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.”