How Dependency On Facebook Inc (FB) Cost Zynga Inc (ZNGA) Dearly?

Share on FacebookTweet about this on TwitterShare on Google+Share on RedditShare on LinkedInPrint this pageEmail this to someone

Recently, the tenure of Zynga Inc (NASDAQ:ZNGA)’s CEO, Don Mattrick, came to an abrupt end. It was less than two years since he joined the company in 2013 and he had to leave the company, bowing to the pressures exerted both within, as well as without. However, is the replacement with founder, Mark Pincus, a good option? The ready-made answer was Pincus was replaced by Mattrick since the former failed to deliver the expected results. Therefore, will he be able to do it this time around?

Piggy-Back Riding

Zynga Inc (NASDAQ:ZNGA)’s founder and Chairman, Mark Pincus, will not be getting anything substantially in terms of salary as a CEO, since he said he would take $1 as salary. However, the issue at hand is that there is no worthwhile gaming console the pipeline to convince investors on the future prospects. In fact, one of the reasons why Mattrick was shown the exit door was that there is no gaming console in the pipeline to generate revenue in the coming quarters.

In his earlier days as the CEO of Zynga Inc (NASDAQ:ZNGA), Pincus was mostly riding piggy-back with Facebook Inc (NASDAQ:FB). At one point of time, i.e. at the time of Facebook entering the IPO scene, there were reports that the social networking site was benefiting more from Zynga Inc (NASDAQ:ZNGA). The social networking site was benefiting from the gaming console company since users were attracted by the games provided by Zynga. However, after the separation, it was not Facebook, but Zynga, that was dealt with a deadly blow from which it is yet to recover.

Replacement

Pincus had all the time in the world to recoup the company as an all around gaming company after it exited from the clutches of Facebook Inc (NASDAQ:FB). However, he failed to come up with a roadmap to put the company on the recovery path. Mattrick managed Microsoft Corporation (NASDAQ:MSFT)’s Xbox gaming division before he took over as CEO of the beleaguered Zynga Inc (NASDAQ:ZNGA). He tried to bring recovery through the acquisition, which is yet to show signs of delivering solid revenue. He acquired NaturalMotion for $527 million

According to Piper Jaffray’s senior analyst, Mike Olson, Mattrick was overly aggressive in issuing forecasts. In the process, he lost the trust and ear of investors. Olson said it was tough to repair the damage done and was not at all surprised by the changes that the company is trying to make. However, he was not convinced by the replacement of Pincus as its CEO and the investors are also not so confident about Pincus.

Founder Response

For his part, Pincus said that the last two years have taught him enough about his earlier performance. He said that Mattrick was the right choice for Zynga Inc (NASDAQ:ZNGA) two years ago, to take the game into mobile when he took over the reins.

Pincus owns about 10% of the gaming company. This apart, he is said to enjoy 60% voting rights and continued to enjoy the position of product chief until a year back when he shifted his focus to unveiling a startup incubator. Now, he has come back to head the company to find out what differentiated. He has only shown his authority.

Over-Dependent

Now, the current tale of the gaming company, has become somewhat a case study for others. This is primarily because it depended heavily on Facebook Inc (NASDAQ:FB) as a platform. Another reason, is that it was a big player in games when the social network was widely used on desktop or laptop PCs. This was the same reason analysts doubted the success of Facebook on mobile, before its IPO launch.

However, the social networking site learned the art to transform itself to be available in smart devices too. But Zynga Inc (NASDAQ:ZNGA) has been struggling in the transformation to move towards mobile apps and devices, despite games being more social than ever before. At one point in time, Pincus sought advice from Bill Campbell, who was regarded as an expert, on running a fast-growing company.

The current CEO was one of the beneficiaries of an early exit in the post-IPO lock-up period. He had sold part of his holdings, at $12 a share, just few months ahead of the dramatic shortfall in meeting the Street expectations. Therefore, his $1 salary theory will not be liked by investors. However, he was the person behind the OMGPOP acquisition, though it was closed down finally.

Management Shakeup Likely

There appears to be a shakeup in management in the cards. This is because Mattrick picked up Clive Downie as COO and David Lee as CFO after he entered Zynga Inc (NASDAQ:ZNGA). Sterne Agee analyst, Arvind Bhatia, said that Mattrick’s leaving the company could open other C-level executives to follow suit.

One of the primary reasons for such a feeling is that both Downie and Lee have been convinced by Mattrick’s vision and wanted to be part of that vision. Now that he is gone, there will be fresh vision under the lens of Pincus and doubts will likely remain in the minds of these two executives whether they will fit into the fresh scheme of things.

Main Problems

In a research note to clients, Cowen analyst, Doug Creutz, said that Zynga Inc (NASDAQ:ZNGA)’s main problem is low quality of games and lack of innovation. The company also failed to understand the market of smart devices. Another reason was the unfavorable internal culture during the earlier tenure of Pincus.

The analyst is convinced that the return of Pincus will bring more disruption internally and that the internal disruption will only harm the company further. The dismissal of Mattrick only suggests the absence of confidence in the pipeline. The over dependence on Facebook Inc (NASDAQ:FB) has undoubtedly prevented them from being more innovative.

Conclusion

The dependence on the social networking site has definitely cost Zynga Inc (NASDAQ:ZNGA), since it lost valuable user-base. The gaming company is still struggling to find, not only the right path, but also the right kind of mix needed for smart devices. This is more to do with the innovative approach on which it is struggling. Though the exit of Mattrick was expected or wanted by various sections, for damaging the company’s Poker game, the replacement with Pincus has brought little enthusiasm. He might announce job cuts and cost saving measures to shore up the balance sheet. However, the need of the hour is the right kind of product mix for smart devices. Until then, it is safe to keep away.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

You may also like...

More in FB
linkedin_logo
LinkedIn Corp (NYSE:LNKD) Adds New Revenue Stream With The Unveiling Of Elevate

LinkedIn Corp (NYSE:LNKD) continues to pursue new revenue sources, recently adding e-learning provider Lynda.com at the cost of $1.5 billion...

Close