Zynga’s Diversification Challenge

Zynga’s going to eventually need some new, highly social friends if it wants to eschew its reliance on Facebook. The problem is, the number of viable social gaming outlets appears to be dwindling. And based on early results, neither Fish, nor Poker nor the Mafia seems to travel very well.

Since Zynga signed a much-publicized deal to distribute its games on Yahoo last year, Yahoo Games has lost 20 percent of its traffic. Per ComScore, Yahoo Games reached just under 10 million unique users in June, down from 12.4 million in June of 2010.

That decline occurred just as Zynga began rollling out games such as FishVille, Mafia Wars and others within Yahoo’s social games channel. But actually Yahoo’s Games’ decline had been in the works for years. It along with one-time-giant gaming property MSN Games had seen traffic skid since social games like FarmVille exploded in recent years.

MSN also saw its gaming audience nosedive. According to ComScore, MSN Games lost 23 percent of its audience, landing at 4.3 milllion uniques. In fact, the entire online gaming category dipped 8 percent in June, going from 102.8 million active players in June of 2010 to 95 million last month. Plus a few months ago Zynga cut ties with ailing social networking site MySpace, which was recently sold to Specific Media.

“There’s just not that many options out there,” said Bill Clifford, svp and gm of WildTangent, one of the few companies with a growing social gaming audience. The company’s games are baked into 85 percent of PCs sold in the U.S. According to ComScore, WildTangent’s unique users soared by 16 percent over the last year, netting out at 20 million unique users.

“The portals really haven’t evolved their gaming offerings at all,” explained Clifford. “They’re still waiting for people to browse, to visit a specific URL for gaming.”

In a social gaming world, people find out about games or are invited to play with friends via Facebook. Problem is, there are no other Facebooks out there. Plus, Facebook gamers — at least a small but lucrative percentage — are conditioned to pay for games via Facebook Credits. “Yahoo and MSN don’t really have that,” said Clifford. “People are conditioned to play for free.”

Executives from both Yahoo and Zynga were unavailable for comment. For its part, Zynga isn’t banking on Yahoo to provide an immediate audience or revenue boost, at least according to its recently released S1, filed in a lead up to the company’s much anticipated IPO.

“Facebook is the primary distribution, marketing, promotion and payment platform for our games,” the report reads. “We generate substantially all of our revenue and players through the Facebook platform and expect to continue to do so for the foreseeable future. Any deterioration in our relationship with Facebook would harm our business and adversely affect the value of our Class A common stock.”

In fact, Yahoo is scarcely mentioned in the report — it’s cited as a potential competitor, not partner. Nor are any other distributors beyond Facebook. But Zynga acknowledges in its filing that it is vulnerable to Facebook’s whims and could use some diversification.

“Some current and potential competitors [such as Amazon, Facebook, Google, Microsoft and Yahoo] have significant resources for developing or acquiring additional games, may be able to incorporate their own strong brands and assets into their games, have a more diversified set of revenue sources than we do and may be less severely affected by changes in consumer preferences, regulations or other developments that may impact the online social game industry.”

The report continues: “We have benefited from Facebook’s strong brand recognition and large user base. If Facebook loses its market position or otherwise falls out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our games, which would consume substantial resources and may not be effective.”