There’s a simple explanation for Zynga’s rapid rise and dramatic fall. It’s been said many times, but it’s still true: even though Mark Zuckerberg tried to distance himself from the games maker, Zynga’s fortune is still tied up with Facebook’s.

Casual players tend to play one uber-addictive game at a time

Facebook allowed Zynga to create a casual gaming market out of people who never considered themselves gamers. Stay-at-home moms and bored office drones who used to play solitaire discovered the pleasures of games like FarmVille, CityVille, and Mafia Wars. But now that Facebook has conscripted every person in a position to waste hours of time clicking on a computer, Zynga has hit a ceiling.

Because casual players tend to play one uber-addictive game at at time, Zynga is now fighting competitors for the same players. The struggle for player hours is also happening between Zynga’s own games.

The carry-over effect

Part of Zynga’s motivation for buying the fast-growing mobile game Draw Something was because people were playing it instead of playing Zynga games. When Draw Something hit 20 million downloads in five weeks, Zynga was sweating, fearful that more of its players would migrate. It bought the game in a rushed acquisition that closed a week later.

Draw Something continued to compete with Zynga’s existing games like Words With Friends, but it also had wider appeal that Zynga hoped would result in a net addition of players. Draw Something was downloaded internationally, and even reached some smartphone users without access to a desktop. But due to the loss of novelty and Zynga’s reluctance to innovate around the game, Draw Something started losing users rapidly after the acquisition. Its promise of adding new players to Zynga’s network evaporated.

Farmville_2


Zynga’s biggest game right now is FarmVille 2, which has more than nine million daily active users and 61 million monthly active users. Pincus was happy to talk it up during the company’s earnings call with investors, but he had to hedge. Unable to say that FarmVille 2 had pulled in a new audience, he told investors that FarmVille 2 players were "either new to the network, or players who hadn’t made any payments in the last 30 days."

Zynga may have attracted some entirely new players and inspired old ones to spend money, there’s been little net gain in players. FarmVille 2 still has fewer users than the first FarmVille did at its peak. And as Pincus acknowledged, Zynga "will see some decline in bookings from other games" due to FarmVille’s success. (Bookings are in-game purchases that are reflected immediately, as opposed to revenues which are accounted for differently.)

FarmVille 2 still has fewer users than the first FarmVille did at its peak

Player migration between games is especially damaging between web and mobile, because Zynga makes vastly more money on the web. More than half of Facebook-connected players on mobile are former web players, meaning Zynga also needs to worry about its mobile business cannibalizing its more lucrative web business.

In order to avoid merely shifting its players between games and achieve net user growth the way it did during the early Facebook boom, Zynga is pursuing two strategies: mobile games, and "mid-core" games, basic role-playing or action games which engage players longer than casual games but don’t require the commitment of hardcore PC and console games.

Growing the casual gaming pie

The mobile market is one where Zynga could see rapid adoption — the kind of adoption that propelled its massive success on Facebook — while reaching people who have never played a Zynga game. "We've all seen mobile become the fastest growing platform for gaming," Pincus said. "Mobile is the next opportunity for Zynga." Starting now, Pincus said, all Zynga games include a mobile or tablet version from day one.

"Mobile is the one area where you're seeing net new player growth," said Charles Hudson, a partner with SoftTech VC and a founder of Bionic Panda Games. "Mobile is still a really green field opportunity."

Starting now, all Zynga games include a mobile or tablet version from day one

Building a network of mobile games also gives Zynga the chance to build out a publishing or distribution platform that independent developers can pay to take advantage of. But Zynga’s transition to mobile is likely to take on the order of "quarters, not months," which is why Hudson wrote a blog post titled "The Zynga hate has gone too far," speculating that it might be time for Zynga to retreat and take the company private. There’s little chance of this happening, but the post went viral after Pincus slyly retweeted it.

"Zynga needs to take more risk," Hudson told The Verge. There aren’t a lot of public companies that take a lot of risk. It becomes really hard to do stuff that’s more experimental... I think as a private company, Zynga could probably tinker around and maybe work on some more novel ideas."

Gaming research firm Newzoo estimates the mid-core market in the US and EU is worth $2 billion. Zynga is pursuing this route as well, hoping it can convince some casual players to upgrade and attract a new class of players. Zynga announced the acquisition of gaming studio A Bit Lucky in September, and will launch its first mid-core title early next year. Zynga also announced its first real-money gambling venture yesterday, a UK partnership with casino site bwin.party.

Challenges

Some have suggested that now might be a time for Zynga to ramp up, add staff, and try to innovate new games so it can hatch its own Draw Somethings and Words With Friends rather than having to acquire them. "We didn’t create enough new heat for our players," Pincus told investors.

Some have suggested that now might be a time for Zynga to ramp up

Instead, the company has contracted. Zynga just cut 13 underperforming games, slashed staff by five percent, closed studios in Boston and proposed closing its operations in Japan and the UK, and instituted "more stringent budget and resource allocation" between its games. This "cost reduction program" and its estimated savings of between $60 and $80 million pleased investors.

Zynga’s stock bumped up 13 percent after its quarterly report came in looking less disastrous than anticipated, although it’s still worth less than a quarter of its value at this time last year. Zynga remains the biggest developer on Facebook’s platform. It commands the largest gaming network, reaches 311 million monthly active users, makes three of the five most popular mobile games in the US, and expects to make $1.09 billion in bookings for the year.

However, Zynga's substantial challenges loom menacingly. Transitioning to mobile, coming up with original games in addition to buying them, and retaining its players will be difficult, and may be even more so with a leaner staff. It's likely to be several quarters before the company can grow significantly again.