BUSINESS CASE STUDY

REBECCA WEINBERGERPAUL GLAZIK

CHRIS PHILLIPSNANCY LEYVA

Analysis

ZYNGA INTERNAL ENVIRONMENT

REBECCA WEINBERGER

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BACKGROUND

• Created in 2007 as Presidio Inc. by Mark Pincus

• Based out of San Francisco, CA

• 2010 - Incorporated out of Connecticut and renamed Zynga

• 2011 - Initial Public Offering on NASDAQ

• 2014 - Added a new Director to the Board, Dr. Regina Dugan, former V.P. at Google

• Owners of several top social media games for mobile/tablets systems such as: Farmville, Zynga Poker, Mafia Wars, Words with Friends

PRIMARY ACTIVITIES

• Develop, market and operate social games as live services played over the Internet, social networking sites and mobile platforms

• Generally, all games are free to play and revenue is generated through the in-game sale of virtual goods, mobile game download fees, and advertising services

• Pioneer and innovator of social games and a leader in making “play” a core activity on the Internet

• Free to play business model

• Social games leverage the global connectivity through Internet platforms

• Virtual Goods and Paid Downloads

• Virtual currency can also be earned for free through game play or accepting promotional offers from advertising partners

• Generate revenue when players purchase mobile game downloads

SUPPORT ACTIVITIES

• Firm infrastructure is heavily based on technology

• Constantly investing in hardware and software to maintain their datacenter infrastructure

• Technology infrastructure that can efficiently and reliably handle increased player usage, fast load times, and new feature/product development

• Invested extensively in developing proprietary technology stack

• Handles sudden bursts of activity for millions of players

• Datacenter and cloud computing management

• Shared code base

• Cross-promotional features

CULTURE OF MANAGEMENT

• Mark Pincus- Founder

• Don Mattrick- CEO

• Company growth is heavily dependent on efforts to employee talent

• High demand of game designers, product managers, engineers and executives

• Devote resources to indentifying, recruiting, hiring, training, successfully integrating and retaining employees

• Maintains team spirit in employees and applies effective human resource strategies to encourage and motivate employees to perform their best

• There is a spirit of competition within Zynga’s structure. Each unit operates separately to produce new games/products/ideas

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RBV: RESOURCE BASED VIEW (INTERNAL)Tangible Resources:

• Financially – Head is still above water and assets can be quickly liquidated

• Physical – They have several geographical locations: many are proprietary to the games they create

• Technological – One of the leading game developers; own their own gaming rights and in many cases the coding to those games

• Organizational – Although they have an organization, we believe the jury is still out on it’s effectiveness and ability to produce newer, more popular games

Intangible Resources:

• Human – The market for good programming and coding talent is small: new game development is key to Zynga’s long term success

• Innovation/Creativity – Zynga is well prepared for on-line gaming growth. The move to their own website platform is an example. But this can only be achieved with new and interesting gaming products

• Reputation – From a market based view, Zynga is a bit of an ugly duckling, but from a consumer view, they’re a leading game developer

Organizational Capabilities:

• Excellent at capturing consumers with game qualities (consumers want to keep playing)

• Capable of competing on a global level

• Zynga’s games are leading brands within the mobile gaming industry

Analysis

ZYNGA FINANCIALS

CHRIS PHILLIPS

INVESTING INFORMATION• NASDAQ (ZYNG)• American Stock Transfer & Trust Co. LLC• No Dividends paid or declared• Initial offering in 2011 was at $10 p/s; raised

approx. $96M• SIC 0001439404

• 7434 Services – Computer Processing & Data Preparation

• Feb 2014 completed purchase of NaturalMotion $527 million

• Hiring of Dr. Regina Dugan helps legitimize Zynga R&D and board compliance

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FINANCIAL POINTS

Revenue: 2013 2012 Gain/(Loss)Online game 759,572$ 1,144,252$ (384,680)$

Advertising 113,694 137,015 (23,321)$

Total revenue 873,266 1,281,267 (408,001)$

Research and development 413,001 645,648 (232,647)

