Sunday, 28 July 2013

(28-07-2013) Links 28 July: Zynga Falls On Better Results But No Real Money Gaming Licence - Bus1nessN3wz

Links 28 July: Zynga Falls On Better Results But No Real Money Gaming Licence Jul 28th 2013, 16:02

Zynga's results were better than Wall Street Expectations so we would assume that the stock rose on them. It is, after all, beating expectations that causes price rises:

Zynga faces an uphill climb as its user base continues to erode. The troubled games maker — whose top- and bottom-line results bested Wall Street's expectations — reported that daily active users fell 45% from 72 million in the second quarter of 2012 to 39 million this past quarter. Monthly active users dropped 39% from 306 million in the second quarter of 2012 to 187 million in the earnings period reported.

The games maker reported second-quarter revenue of $230.7 million. Analysts were expecting Zynga to report revenue of $183 million, according to the survey of estimates from Thomson Reuters.

They're clearly not great results but that's not the point at all. The market has an idea of where it thinks results will be and beating those should mean a rise in the stock price. This isn't what happened though:

Shares of Zynga plunged 14% on Friday to $3.01.

Hmm, clearly that didn't happen. So what was it?

Zynga, the troubled social gaming company, admitted on Thursday that the company had no future in online gambling and would abandon its effort to get a gambling license in the U.S.

Ah, that's the news that the market wasn't looking for. Zynga's still going to pursue a UK licence but that's a market where there's a lot of competition already, online gambling having been legal all along there. It's the US where they're not going to go for a licence.

"While the company continues to evaluate its real-money gaming products in the U.K. test, Zynga is making a focused choice not to pursue a license for real-money gaming in the U.S.," the San Francisco-based company said yesterday in a statement. The stock tumbled as low as $2.81.

It seems a slightly odd decision. For we know that there's a huge appetite for such real money online gaming in the US. Congress had to pass laws to stop people doing it after all. And as those laws are relaxed one might have thought that there's a good opportunity there. There was a certain hope that the company could really clean up in that sector:

The one thing Zynga had going for it was that it was well positioned to own the real-money gambling (RMG) market in the United States if it became legalized. Yesterday, Zynga announced its decision to pull away from RMG all together. The only excuse given, frustratingly without elaboration: that Zynga needs to focus on casual games.

If the reasoning seems odd here's another take at it:

As for why Zynga decided to abandon real money gaming in the U.S., Ko said essentially that Zynga decided it needed to focus on its core competency, social gaming. The decision makes sense, but also is basically an admission that all the talk about real money gaming in recent months has been a massive distraction. "The decision we made around real money gaming centered around focus. We looked at social gaming, free-to-play. It continues to grow and we're not executing against that. It really centered around focus."

No person or company can do everything and decisions do have to be made about where the limited resources should be concentrated. It's the flip side of the economists' obsession with opportunity costs. If Zynga's to do social gaming then it has to give up trying to do RMG. And they do see social gaming as still growing:

"The next few years will be a time of phenomenal growth in our space and Zynga has incredible assets to take advantage of the market opportunity," said former Xbox boss and now Zynga CEO Don Mattrick.

It may or may not be the right decision for the company:

The most notable news in Zynga's earnings release had nothing to do with earnings: The company is no longer pursuing online gambling—a category that Wall Street analysts perceived as having huge potential.

This is a distinct turnaround from the company's prior stance of pursing the potential for real-money gaming in the U.S., applying for various licenses.

Here's what my suspicion is, as someone who has had to wait on regulatory approval in entirely different markets and lines of business. There's a huge cost associated with entering that regulatory bearpit. And you never know whether you'll ever get a licence, or whether one you do get will be viable, or whether people are going to change the rules on you after you have. So chasing such regulated business is a large risk: perhaps Zynga just thought that it was too much of one and that social gaming offers greater certainty?