Zynga’s Ship is Sinking: Is Cost Cutting Enough to Save It?

Zynga_PokerLosing the soft-core gaming crowd that it built its initial success on, the company is seeking profits coming from a different direction. Early in December, Zynga announced that it had filed paperwork seeking permission to conduct real-money online gaming in Nevada, the latest in a series of real-money gambling initiatives. As early as January of 2012, the company announced its intention to build out Zynga Poker into the real-money market, and has since partnered with bwin.party in the United Kingdom. Zynga Poker was the company’s first social game and is currently the most popular free-to-play poker game in the world.

CHEAT SHEET Analysis: Zynga’s fate is riding on trends

One of the core components of our CHEAT SHEET investing framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.” Zynga’s sinking ship could potentially find buoyancy in the massive global gambling market, estimated to be worth $417 billion. The U.S. alone commands 25 percent of that market, and online gambling currently accounts for just 3.3 percent of the profit, meaning there is massive growth potential.

But in order to stay afloat Zynga will need to make sure that its Poker title remains a blockbuster. Traditional gaming titans such as Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) understand that success in the gaming industry is predicated on blockbuster releases, and have fostered the talent necessary to stay ahead of the curve. Zynga’s brain drain and generally sordid state of affairs will make it difficult to re-attract talent, but capitalizing on the real-money market and deepening its pockets could become an incentive for skilled developers.

The trends are pointing toward increased mobile use and the proliferation of real-money gaming. Zynga was once a powerhouse of social gaming but clearly the times have changed, and the company is shifting gears. Unable to successfully monetize its original vision of user-friendly, socially-focused PC games, the Zynga of the future could become synonymous with sports betting and Texas Hold ‘Em.

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