Despite having already written a post about why I don’t think Zynga will be a major player in the post-US legalization world, I still get asked by people what I think about the company.
Mind you, I work for someone who is a tangential competitor to Zynga but I don’t feel that I’m bashing here because my original post was in October of 2010 and my views are very similar to as what they once were.
The only difference is that since Zynga has plans on going public they’ve had to open the kimono a bit and show their numbers. After taking a peek at the financials my belief that Zynga is not poised to take on real money gaming in any significant way is further reinforced.
While everyone seems to make a big deal about the sheer volume of players on Zynga’s network of gaming sites some numbers have come out that should give Zynga zealots some pause.
According to this Business Week article, Zynga gets about 232 million monthly active users across its network of games. From that, they’ve been about to generate $597 million in gross revenue.
Hey, I’ll give ya that both of those numbers are impressive. It’s easy to see why people would think that Zynga is poised to become the world’s biggest poker room without breaking a sweat.
However, those numbers don’t tell the whole story. $597 million annual gross income is just under $50 million a month. Yet, Zynga has 232 million monthly active users so if you divide their monthly income by the number of users you end up with an average gross income per player of just 21 cents. That’s not very impressive. Even if they simply sent a letter to each of their active monthly users ever month they would be losing money.
The reason why they gross so little per player is because only a very, very small number of people ever pay to play on Zynga. The before mentioned Business Week article speculates that less than 10% of Zynga’s players ever open their wallet. I’ve seen other analysts peg that number closer to 5%.
So 95% of Zynga’s customer base refuses to part with their hard earned cash to play online poker. Five percent of 232 million active monthly users is 11.6 million. In order for those 11.6 million users to generate $50 million in gross revenue they need to spend, on average, $4.31.
Again, not a very impressive number. Five bucks a month? But wait, there’s more.
Also according to the Business Week article (as well as several other I have read), Zynga has whales!
Just like in Vegas, a whale is someone who spends a lot of money. In Zynga’s case, the top 1% of their players generate anywhere from 25% – 50% of that $50 million per month. That means that the other 4% (making up the magic 5% who spend money online) aren’t even close to spending $4.31 per month.
In other words, rather than 11.6 million players contributing roughly $4.31 each, the truth is that 2.32 million spend about $10.78 each while the other 9.28 million spend only $2.69.
It should be fairly obvious from this little exercise that Zynga does not have an attractive pool of players when compared to real money gaming sites. Or to put it into perspective, prior to the UIGEA passage in 2006, PartyGaming reported revenues of close to $1 billion with roughly 60% – 70% of that revenue coming from poker.
Even though Zynga is far larger than PokerStars and PokerStars is far larger than Party was at its peak it’s safe to assume that real money gaming sites yield far, far, far more per player than Zynga does currently.
And all of this circles around to one of the main points I made last October when I wrote about Zynga, Zynga cannot possibly convert enough of their play money players to real money gaming to pose any sort of serious threat to the bigger real money poker rooms.
Because, don’t forget, the $597 million is across all of their products. This is for all of the virtual goods people purchase in Mafia Wars, Farmville, and all of their other games as well as the chips they buy in poker.
But the bigger issue here is that Zynga is not a poker company. They’re not even a gambling company. They’re a game maker. They’re a successful game maker and poker happens to be one of their products but the obvious question is whether or not they have the expertise to operate a poker room.
Play money gaming and real money gaming are more different than whether or not you can redeem your chips for cash. Real money gaming involves a lot of checks and balances. It’s one thing if a player claims that he had 5 million in chips in his account before the crash and now only has 1 million on a play money site and something completely different if it happens on a real money site.
Chip dumping, collusion, bots, etc are all daily concerns for real money poker rooms because they have real money consequences. What’s the cost to Zynga to just give you some chips if you’ve been wronged? Nothing. They have no tangible value.
Likewise, I often hear people propose that someone will want to license the Zynga software to use as their own real money gaming system. I find that hard to believe. In addition to the reasons already listed above concerning back office functions, fraud detection capabilities, and auditability, there’s the issue of being able to buy the same thing but actually built for real money gaming. Ongame is on the sales block, Full Tilt might be at some point, 888 is providing white-label solutions, and I’m sure iPoker would jump on the real money bandwagon in a heartbeat. So why would you want to buy, license, or even rent Zynga’s poker client if you have ready alternatives that do everything you need them to do?
