VCs, Welcome to the Game Industry

After my post about how Zynga seemed to have hit peak soccer mom, news broke that their profit took a nosedive by %95 this quarter. Some may say this is the bubble bursting on social, but it’s probably not. It’s just the maturing of the social game industry.

Zynga’s active users are down by about 3 million. Growth is flat, this is true. However, Zynga has attributed their falling revenues to the lack of major releases generating new revenue. I’m likely to believe it.

This is a familiar pattern to anyone who follows the dinopubs–companies such as Take 2 have wildly gyrating stock prices due to the release patterns of tent pole games like Grand Theft Auto. With AAA console titles taking 3-5 years to develop, you can go many costly quarters without any decent revenue coming in. This is especially scary when you are spending $50 million to develop a title and $100 million to market it.

Remember the early days of social games? Think back to 2008 when Jetman was hot. It was a crude Flash action title that was probably whipped together in a weekend. SGN bought it as one of the first acquisitions in the space. Contrast that with Adventure World–a lush, rich adventure in…uh…clicking on lots of stuff to generate spam. Ok, not my cup of tea–but the amount of work put into this generation of social games is deceptively large.

Zynga has been spending a lot of money acquiring companies and massive amounts of staff. I’m sure their 2,000 or so employees aren’t sitting around filling out Netflix trial subscriptions for free FarmVille Bucks. There’s a lot of development going on. Social games are taking longer to make and fickle audiences are saturated with compelling content. Naturally, if you don’t have anything new out there your usage and revenue will drop off.

The thing is, this hit-driven pattern was part of what made games totally off-limits to investors until the social revolution. No longer can you throw a heap of money at a bunch of pizza-eating Stanford CS grads in a SOMA loft to crank out code and buy millions of users until you supernova into an acquisition by the greater fool. VCs wanted to invest in so-called ‘game factories’ but now you actually have to produce quality games and work hard for your users. Scary stuff.

I’m not quite sure the crop of VCs that heavily invested in social gaming are ready for slow growth and a revenue chart that looks more like a string of al dente spaghetti than a hockey stick. Will social gaming become as unattractive to VCs as the traditional dinopub industry is? Zynga better not delay their IPO much longer–or time it to coincide with the release of a major title.

One thought on “VCs, Welcome to the Game Industry

  1. Pingback: 2011 Year in Review « Ralph Barbagallo's Self Indulgent Blog

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