2013 2012Income (loss) from operations (65,631) (182,971)

Current assets: 2013 2012 ChangeCash and cash equivalents 465,523 385,949 79,574Marketable securities 659,973 898,821 (238,848)All others 115,903 199,600 (83,697)Total current assets 1,241,399 1,484,370 (242,971)

Impairment of intangible assets 10,217 95,493 (85,276)

Deferred revenue 186,663 338,964 (152,301)

Total liabilities 401,814 750,817 (349,003)

Total stockholders' equity 1,877,271 1,825,503 51,768Total liabilities and stockholders' equity 2,279,085 2,576,320 (297,235)

• On-line Game Revenue is down by 34%• Although income is up by 59%, it’s still

operating with a loss• Facebook accounts for 41% of Zynga’s A/R

in 2013; 58% in 2012• Advertising for 2013 was $60.6M; 102.2M in

2012• 3rd Qtr 2012 included a $95.5 million

impairment to Goodwill, and $10.2 M in 2013 for discontinued games (OMGPOP)

• Debt has been reduced• Only CEO has Class C stock• Accumulated deficit

increased over 30%

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1st Qtr 2014 (U.S. $ thousands except where noted)Change +/- Change +/- Change +/-

2014 2013 2014 2013 2014 2013Revenue 168,020 263,589 -36% 606,709 205,918 195% 44,580 24,605 81%

Operating Expense 53,504 69,394 -23% 195,696 64,014 206% 13,756 8,536 61%

Cash Flow % from Operations 0.68 0.74 -0.06 0.68 0.69 -0.01 0.69 0.65 0.04

SG&A 184,773 199,128 -0.07 249,234 76,326 2.27 30,117 21,563 0.40

Profit (70,257) (4,933) 13.24 161,779 65,578 147% 707 -5,494 -113%

Cash Assets

Current Ratio

Outstanding Shares

ROA (trailing 12 mo avg)*

ROE (trailing 12 mo avg)*

Revenue per share (trailing 12 mo avg)*

Zynga (U.S.) King Digital (Eng) Glu Mobile (U.S.)

-2.26

-5.31

79.99

174.76

-10.12

-29.86

1.68

81,320M

0.95 7.51 1.68

782,200M 678,170M 36,950M

3.32

884,460M

2.95

317,680M

COMPARISONS

Analysis

ZYNGA EXTERNAL ENVIRONMENT

PAUL GLAZIK

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MOBILE GAMING INDUSTRY

• In 2013, 92 percent of iTunes revenue was from games

• Mobile gaming will be a $10 billion industry in 2014

• Predicted to reach $60 billion by 2017

• Mobile gaming revenues are expected to grow at a rate of 19% through 2016

• Many small companies in industry. New entrants every quarter.

• Larger companies forming through M&A’s.

• In Q1 2014, mobile gaming related acquisitions topped $5 billion, almost as much

as all of 2013.

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OPPORTUNITIES & THREATS

Opportunities:• New Game development – (license new

characters)• Newer markets - Globally• Newer players – younger generations• New platforms to play – PCs are not dead• New experiences – 3D, even more live

interaction• New Relationships – Google, Nintendo

Threats:• Competition• Relationship with Facebook• Underperforming - Failed

games/acquisitions• Unable to retain new talent• Lack of creativity, uniqueness, originality• Underperforming financial market• Copyright, patent infringements –

counterfeit gaming

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MAJOR COMPETITORSDENA CO., LTD (Japan)

• Best known game: AntSmasher

• Japanese technology firm established in 1999

• Company profile states they “develop and operate a broad range of mobile and online services including games”

• Competes with Zynga through its Mobage game service

Gree Games (Japan)

• GREE is a global mobile social company with businesses that includesocial gaming, social media, advertising, licensing and merchandising, and venture capital (direct from GREE business overview)

• Offers a small catalog of online games

• Also offers social media services (Japan only)

Electronic Arts (EA) (U.S.)

