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Will There Ever Be An End To Zynga’s Woes?

Oh dear… It seems Zynga’s bad day on July 25 looks set to become a bad month. After post­ing earn­ings that show a drop of three cents per share, they are now wrestling with an array of law­suits for copy­right infringe­ment and insid­er trading.

The social games start-up is cur­rent­ly mid-wran­gle with EA over cer­tain sim­i­lar­i­ties between its game The Social Sims and Zynga’s The Ville, and now San Fran­cis­co lawyers Kessler Topaz Meltzer & Check have wad­ed in to join the par­ty after fil­ing a suit on behalf of investors stat­ing that the com­pa­ny allowed key execs to sell shares up to three months before oth­er employ­ees, and that law­suit is not the only one.

Copy­ing the works of oth­er com­pa­nies and insid­er deal­ing all leave a bit of a bad taste in the mouth. As a result is Zyn­ga now in meltdown?

A Bright Start

The com­pa­ny pro­duces brows­er-based games avail­able as stand­alones on mobile plat­forms and as wid­gets on social net­works includ­ing Face­book and Google+. It cur­rent­ly has 3000 employ­ees, over 300million month­ly active users and 72million dai­ly active users and post­ed rev­enue of $1.16billion in 2011.

Zyn­ga was found­ed in 2007 and it’s first game, Texas Hold ‘Em Pok­er was released on Face­book the same year. After secur­ing almost $40million in finance in 2008, along with the cru­cial appoint­ment of for­mer EA chief cre­ative offi­cer Bing Gor­don and the pur­chase of vir­tu­al world social net­work­ing game YoVille, it seemed Zynga’s star was in the ascendancy.

As of April 2012 Zynga’s prod­ucts had almost 300million month­ly users, with games such as the Hid­den Chron­i­cles, Cityville and Zyn­ga Pok­er among some of the most pop­u­lar social gam­ing titles on the plan­et. Cityville alone has over 60million active users. In 2009, Zyn­ga was the num­ber one app devel­op­er on Face­book and by August of that year became the first devel­op­er to see 10million dai­ly active users on Face­book. It had 20million by Octo­ber ‘09.

Brim­ming with con­fi­dence, the com­pa­ny filed with the SEC to raise approx­i­mate­ly $1billion in an ini­tial pub­lic offer­ing in July 2011 and began trad­ing on NASDAQ in Decem­ber of that year.

So What Went Wrong?

Fol­low­ing two years of almost con­tin­u­al acqui­si­tions and user num­bers going through the roof, Zyn­ga hit chop­pi­er waters after floating.

The crash in earn­ings was, they said, linked to a change in Facebook’s gam­ing plat­form, a delayed game release and sev­er­al new prod­ucts that had received less-than-desir­able reviews. At the end of the day on July 25 trad­ing closed at $3.18 per share. Just a year ear­li­er you couldn’t have bought a share in Zyn­ga for less than $12.

Per­haps unsur­pris­ing­ly, Zyn­ga has strug­gled to get their users to pay for vir­tu­al items with­in their games and when cou­pled with the fall in stock val­ue this may indi­cate that the sale of vir­tu­al items for cold, hard cash is not a viable busi­ness model.

Fol­low­ing the alle­ga­tions of insid­er trad­ing Zynga’s chief oper­at­ing offi­cer John Schap­pert suf­fered a very pub­lic demo­tion. This could well be because he is one of the very exec­u­tives accused of using infor­ma­tion ille­gal­ly. He sold $3.9million worth of shares in the infa­mous exec­u­tive stock sell-off.

Not the great­est week for Zyn­ga or Schap­pert, but accord­ing to some the law­suits, prof­it crash­es and ques­tion­able busi­ness mod­els are just the tip of the iceberg.

Ana­lyst Richard Green­field told Bloomberg recent­ly that Zyn­ga is “in utter melt­down mode.”

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