Zynga has laid off 100 employees and is closing its Austin and Boston offices, everyone has reported. CEO Mark Pincus had hinted at “targeted cost reductions” to weak-performing games in a recent employee letter.
But beyond drastic cost-cutting, the company has a much deeper problem, and that is one of strategy.
Today we saw that Zynga is developing an ad platform to sell “more lightweight experiences” to brands. Previously the company’s games have featured major brand integrations with Lady Gaga and McDonald’s. But this new platform would jam more banner ads, video pre-rolls ads, and interstitials into the games. In other words, the crappy, ineffective, interrupting, uninvited, annoying, pushy, click-driven, user-experience-ruining ads most of us in the startup world desperately want to kill.
This news got a lot less attention than the layoffs, but it may say more about the company’s fortunes. Make no mistake, this is a move of desperation, and it is happening way too late in the game.
Things look bad for Zynga now — I don’t have to tell you about how badly the stock has performed on repeated earnings disappointments. But think back to a time, somewhere between 2008 and 2010, when Zynga was positively on fire. Advertisers wanted to be in Zynga games more desperately than they wanted to be on Facebook and Twitter. Zynga offered what is now the most desirable form of advertising there is — a native ad built into the gaming experience. A Lady Gaga-sponsored area in CityVille called GagaVille. A Mafia Wars tie-in with The Green Hornet. A McDonald’s dairy barn, cafe, and bakery in FarmVille.
These high profile brand integrations have not been cheap. They typically start at around half a million dollars. And they have a dirty secret: A brand will never buy twice, says Chris Cunningham, CEO of native ad network Appssavvy. That’s like running the same Super Bowl ad two years in a row. Something that custom, time-consuming and expensive is difficult to repeat, a fact Zynga has learned the hard way.
But the company, distracted by its IPO, showdowns with Facebook, and a skyrocketing virtual goods business, did not build advertisements into the DNA of the company, hustling to maintain relationships with Madison Avenue. The virtual goods business was doing too well, even with Facebook taking a massive 30 percent cut, to make brand advertising a priority. Zynga forfeited the option to make brand advertising a huge part of its business during that time because the company viewed ads as competing with its core virtual goods business. Ads have remained a small portion of the company’s revenue — 12 percent last quarter at $41 million.
Now with Zynga’s earnings in the dumps, advertising is looking like a smarter option. Brand advertising has been around for decades. The riskier virtual goods economy is still in its infancy.
Making matters worse, the company is no longer the only social game in town, and brand advertisers are not begging to get into Zynga games. Plenty of social gaming competitors have crowded with market with cheaper and even repeatable ways to buy their way into social games, thanks to a growing market with players from King Games to Playfish and PopCap. Having seen the virtual goods business fall off a cliff, many competitors have built native advertising built into their DNA from day one.
Now, Zynga’s bright idea is to go after lower margin commodity advertisements. It is launching an ad network at a time when perception of ad networks is at an all-time low. Zynga missed its chance to get in good with brands and agencies when it was hot. Now here it is, peddling the lowest hanging fruit of the Internet, banner ads. Woof.
[Illustration by Hallie Bateman]