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CASE 17
Zynga INC. (2011): Whose Turn Is It?
I. CASE ABSTRACT
Mr. Pincus, founder and Chief Executive Officer (CEO) of Zynga, had built a
company around social gaming. This new type of gaming had transformed the gaming
industry on multiple levels and across various platforms. Zynga had originally
built its games using the Facebook platform and had capitalized on the company’s
unique method of social networking that had captured audiences around the world.
However, this strong reliance on Facebook and changes in consumer gaming practices
caused some concern for outside investors and the future of Zynga. As a result of
these concerns, by 2012, Zynga had expanded beyond its near total reliance on the
Facebook platform. The company had developed browser–based games that worked both
stand–alone on mobile platforms such as Apple iOS and Google Android and as an
application on social networking websites, such as Facebook, Zynga.com, Google+,
and Tencent.i
Decision Date: 2012 FY Sales: $1.1 billion
FY Net Loss: ($440) million
II. CASE SUBJECTS AND ISSUES
Strategy Formulation Government Regulation
III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
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Zynga INC. (2011): Whose Turn Is It?
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IV. CASE OBJECTIVES
1. To discuss online gaming.
2. To discuss social media.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
2. This is an excellent case for an exam or written case analysis.
VI. DISCUSSION QUESTIONS
1. How could Zynga continue to generate new social games to attract the
masses?
2. Did Zynga’s business model need modifications?
3. Would it be a wise decision to move away from Facebook and towards
Zynga’s own platform?
4. What was the future of mobile gaming?
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Zynga INC. (2011): Whose Turn Is It?
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7. How should Zynga spend the approximate $1 billion generated from its IPO?
VII. CASE AUTHOR’S TEACHING NOTE—Not Available
VIII. STUDENT STRATEGIC AUDIT
I. Current Situation
A. Performance
Over the past year, Zynga’s profitability varies significantly based on
which revenue and net profit figures are used in the calculations. The company’s
preferred method of calculating revenues and profit uses “bookings,” which
includes both revenues and deferred revenues. Zynga considers bookings as a
“better indicator of the sales activity in a given period.” It’s unclear how the
company determines deferred revenues but our assumption is that unused virtual
Using both profitability measures, Zynga’s gross margins have remained
steady (approximately 70 percent). Using standard revenues and net profit
calculations, ROI (–16 percent versus 8 percent), Net Profit margin (–35 percent
versus 15 percent), ROE (–23 percent versus 18 percent) and EPS (–1.4 versus .12)
are negative and have declined substantially from 2010 to 2011. However, when
utilizing Bookings and EBITDA the company is operating at a net profit while still
decreasing over the prior year: ROI (35.3 percent versus 12.1 percent), EBITDA
(46.8 percent versus 26.2 percent), ROE (81.4 percent versus 17.3 percent), and
EPS (1.75 versus 1.05). Our assumptions regarding the major disparity in EBITDA
versus net income for 2011 versus 2010 is that the company added back stock–based
compensation from 2011 common stock issuance and gains from legal settlements, in
addition to the deferred revenues. ROI decrease can be attributed to the sharp
rise in assets from acquired companies and build out of Zynga’s new
CASE 17
Zynga INC. (2011): Whose Turn Is It?
which the company used to measure the monetization of all players through the sale
of virtual goods and advertising rose in 2011 to about $.05 per player.
B. Strategic Posture
1. Mission:
As stated by the company, their mission is to “connect the world through games.”
2. Objectives:
The company has some broadly defined objectives, but none are explicitly listed
with a measurable outcome. The case states no profitability objectives, only a
goal of growing revenues. The other objectives seem to fit with each other and
their mission.
1. These objectives fit with the external environment trend in the industry
towards mobile games but fail to address the threat of low ad revenues in
mobile games.
a. Corporate and business:
○ Generate revenue growth by attracting, retaining, and increasing the
number of players.
○ More effectively monetize existing players.
b. Functional:
○ Seamlessly connect players across different platforms.
○ Enhance customer experience.
3. Strategies:
The following strategies seem to fit their objectives and mission, but fall short
of specifically targeting how the company will grow revenues outside of their
a. Corporate and Business:
CASE 17
Zynga INC. (2011): Whose Turn Is It?
○ Expand by acquisition of other gaming companies, specifically in
companies with experience in developing mobile applications.
○ Grow market share through launch of new games on multiple platforms
and enhance existing games with fresh content and new features.
