU market share of the top 11 developers, reaching a very impressive all time high of 53.5% this week, or 238 million of the total MAUs of 445mm of the top 11 game developers.   While the seven Zynga games highlighted above have lost a combined 31 million MAUs from their peak, Treasure Island has added over 27 million MAUs in the past six weeks.

We believe there are multiple factors driving the MAU declines being experienced by every major Facebook game developer.  There are seasonal factors, as people go outside more in spring than winter.  We estimate that Facebook’s gaming notification and gift request changes have impacted MAUs significantly more than the weather.  We also believe that new/smaller developers are taking an increasing share of new MAUs, with last week rapid growers including Family Feud by iWin (up 900,000 MAUs last week), Kingdom of Camelot from Watercooler (up 500,000) and Nightclub City by Nightclub City (up 400,000).    Finally, there appears to be some game fatigue occurring as well, as social games don’t yet engender the long term loyalty experienced by hard core games like World of Warcraft.

Current declines notwithstanding, we continue to believe that social gaming is emerging as the next major force in gaming.  However, we also recognize the social gaming industry remains in the early stages of its evolution, and the success of today’s leading social gaming companies like Zynga, EA, Playdom and CrowdStar will depend on their ability to evolve in this dynamic environment and provide gamers with ever evolving gaming experiences.  We also continue to believe that Zynga’s massive scale and the resulting inherent marketing advantages, positions Zynga to continue to drive new mega hits like Treasure Island and remain the dominant player in the social gaming industry.



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We couldn’t be more pleased with the thousands of articles written around the globe in response to our Zynga report two weeks ago which estimated that Zynga would trade at a market cap of $5 billion if it were public.   While a some bloggers agreed with our fundamental analysis, we note that many more people disagreed.  A poll at the bottom of a thoughtful GamesBeat posting about our report indicates that 72% of respondents (275 voters) believe  Zynga “is worth less” than our $5 billion valuation.  While we won’t know the answer until Zynga goes public, SecondShares is now committed to continuing to cover Zynga and report on its progress.  We’re pleased to report that Zynga’s progress since we published has been quite impressive.

In the two weeks since our report, Zynga’s MAU (monthly active users) growth has meaningfully accelerated, as Zynga added over 5mm new MAUs a week, an annualized growth rate exceeding 100% vs. our projection of 35% annualized growth.

Now we don’t expect this growth rate to be maintained, but we are impressed.  We also note that Zynga’s MAU market share of the Top 10 app developers rose to 53.8% from 53.1%.

In our risk section we noted that many of Zynga’s games had peaked, including its monster smash Farmville.  In the two weeks since, Farmville has dropped about 1.5mm MAUs (to 81.6mm).  Fishville has also continued its fall, losing 1.7 mm MAUs (to 20.4mm)  and is now off more than 50% from its peak.  But we knew games have a lifecycle, and the bigger question/risk, was Zynga’s ability to continue to bring new hits to the market.  Congratulations Zynga, and its shareholders, Zynga has produced yet another hit.  Treasure Island, which was nowhere when we wrote the report two weeks ago, has over 16.5mm players, is growing like a weed, and is poised to become one of the top 10 games on Facebook this week.  That is stupendously impressive.  The dramatic growth of Treasure Island more than offset the modest losses in Farmville and Fishville, and enabled Zynga to increase its MAUs by more than 10mm in just two weeks, to over 250mm.  Our year end projection of 300mm MAUs for Zynga is looking mighty conservative at the moment.  While 72% of GameBeater’s readers thought our price target was aggressive, we strived to be conservative, and look to be achieving that goal.

Interestingly, Zynga is not the only game developer enjoying success.  The number two player, EA, also had a great two weeks, growing its MAUs by 7mm to over 57mm on the back of their new hit Hotel City, which now has 9.5mm MAUs vs. just 1.7mm when we wrote our report two weeks ago.  EA grew its MAU share to 12.3% from 11.2% in the last two weeks ago.

Lastly, largely due to Zynga and EA, total Facebook MAUs derived from the Top 10 developers increased 14mm, to 465mm MAUs, a 75% annualized growth rate, indicating that the Facebook platform remains poised for continued growth of social gaming applications.

The last two weeks gives us even greater confidence that social gaming is the next big wave in gaming, bigger than almost anyone currently forecasts, including us.

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