Zynga's 'Hunger Games' economy

The 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.

By MoneyShow.com Mar 28, 2012 5:05PM

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 lines of people queuing up to see a flick about a dystopian 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 unprecedented pace -- for sport, of course. Shares of Smith & Wesson (SWHC) are up 43% since I wrote less than three weeks ago that "nothing involving guns seems impossible."


We employ football metaphors to sell patriotic optimism to car buyers.


And when we want to signal that nothing our candidate says should be taken seriously we invoke the 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 is grooving on "Angry Birds Space" instead of flying space shuttles.


The past decade may have featured two costly and inconclusive Asian wars, but Activision (ATVI), which published the first "Call of Duty" game seven months after U.S. troops occupied Baghdad, has since seen its share price quadruple.


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 (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 losers.


I should state up front that I hate Zynga. Not because even a casual reading of its financials shows it to be a terrible, overpriced deal for investors. Not because the company has in the past let scammers prey on its customers, in line with the acknowledged predilections of its founder.


And not because Zynga allegedly threatened to fire some employees if they refused to cough up unvested stock options before last year's initial public offering.


I hate Zynga mostly 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 virtual sausage factory for Reddit readers.


The spend-more-win-more 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 favor."


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 (GOOG), Silver Lake Partners, and LinkedIn (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 future.


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 stash, on OMGPop, which was a 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 smartphone or iPad.


"Draw Something" has become a runaway hit at a $1 per app or free with advertising, 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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