○ Compete on player experience, rather than price.
○ Continue revenue growth through the sale of virtual goods and
advertising.
4. Policies:
These policies fit with objectives and strategies, with the exception of no
specific link between how they intend to fit acquired companies with very
different cultures into the “Zynga Way.”
a. Keep acquired company management teams in place to encourage and reward
creativity.
5. The objectives and strategies mention expanding the company’s international
presence and partnerships but include no specific policies for integrating
II. Corporate Governance
A. Board of Directors
1. Eight members
a. Two internal and six external.
2. Board members own stock options through restricted stock units. Assumption from
the case is that external members do hold significant shares, given the
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Zynga INC. (2011): Whose Turn Is It?
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3. Zynga is publicly held. There is a three class common stock structure: class C
had seventy votes per share, with Mark Pincus as the only holder of class C
4. The CEO launched one of the first social networks and made founding investments
in several online companies such as Facebook and Twitter. Other directors
5. Most directors have served less than one–two years.
6. According to the company website, board members “oversee management to ensure
that stockholder long–term interests are served. Through oversight, review,
and counsel, the board establishes and promotes Zynga’s business and
organizational objectives. Among other things, our board oversees our
business affairs and integrity and works with management to determine our
mission and long–term strategy.”
B. Top Management
1. CEO, COO, VP of Business and Corporate Development, General Counsel and
2. Management team members have experience in online gaming with Electronic Arts
(the COO, VP of Zynga Games, Chief Marketing and Revenue Officer, VP of Corp
3. Management has been responsible for company performance, given their decisions
to acquire companies, which raised costs considerably. Revenues have not
4. We found no evidence that top management has a systematic approach to strategic
management.
5. The company has a decentralized management structure which gives each division
6. Top management promotes the “Zynga Way,” giving each division the autonomy in
strategic decisions and rewarding those divisions that performed the best.
7. Given the loosely defined intellectual property laws in the gaming industry,
the company had participated in the legal practice of copying other
companies games which may be viewed as unethical.
8. N/A
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Zynga INC. (2011): Whose Turn Is It?
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9. Top management does have the online gaming experience but seems to lack the
III. External Environment: Opportunities and Threats (SWOT)
A. Societal Environment
1.
a) Economic
a. Globalized communication (opportunity)
i. Easier to communicate with friends/family globally increases
the desire to stay in touch through social networking and
gaming.
b) Technological
a. Technology is always advancing, especially with faster, more
advanced Internet services (opportunity).
c) Political–legal
a. Ideas can’t be patented, licensed, or otherwise protected (threat).
i. Competing firms are copying ideas off each other and making
very similar games.
b. Online business regulations and laws are evolving and subject to
interpretation (threat).
c. Privacy laws and regulations are becoming very severe, prohibiting
firms to store, process, and share player information with other
2. These forces are similar in all regions of the world. The only variation that
may occur is in the political–legal section, where specific regulations may
differ per country.
B. Task Environment (Industry)
1. The high bargaining power of buyers along with the high threat of substitutes
and the high rivalry among competing firms drives the competition in this
industry. These specific forces are the same globally.
a) Threat of New Entrants: Low
a. High capital needed to support platforms and technology.
b. Low revenue potential.
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Zynga INC. (2011): Whose Turn Is It?
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b. Fragmented industry—consumers determine the trends and preferences
for online/mobile games.
c) Threat of substitute products or services: High
a. Board games
b. Social networking
c. Watch TV
d) Bargaining Power of Suppliers: High
a. Hosting websites such as Facebook have a tight contract with Zynga,
making sure that the company cannot host its games on their own
platform.
e) Rivalry around competing firms: High
a. Primary Competitors: game developers and other social networking
sites Crowdstar, DeNA, Electronic Arts, King.com, The Walt Disney
Companies, Vostu LTD,Wooga GmbH, game developers for mobile (Apple,
Electronic Arts, GREE, DeNA, Gameloft SA, Glu Mobile, Rovio Mobile,
Storm8), other game developers (Activision Blizzard, Big Fish Games,
f) Relative power of unions, governments, special interest groups, etc.—
Moderate
a. Gaming firms are subject to foreign and domestic laws and
regulations for conducting their business online, especially on–line
gambling regulations.
b. Gaming firms are also subject to privacy laws and regulations
regarding player data.
c. The law does not permit gaming companies to patent protect an idea,
only the expressions or codes used to create the game, hence, copying
has been very prominent among gaming firms.