Maybe some people think Zynga looks better than the other poker clients out there. Personally, I don’t but if there’s one thing I’ve learned in this business it’s that everybody has a different idea about what a good looking software client should be. How else can you explain how Full Tilt and PokerStars were the two most popular rooms and each having raving fans saying how much they love the software yet they are apples and oranges in terms of looks. In fact, it is not uncommon to hear (former) Full Tilt players say they hate the PokerStars software and to also hear PokerStars players say they hate the Full Tilt software.
Regardless, that’s just a UI issue. If Zynga was so far superior to other poker rooms it’s only about a 3 – 6-month project to redesign the client.
Lastly, as I’ve made reference to previously, Zynga isn’t a poker company. Other than their acquisition of the MarketZero team (makers of Poker Table Listings) you hardly hear any buzz about Zynga in the real money gaming world other than people pondering what would happen in Zynga got into real money gaming.
If Zynga was serious they would be hiring like crazy. Sure, they are hiring people but they’re not hiring people from the real money gaming world. I don’t recall seeing any press releases about this or that executive from a real money gaming company joining Zynga. Nobody I know has told me that they’ve gotten a call from Zynga. There’s nothing to indicate that any of the job listings at any of the major head-hunting firms is for Zynga (in fact, quite the contrary since the job listings usually indicate the country the job is in and it’s all in the same old Malta, Gib, IoM, etc locations).
Now, the real question is whether or not Zynga could become a real money gaming company. Sure they can. But first they would need to address everything I’ve mentioned above. It’s not impossible but it would require a bit of a paradigm shift at Zynga.
This isn’t as simple a task as just accepting money. Zynga has to make a lot of internal changes in order to become a respectable real money gaming operator. Until there are some signs that Zynga is making these changes I really can’t consider them prepared to enter the market.
Yes I agree lots with the article lol I have wasted £100s paying for virtual chips with real money it’s just addictive I think I should get on to real poker
the software is full of whistles and bells and lags like crazy. at least half the table calls every hand . i like the sitngo’s- there seems to be some rational play there. there are good players on zynga and i won $250 in a heads up on merge- i owe it to the experience i got from playing in the final threes and two’s of the sitngos on zynga
You are wrong. “What’s the cost to Zynga to just give you some chips if you’ve been wronged? Nothing. They have no tangible value.” There is value to the chips. Players are reset daily for violating TOS if they gave one worthless chip to another player. Zynga would like to think they have the monopoly on “chips” hence the 3rd party jargon in their TOS. Many players buy from sites or from other players so the numbers governing revenue are skewed. I wonder how this company has gotten away with illegal gambling since they sell these “virtual goods” for profit and it’s clear they will be used for betting in Texas Holdem Poker. Somehow they have avoided the Illegal Internet Gambling Act of 2006. If the chips were worthless they would not go through the expense of prosecuting a hacker for stealing millions of chips which Zynga put a dollar value on.
How do you monetize Zynga anyways as of present?
Zynga has been hiring, they hired the PTR talent, which was a late comer, high success team to the poker world.
I long for Zynga to enter real money, if only to counteract the casino dominance that seems to be the foregone conclusion to the US market.
If UB/AP were a player pre black friday, as everybody seems to suggest, then Zynga is clearly a player post black friday, even at diminished projections and conversions. Look at the market share of most companies, Zynga, even at your seemingly soft conversion numbers, would trump almost every single non PokerStars brand.
I would personally welcome another non casino company brand (assuming Zynga doesn’t jump into the casino world), say what you want about PokerStars, but their default line is market value, not market “rape” value. No “inactive account service fees,” no “screw you conversion fees” and absolutely no “our player ratio is off, this affiliate/player is dropped bc they win too much.”
What a joke some of these places have become due to backwards and short sighted thinking. Bring on Zynga, bring on Google, bring on Yahoo, it can’t get worse for POKER players.
@Gareth: I am not saying that at all. I’m sure many of those 230 million people have discretionary income. Some may even have lots of it.
What I am saying is that they have demonstrated an unwillingness to give Zynga some of that discretionary income. I’m saying that of that 230 million people only 5% ever spend a single penny with Zynga and over half their revenue comes from only 1% of their players.
In the real money gaming world players who play the free money games and don’t convert to real money players within 90 days almost never convert. The conversion ratio after 90 days is a fraction of one percent.
Is it because they don’t have discretionary income? For some that could be the case but the dominating reason is that those people don’t want to gamble for real money on an online poker site.
The only number that counts for a real money gaming site is the number of depositing players. For a real money gaming site, if they don’t deposit there is no rake to collect thus they generate zero revenue.
Zynga is in a unique position because they’ve become good at monetizing play money poker but that does not mean they can automatically translate that success into the real money gaming world. The people who deposit and play on real money gaming sites have a different perspective on online gambling than do players who just play play money games.
