Adam Krejcik from boutique research ﬁrm Eilers Research looks at Zynga’s recent downfall and ﬁnds some reasons to be cheerful
Much has been made over Zynga’s recent downfall, including its precipitous decline in the social casino game market. In fact, we have pointed out this falloff in the last two issues of our “Social Casino Tracker”, noting most recently that Zynga had been surpassed by both Caesars Interactive (owns Playtika & Buffalo Studios) and IGT (owns DoubleDown) in terms of revenue generation.
While Zynga still faces a number of near-term challenges and longer-term structural issues, our latest round of channel checks indicate some signs of stabilisation within its core Poker franchise and we note Hit It Rich! Casino Slots (developed by Spooky Cool) could very well be the company’s best new game launch on Facebook this calendar year.
Zynga’s decline in the social casino game sector is largely attributable to attrition in Zynga Poker (both Facebook and mobile version), which we estimate still accounts for nearly 80% of its social casino game business. Additionally, increased competition especially from companies with ties to the real-money gaming industry and a lack of traction with new social casino titles (i.e. Zynga Slots, Zynga Bingo), has also played a role. That being said, we are encouraged by two recent events 1) stabilisation in Zynga’s Poker franchise and 2) impressive user growth in Hit It Rich!Casino Slots.
In terms of Poker, DAUs for the Facebook version of Texas Hold’Em Poker are ﬂat q/q and player stickiness (DAU/MAU ratio) has improved in Q4, indicating a more engaged and active user base. While the iOS version of Zynga Poker continues to show weakness the rate of decline also appears to be decelerating.
Reasons to be cheerful
Our checks indicate Hit It Rich!Casino Slots (developed by Spooky Cool) has got off to a strong start, despite fairly limited customer acquisition spend. Unlike Zynga Slots, we believe the mechanics and gameplay of Hit It Rich!Slots are much more aligned to traditional land-based slot machines and real-money online casino games. We note these types of social casino apps have proven to be very successful as demonstrated by IGT/DoubleDown, WMS/Jackpot Party Casino, and High 5 Games/High 5 Casino, which are now among the top-grossing apps on Facebook. Additionally, we note Hit It Rich!incorporates a number of third party licenses such as Sex in the City, The Terminator, Wizard of Oz and Elvira.
We believe Joe Kaminkow (Spooky Cool founder), who is notorious for aggressively licensing third-party content for land-based casino slot machines likely played a major role in this strategy. While licensing content will negatively impact margins, it can also serve as a key differentiating factor and help in terms of discoverability, which is crucial in the highly competitive social casino game market. We suspect more and more publishers are going to be negotiating for third-party content in the coming months.
Hit it rich
In terms of revenue potential, we estimate Hit It Rich! could generate upwards of $5m in gross revenues on Facebook alone this quarter and could eventually exceed $10m/qtr if monetisation levels can be improved. Our checks indicate ARPU levels for Hit It Rich!still trail other well-known social casino apps such as DoubleDown, Jackpot Party, and High 5 Casino; however given the game play mechanics and Spooky Cool team (staffed with a number of ex real-money gaming executives from companies like IGT, Aristocrat, and WMS), we expect monetisation levels to improve.
While Zynga still has a long way to go before it catches up to the likes of IGT/DoubleDown and Caesars Interactive, we believe things are ﬁnally beginning to turnaround. Moreover, following a long string of bad M&A decisions (i.e. OMGPOP); Zynga’s acquisition of Spooky Cool in 2Q13 may turn into one of its best investments yet. All this has not been lost on this investment community either with shares trading near 52-week highs and up +46% in the last three months.