• Founded in 1982

• Large software company that produces console, computer, online, and social media games

• Owns several successful titles, including Plants vs. Zombies, Zuma, and Bejeweled

• Posted $3.8 billion revenue in 2013

• In 2013, attempted to sue Zynga, claiming The Ville (Zynga) was a copy of Sims Social (EA). Suit was settled.

Gameloft (Europe)

• Founded in 1999 by Ubisoft co-founder Michael Guillemot

• By 2003, Gameloft offered games to over 100 mobile phone models

• First company to offer games on the iPhone app store after it launched in 2008

• In 2013, Gameloft’s “Despicable Me: Minion Rush” game was their first title to reach 100 million downloads

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PROFIT SUMMARY

• Gameloft posted $273 million profit in 2013

• Electronic Arts earned $264 million in 2013

• Zynga’s net income for 2013 was ($36 million)

• Zynga again operates at a loss while competition profits

Analysis

ZYNGA STRATEGY AND MARKET STRATEGIES

NANCY LEYVA

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ZYNGA STRATEGY

• Founded on passion for games and for family and friends

playing together

• Mission: “connect the world through games”

• Encourage entrepreneurship and intelligent risk-taking to

produce breakthrough innovations

• Zynga’s goal is to create top hits that engage mainstream

global audiences

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CURRENT STRATEGIES

• Differentiation among game lines: Zynga’s content perspective allows them to expand their offerings across several game categories: (Farm, Casinos, Words, Live simulation)

• Paying a premium for new talent and new acquisitions: Because the margin for finding new games/talent or good companies is very small (NaturalMotion)

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SUSTAINABLE STRATEGIESPromoting new on-line mobile/tablet/PC website platform www.zynga.com

• Facebook’s platform will inevitably threaten Zynga’s long term revenue, while its still the largest platform for Zynga users. Using Facebook as a platform costs Zynga an average of 30% of sales.

Invest in talent and geographical presence• The acquisition of NaturalMotion gives Zynga a European presence and access

to a new market of game development talent and consumer base

Cost Leadership• Continue to find cost cutting measures like closing unprofitable game lines• Keep long term debt low• Continue to re-value the assets of all acquired units

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MARKET STRATEGY CHARACTERISTICS (BUSINESS MACRO LEVEL)

• Mainly competing for leisure time, attention and discretionary spending of their players

• Gaining the trust of the player to enjoy the experience/interaction (targeting members/users of Facebook, Google, I-Tunes)

• Promoting next level activity/game advancement for cash/credits

• Selling additional life spans/game resources for cash/credits

• Capturing consumer/customer information for data analytics

• Analyzing captured gamer data for marketing/sales/advertising

• Selling captured gamer data to 3 rd party users (Facebook, Google, etc.)

• Selling advertising space to 3 rd parties

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ZYNGA RECOMMENDATIONS

• Zynga needs to examine its cost structures and business model compared to competition and

find out why.

• Find game platform(s) that are going to be long term and sustainable

• Zynga has to differentiate itself somehow from it’s competitors (license new/old characters)

• Zynga should investigate a possible sale or merger

• Zynga currently invests in both mobile and social media gaming. Competition is large and

fierce, Zynga needs to re-focus on what makes them the real market leader while also turning

profits.

• Increase advertising/marketing expense; Tell the public, not just social media users, who

Zynga is.

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RESOURCES:

• Yahoo Finance (ZYNG, KING, GLUU)

• Google images

• SEC.GOV/edgar

• Fundamentals of Corporate Finance; Ross Westerfield, Jordan, 10 th Ed., 2013

• Strategic Management; Dess, Lumpkin, Eisner, McNamara, 7 th Ed., 2014