2. The key factors affecting the corporation’s immediate environment are the
threat of substitute products/services, as well as the high bargaining power
IV. Internal Environment: Strengths and Weaknesses (SWOT)
A. Corporate Structure
1. Decentralized management (S/W)
a. Studios and newly acquired firms operate independently.
i.“Meritocracy” used to encourage creativity.
b. Zynga is organized by function (develop and monetize social games)
and geography (e.g. Zynga Boston, Zynga Seattle, Zynga China, Zynga
Germany…).
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3. The present structure is consistent with Zynga’s desire to innovate and
grow internationally.
B. Corporate Culture
1. Zynga’s culture is well–defined for “veteran” employees, but emerging for
employees hired through acquisitions (S/W).
2. Culture is defined as entrepreneurial, execution–focused, fiercely
competitive, and stressful. Autonomy, with “meritocracy”, is aligned with
objectives, strategies, policies, and programs (S).
C. Corporate Resources
1. Marketing
a. Zynga is currently marketing their products to attract, retain, and
increase their revenue generating customers.
i.i. Its target market is forty–three–year–old women. Also,
people thirty–five and older (W).
on Zynga With Friends; PROMOTION has increased by 22 percent.
Most games are over four years old. New products include
Farmville 2; Zynga Slots and Zynga Elite Slots; Ruby
Blast(Zynga China and Zynga Seattle); and Scramble with
Friends and Matching with Friends.
2. Finance
CASE 17
Zynga INC. (2011): Whose Turn Is It?
a. Zynga’s finance strategy is aimed at growing revenue, domestically
and internationally. They are using acquisitions as the main source
b. (SEE FINANCIAL RATIOS) Revenue has increased 25 percent from $522
million to $653.5 million from six months ended June 2011 to June
2012. Their total costs and expenses, under G&A, increased
i.i. Zynga’s strategy for growth and innovation has adversely
affected the bottom–line (in the short–term). This increased
focus on sales and marketing, as well as R&D, resulted in a
Net loss of $108.2 million in 2012 (six months ended June
30). The current ratio was .95, 1.74, and 3.03 in 2009, 2010,
and 2011 respectively. Although Zynga has increased their
financial strength and liquidity (anything under one shows
liquidity issues) from 2009 to 2011, the reason for the huge
jump is attributed to the IPO in 2011. The OCF ratio for 2011
is alarming. At .58, Zynga is not generating enough cash to
satisfy short–term liabilities. There is a trend toward
liquidity issues(OCF was .63 and .81 in 2010 and 2009
respectively), negative earnings, and investors selling
shares (W).
ii.ii. N/A
iii.iii. Although the cash from operations and overall revenues
have increased every year from 2009 to 2011, the cost of R&D,
marketing, and acquisitions has adversely impacted net
income. The short–term liquidity issues and high–cost of
revenue will continue to hold the stock price down. The stock
price has dropped 70 percent from $10 in December 2011 to
$3.05 in July 2012 (W).
iv.iv. This financial analysis is consistent with a long–term
growth and innovation strategy. The company will need to
e. N/A
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Zynga INC. (2011): Whose Turn Is It?
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f. N/A
3. Research and Development (R&D)
a. Zynga has a strong focus on R&D. Innovation is a key objective.
i. i. This is clearly stated and represented by a $727 million
expense in 2011 (S/W).
ii. ii. This is consistent with corporate strategy, mission,
objectives, and policies.
e. N/A
f. It is implied that each country has their own R&D budget (S/W).
g. N/A
4. Operations and logistics
a. Zynga has one operating segment: development. Each studio is
responsible for its own development project. Increasing IT
b. The development of new games, maintenance of existing games, and IT
support are the main operations capabilities for Zynga. Back–office
work is completed domestically. Studios are operating domestically
and internationally.
i.i. N/A
ii.ii. Zynga is service–oriented. It has its own data centers on
the East and West coast. In 2011, 80 percent of users were
logged in through Zynga data centers and 20 percent were
logged in through Amazon cloud. In 2012, Zynga built an
internal infrastructure called zCloud. It serves most users
and third–party developers. It has a new platform called
Zynga with Friends that serves customers through one site. In
2011, Zynga served fifty–seven million Daily Average Users
(DAUs) and 233 million Monthly Average Users (MAUs).