Market Overview

Five Reasons Facebook Will Buy Zynga

Zynga might be a terrible company, but it accounts for 12% of Facebook's revenue.

Some people don't seem to think that 12% is a large amount of money. But if you were a Facebook (FB) investor and the company suddenly lost $300+ million in revenue, would you be concerned? Or would you laugh it off and say, “Oh, it's just a few hundred million”?

It would be wonderful to be rich enough to think like that – to actually believe that $300 million doesn't matter. But even a multi-billionaire should cringe at the thought of parting with that much money.

Thus, it's only natural that the world's largest social network would consider acquiring the world's largest social games company. Zynga (NASDAQ: ZNGA) might be a disaster of a corporation that loses $150 on every new customer and openly copies its competitors, but it still provides Facebook with a significant amount of income.

If Zynga decided to pack up and leave Facebook (or, more likely, died a miserable death), Facebook's revenue would immediately decline. There aren't any video game companies that are prepared to take Zynga's place. Electronic Arts (NASDAQ: EA) may be a top player in social gaming, but it only received two mentions in Facebook's S-1. EA does not currently provide Facebook with a significant amount of revenue. Zynga, meanwhile, is very important to Facebook's bottom line – and was mentioned 24 times in the company's S-1.

These are just a few of the reasons why Facebook will inevitably acquire Zynga.

5. Zynga is Still a Low-Cost Acquisition

Let's assume for a second that Zynga has hope. We'll pretend that the company has a turnaround plan, one that will be put into action and transform the corporation into a money-making endeavor.

That sounds like one trippy pipedream, doesn't it? But if Zynga can overcome its many weaknesses (or launch a successful gambling website), the company might actually turn into a profitable entity. And if that happens, its purchase price will soar.

Thus, if Facebook is going to acquire Zynga, now would be the time to strike.

4. Better Branding and Customer Retention

Right now, Zynga pays Facebook a number of fees to advertise and to use the social network as a gaming platform. If Facebook acquires the FarmVille maker, it will lose that source of revenue by default.

On the upside, Facebook would then gain control of Zynga's customer base, which is an important part of the social network's future. According to App Data, Zynga currently has 238 million MAUs (monthly active users). While that number seems a little too high to believe (especially with all of the horror stories surrounding the millions of players who try new Zynga games and abandon them a few weeks later), it isn't out of the question. The various “Ville” games are still fairly popular. At 19 million MAUs, Words With Friends isn't doing too badly.

Now let's suppose that there are some redundancies involved here (ex: half of CityVille's players may also play FarmVille) and that Zynga only has 150 million MAUs. Facebook could do a lot with that many users; expand its analytics, beef up its ad revenue, and come up with additional reasons for those users to return to Facebook as often as possible. Facebook profits from every user. But it makes the majority of its money from the people who visit the site several times a day.

By leveraging the hypnotic trance that encourages (forces?) Zynga users to attend to their farms and cities several times a day, Facebook could experience a serious profit boost.

3. There's Nobody Else

While Zynga isn't the only strong brand in social gaming, it is the only one with 238 million MAUs. It's also the only entity that is synonymous with social games. Electronic Arts, for example, is not typically thought of as a social games company. Its lineup includes big-budget console games like NFL Madden 12 and Battlefield 3. Facebook could probably afford to buy EA if it wanted to (if not today, then definitely in a few years). But there's no need to buy a company that does so much more than Facebook needs.

There are other, much smaller social game developers and publishers that Facebook could explore. But without any established hits, most of them are not worth buying. (Unless Facebook was serious about turning the site into a full-fledged, cloud-based video game platform. But that's whole other story.)

Thus, Zynga is the frontrunner for Facebook acquisitions.

2. It Might be the Only Way to Save Zynga

Facebook can't afford to let Zynga die. It could look for other sources of revenue to replace Zynga when the company perishes. But Facebook should do that anyway. The idea isn't to swap one revenue source for another – the goal is to maximize profits and strive for continual growth.

Under Zynga's current management, the company is seemingly incapable of maintaining its newfound success. It may be able to ride the gravy (gambling?) train all the way to the bank. But nothing lasts forever. That's why corporations of any kind – especially those in the business of entertaining consumers – need to constantly evolve.

With Facebook at the helm, you could be certain that Zynga would see adjustments on a continual basis. They may not always be what consumers want. Sometimes they might prove to be disastrous. But whatever they are, they would be a thousand times better than any strategy that Zynga's current managers have implemented.

1. The Future of Facebook Might Depend on It

Going forward, there's no telling how much of Facebook's profits may come from Zynga. Should the social networking giant wait around to find out? For better or worse, Facebook and Zynga are connected in a very big and unique way. When corporate relationships like this occur, marriage is inevitable.

But let's hope that the resulting offspring proves to be more exciting than Empires & Allies.

Follow me @LouisBedigian

Posted-In: CityVille Empires & Allies Facebook farmville ZyngaTech Best of Benzinga

 

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