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Zynga’s Slow Transition to Mobile Gaming

Last week shares of San Francisco based Zynga fell 10%after the company forecast a larger than expected second quarter loss. Investors are concerned about the company’s slow transformation into a mobile gaming company. Zynga management begged for more time for their turnaround efforts and said that the company’s business, although stable, would not pick up until later in the year. Wall Street analysts said that until the company showed more progress on its mobile efforts Zynga will have to depend on its popular ‘Farmville’ game and new games like “Draw Something 2″ to acquire and retain gamers and investors. Macquarie Equities Research analyst Ben Schachter stated “Zynga keeps hinting at meaningful changes to come … profitably, on mobile, but we will need to see it before we can give them credit for it.”

Currently Zynga gets 22% of its income from the company’s mobile platform, up 12% from last year. Zynga’s shares are modest compared with similarly sized companies like Twitter which generated over half of its income from mobile users. Wedbush Securities analyst Michael Pachter said “Zynga is unlikely to ever dominate the mobile gaming market in the same way that it has the web-based gaming market for many years.” Zynga hopes to attract gamers on mobile devices as it loses players on PCs’. Many investors doubt that this strategy will sustain Zynga’s revenues and profits. In a research note Piper Jaffray analyst Michael Olson told investors “Zynga’s path toward renewed growth is uncertain and fraught with competitive and internal risks.”

In recent months Zynga has tries to establish a network not dependent on Facebook and want to launch real money games around the world. Analysts believe that real money games are good long term opportunity for the company but will not boost Zynga’s revenues anytime soon. Wedbush’s Pachter told Reuters “Zynga must overcome significant competitive and legislative issues, among others. The near-term impact of real money gaming should be limited.” Jon Najarian, cofounder of optionMONSTER.com believes that Zynga is trying to survive until it can enter the online gambling business in the US. Several states have legalized, or plan to legalize, internet gambling. Zynga spent about $75,000 lobbying to get internet gambling legalized in California.

The company has launched a real money gambling site in the UK. Trouble is, online casinos are a dime a dozen in the UK and some believe that Zynga may be grasping at straws in the UK. Zynga is well set to survive for a while. The company has $1.65 billion in cash and has paid down long term debts of $100 million in April. Najarian believes that internet gaming in the US is Zynga’s only hope and said “With gambling, I think they can survive. Without it they don’t. It’s a binary bet.”

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