Customer Ecosystem

It’s becoming increasingly evident why Zynga wants to go public as soon as humanly possible. Farmville is hot, Cafe World is getting there. The revenue is just rolling in and everything is great. But it’s not going to last, and I think they know that.

Looking at Zynga’s customer ecosystem it’s clear that their current efforts have probably reached their apogee without making significant changes to their ecosystem.  Their scorched earth business model will not provide sustainable growth to support a decent IPO.

Here’s why:

Acquisition: Dependence on Facebook

Go check out Farmville.com. Nothing really there is there? They drive you back to Facebook to play the game. All well and good except that despite as much money they pour into Facebook they don’t own the platform. Additionally, their viral efforts are subject to Facebook’s whims. Having an acquisition model dependent on partners and platforms is one thing. Having an acquisition model dependent on one partner is entirely another.

Now don’t get me wrong, they have some leverage with Facebook…. heck, it’s been reported that they’re on pace to spend $50M annually on Facebook ads. However, as Facebook matures they are going to start getting revenues in other places, like e-commerce. For now, as both of these companies slog toward and IPO they need each other, but Facebook is already beginning to clean up their act. Zynga is going to need to identify new acquisition models when the hammer falls.

Conversion: Smooth sailing, I think

For the uninitiated, let me say that the barriers to entry on a Zynga social game are very low. I can’t imagine they have any trouble getting people to play games. And people love the games, and get addicted, which brings us to the upsell.

Upsell: Scammy incentivization finally getting notice

Lost of people play social games, but few are willing to pay for them. That’s where offers come in. The firestorm that Michael Arrington created at the Virtual Goods Conference has moved one step closer to its denouement today with a post from Zynga CEO Mark Pincus. Not really walking back from using the incentivization model,  Pincus claims that they’re vigilantly cleaning up the scams and that most are good companies. However, with Zynga admitting that these partners make up at least 1/3 of their revenues (and I’d bet they’re higher) don’t expect to many changes. In fact, a quick glance of the offer page (below) shows 12 pages worth of offers.

Even worse for Zynga is that they can have this revenue stream cut off from them. I remember similar programs back in 2002 when I was working for Classmates.com. In fact, one Classmates exec told the PM in charge of the program, “I don’t know how you sleep at night.” Since nothing has changed in 7 years, nothing will ever change, right? Actually no, it’s very possible that a more activist FTC under Obama could come into this industry and clean house. The necessity of such an action can be debated, but one thing is sure, the laissez-faire regulatory approach of the Bush administration provided these businesses with a great deal of leeway.

Retention: Lack of brand loyalty, innovation and the transience of social games

How many people playing Mob Wars, Farmville, or Cafe World know they are playing a Zynga game? How many care? Many Zynga games are essentially rip-offs of other games from Playdom or other companies. Nothing is innovative or unique about their games. Zynga’s on a streak, they execute well, but that’s about it. No one is going to be playing Farmville three months from now, so Zynga will need to continue to hit home run after home run and that’s not going to be easy.

So, let’s go to the tale of the tape…

To illustrate the problems that Zynga discussed above, I plugged Zynga into a customer ecosystem model I like to use. If a company is strong, it will have three of four squares rated green. Anytime a company has a red square it essentially means that their customer ecosystem is unhealthy.

In this case, it’s my opinion that Zynga (as it currently stands) is in a bad position… and probably knows it. Hence the desire to push out an IPO very soon. Good luck with that.

UPDATE: Historical footage of Mark Pincus discussing Zynga’s initial growth strategy. Many strong companies (like MySpace) have a questionable past. But this does nothing to help Zynga’s IPO hopes.

UPDATE II: Senate committee investigates the offer business, including my alma mater, Classmates.com.

UPDATE III: Maybe someone at Zynga is reading this site. Zynga to enable Farmville play on Farmville.com.  a good first step and removing the constraints of the Facebook platform.