That was why I mentioned that Zynga *could* be a player but it would have to change. It would have to cater to a different type of customer. A customer they don’t have experience with. And since I don’t see them doing any significant hiring out of real money gaming it appears that either they don’t realize they don’t know real money gaming or they’re not focused on eventually offering real money gaming.
@Yair: True, it could become an affiliate. I was addressing more the people who keep asking me about Zynga as an operator.
Are you saying that these 230 million users have no discretionary income they’d deposit on a poker site? Are all Zynga users in extreme poverty because they don’t spend more than a few bucks a month on some silly games? Heck, I only spent 75 cents on candy bars last month, there’s no way I’d ever go to a restaurant!
The other hurdles you mention are certainly legitimate, though surmountable. But finding a player pool will be no problem if they decide to enter the market.
I’d love it if Zanga got into real money games… they would provide the easiest, fishiest games yet.
I still cant believe that there are actually people who pay real money to buy play money chips!!! Sign me up if it ever happens 🙂
Great post. I agree with the fact that Zynga probably have no interest in becoming a real money operator, and disagree on the general tone of the post.
Yes, your numbers seem to add up. Zynga probably have about 5% or less conversion, and with the existence of whales (a common phenomena in all social games), the median player value will be underimpressive.
You fail to address one point though, which is what gives Zynga its strength, and will make it a strong player in the future. It will likely never be an operator, but can still be the largest affiliate in a regulated market. Facebook have always been ambivilent towards online gaming, but it is well known that FB and Zynga have a very special relationship (interesting read here). Given that special relationship, and the amazing distribution platform in facebook, they can be driving traffic to whereever they want.
Zynga is the playing grounds of the future poker generation. With the US market closed, the future poker players are slowly getting used to Zynga as their playing ground. When the market finally opens up (god knows when), the second and large wave of depositors will be Zynga graduates. I think the software is horrible, but that doesn’t mean that it won’t be what they are looking for. Pokerstars and their endless amount of customizing and features will not be the food of choice imo. Flashy software with tons of crap on the table may work out better.
Kim,
I think your last sentence sums it all up. We may approach the analysis a little differently but the fact that Zynga is not going to be the new 800 lb Gorilla seems to be our common ground.
I have no idea why people keep asking the Zynga question though. Perhaps it’s better to worry about a far off monster than to deal with the ones already killing their business 🙂
Bill
Bill,
We obviously agree on the conclusion and basically the entire analysis as well. But I’ve always preferred to pose the question differently. Nothing new to you but I figured it might be interesting for your readers.
This is my response when people ask me what I think of Zynga poker and their real money poker ambitions:
Why would Zynga ever want to convert to a real money (RMG) business model? What is so good on this side of the fence compared to the awesome gig they got going over in the SMG space?
The opposite scenario is far more feasible. When will real money based sites try to grab a piece of Zynga’s pie? There’s lots of play money players to entertain. And if you already have a decent RMG business going (getting to that point will be difficult for Zynga as you so excellently explains) SMG can be a great breeding ground for new RMG players.
I disagree with your assessment that Zynga Poker is not a poker company though. It is imho. It’s just not a RMG company. Many RMG poker providers aren’t really fit to call themselves poker companies either if competence is a requirement. And neither qualifies to much beyond the most basic idea of what a games development company is.
The RMG poker industry is riddled with traps. Why would anyone who loves poker and wants to try and make money from it choose an RMG business model over any other business model through which money can be made?
RMG Poker is trailing all other gambling verticals in terms of profitability across the majority of the leading suppliers. Only an industry too fond of itself or incapable of seeing the error of its own ways would wonder why a company that totally dominates its own profitable space would waste time and resources on entering browner pastures.
I like the way you did the numbers. Since my starting point was different, I ended up concluding that Zynga needs to monetize every session played on Zynga Poker with an average of ten cents in order to match Partypoker in revenue generation.
That to me hints at the potential of what they do. Now, as you know, I happen to despise how Zynga in general does things, but that’s sort of beside the point here.
To me it’s almost like someone questioning why google with all its users doesn’t start up an awesome printed and distributed yellow pages business instead.
My assessment is that Zynga will stay away from the RMG sector not because they will fail at it. They will stay away because suceeding would be a failure in itself.
Their purchase of Market Zero had nothing to do with preparing for a real money launch and everything to do with them strenghtening the most important aspect of their SMG business – data analysis.
Fun fact. Zynga was on the lookout for some kind of director of poker recently.
Good post Bill. Since key industry people keep talking about it (like at EIG today), I guess we haven’t made the point clear enough.