Zynga's Hunger Games Economy

By MoneyShow.com | March 27, 2012 AAA

The social games marketer likes to tilt the odds heavily in favor of its
insiders, in the market as well as on the playing board. It's a disaster in the
making, writes MoneyShow.com senior editor Igor

What happens to the richest country on Earth when every little bit of work
that can be done elsewhere has been outsourced? What happens when a
post-industrial economy loses so many middle manager and service jobs that the
percentage of Americans working or looking for work sinks to a 28-year low?

What happens is a Hunger Games economy—and I don't just mean one
propelled by the lines of people queuing up to see a flick about a dystopian and
game-addicted future.

I mean an economy—and culture—that are deadly serious about fun and games,
because that's what's left. Because the biggest luxury in these hard times is
something to take the mind off the bills and the all the fine print blotting out
what had been sold to us as limitless possibilities.

We're buying firearms at an href="http://www.moneyshow.com/investing/article/1/GURU-26881/Here-Are-2-Tickets-to-the-Gun-Show/"
target=_blank>unprecedented pace-for sport, of course. (Shares of
Smith & Wesson ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=SWHC"
target=_blank>SWHC) are up 43% since I wrote less than three weeks ago that
"nothing involving guns seems impossible.")

We employ href="http://www.freep.com/article/20120206/BUSINESS0103/120206007/Script-Chrysler-s-2012-Super-Bowl-ad-s-Halftime-America-?odyssey=tab%7Ctopnews%7Ctext%7CEntertainment"
target=_blank>football metaphors to sell patriotic optimism to car

And when we want to signal that nothing our candidate says should be taken
seriously we invoke the href="http://content.usatoday.com/communities/onpolitics/post/2012/03/etch-a-sketch-mitt-romney-publicity-/1#.T2uZB8UgfZc"
target=_blank>Etch-a-Sketch. It's a well-known toy. In the electronic casino
that decides how much money various parts of our economy get and on what terms,
Etch-a-Sketch's newfound celebrity briefly tripled its maker's share price and
just as quickly brought it back down to earth.

NASA's grooving
on Angry Birds Space instead of flying space shuttles.

The past decade may have featured two costly and inconclusive Asian wars, but
Activision ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=ATVI"
target=_blank>ATVI), which published the first Call of Duty game seven
months after US troops occupied Baghdad, has since seen its share price

The most popular shows on TV are amateur contests.

So, yeah, we've been a little hungry for games lately. So much so that in our
collective infatuation, we've been toying with the possibility that social games
marketer Zynga ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=ZNGA"
target=_blank>ZNGA) may be worth almost $10 billion.

That's much too high. And when the price tag drops closer to reality, this
game, like the others that keep us in thrall, is going to create plenty of

I should state up front that I hate Zynga. Not because even a casual reading
of its financials shows it to be a terrible, href="http://articles.marketwatch.com/2012-03-07/commentary/31127791_1_cisco-systems-earnings-report-post-earnings-growth"
target=_blank>overpriced deal for investors. Not because the company has in
the past let href="http://techcrunch.com/2009/10/31/scamville-the-social-gaming-ecosystem-of-hell/"
target=_blank>scammers prey on its customers, in line with the a href="http://techcrunch.com/2009/11/06/zynga-scamville-mark-pinkus-faceboo/"
target=_blank>cknowledged predilections of its founder.

And not because Zynga allegedly href="http://www.escapistmagazine.com/news/view/114167-Zynga-CEO-Denies-Bullying-Tactics-Over-Stock-Options"
target=_blank>threatened to fire some employees if they refused to cough up
unvested stock options before last year's initial public offering.

I mostly hate Zynga because it farms its paying customers as avidly as
Farmville players grow pumpkins. In essence, all its games are
engineered to suck the maximum cash out of the buyers of the "virtual goods" it
sells, with little regard for game integrity and long-term playability. A former
Zynga programmer recently provided a valuable glimpse of this href="http://articles.businessinsider.com/2012-02-06/tech/31028725_1_social-games-social-network-engineer"
target=_blank>virtual sausage factory for href="http://www.reddit.com/r/IAmA/comments/pc6j9/iama_former_fulltime_zynga_engineer_quit_6_months/"
target=_blank>Reddit readers.

The-more-you-spend-the-more-you-win model is terrible for the players not
planning on spending, and is almost certain to eventually send them packing for
more level playing fields. Of course, insiders will have converted the current
investing enthusiasm for social networking into vast private fortunes by then.
The virtual fantasies of the players will buy real-life yachts and jets for
authors of the games-as-marketing model. "And may the odds be ever in your

Two news items about Zynga from last week provide an important tell about the
real odds. Late Thursday, the company filed for a second offering of stock by
founder and CEO Mark Pincus (who is unloading 15% of his stake), as well as
other key insiders and early investors, including Google ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=GOOG"
target=_blank>GOOG), Silver Lake Partners, and LinkedIn ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=LNKD"
target=_blank>LNKD) Chairman Reid Hoffman.

The offering, hilariously justified by sources who leaked it to The Wall
Street Journal
as "an attempt to reduce future volatility of Zynga's share
price," essentially lets these worthies sell ahead of lockup expiration for
other employees, who won't be able to sell their shares before late April.

And since the increased public float will still amount to less than a quarter
of all shares, you can be sure that there's a lot more selling in Zynga's

Will it be into a share price significantly higher than the current one?
Given the ridiculous valuation, I have my doubts, but then this is a culture
that loves games. Just maybe not the ones Zynga is good at, in the long run.

In last week's filing, Zynga also acknowledged paying $180 million in cash,
amounting to 10% of its rainy-day sstash, on OMGPop, which was a href="http://www.nytimes.com/2012/03/26/technology/draw-something-changes-the-game-quickly-for-omgpop.html?_r=1&r=1"
target=_blank>failing New York startup before hitting paydirt with Draw
Something, a mobile, non-competitive alternative to Pictionary that lets people
guess what their friends are drawing on their cell phone or iPad.

Draw Something has become a href="http://bits.blogs.nytimes.com/2012/03/16/draw-something-a-new-twist-on-pictionary-charms-mobile-gamers/?r=1"
target=_blank>runaway hit at a $1 per app or free with adds, plus whatever
people want to spend on extra colors and such. But there's no "winning" as such
and you don't have to pay up to achieve, so it's a very different game from any
of Zynga's moneyspinners.

The acquisition lets Zynga expand into mobile apps, lessening its reliance on
Facebook, with that partner's usurious 30% cut of the Facebook revenue that
remains Zynga's meal ticket. But it also illustrates how low the entry barriers
are in this business, and what demand exists for simple, cooperative games that
don't lend themselves to multilevel marketing schemes.

We'll love games long after the economy improves enough to limit the downtime
available for such diversions. But Zynga's farming of fun is not a sustainable
business model. People aren't pumpkins-they move on.

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