Last week, a lot of people mentioned to me, either gleefully or fearfully, the Sterne Agee’s analyst report that said Zynga was losing $150 on each new paying user. I did not have a chance to look at the numbers closely that led to this assumption but just doing basic calculations in my head and having prepared P&Ls for multiple Facebook titles, I knew it was garbage. The claim, however, did get a lot of traction because it was so outlandish and there are many Zynga haters out there who want to see it fail.
Fortunately, rather than having to do the math myself, there was a great piece in Business Insider that explained why the analyst report was wrong and Zynga was probably making $30 on every paying user. You can obviously follow the link to the article so I won’t go into detail on why the original claim was false. The gist of the analysis, though, was that the original analysis did not account for the natural attrition in social games (it assumed that everyone playing a Zynga game entering the period he measured remained a paying user). Anyone who has been in the industry over a week knows that all games lose players, some faster than others, and you need to replace these players by bringing in new customers.
Given Zynga’s market cap (and despite all the bad press, you are still looking at a company with a $6+ billion valuation), there are going to be a lot more analysts and pundits who have no idea what they are talking about trying to evaluate Zynga’s business and prospects. For those in the industry, the lesson is not to put much credence into what the “experts” are saying and focus on growing the fundamentals of your company.
The Business of Social Games and Casino 