Zynga Is Going All-In With Real Money Gaming

| About: Zynga (ZNGA)

With the rapidly approaching earnings call for the final quarter of 2012, all eyes will be on Zynga (NASDAQ:ZNGA) tomorrow. Without expecting too much change in its financial standing from Q3, there is hope of an announcement connected to the development of it real money gaming platform.

The shift into real money gaming will not be as easy as it seems. Despite having amassed millions of players worldwide, Zynga's real money gaming platform is faced with three challenges:

1. Real money gaming will only be accessible in territories where online gambling is regulated and 100% legal.

2. Converting the percentage of the users based in the areas where real money gaming is legal, to actually make a deposit and play for real.

3. Players under the age of 18 will obviously not be permitted to play real money games. This alone is estimated to be around 34% of Zynga's player base.

In Q3 Zynga's revenue for the three month period was reported unaudited as close to $317m. However, their total costs were reported as $413m for the same period. Right now, the thing that is giving Zynga the psychological edge in the move to real money gaming is the cost per acquisition of real money players. The pressure is on for Zynga to convert their fun players to real money players. Once that exercise has been attempted, the acquisition strategy for Zynga will be the same as any other online gambling company. The difference is that every other online gambling has the experience and knowledge to do exactly this and has been doing exactly this for the past 10 years.

Its net decrease in cash and cash equivalents for nine months to September 2012 was reported as being close to $1.2bn. In the last article I wrote there was strong criticism that I didn't include anything about Zynga's deal with Nokia, the amount of "cash-on-hand" it has and the fact that they have a database of millions of players.

Let's start with the players. Total revenue from Zynga players was $316m in Q3. However, 56% of their player revenues came from U.S.-based players. Correct me if I'm wrong but, despite a ton of speculation, regulation in the U.S. has NOT yet happened. When Zynga and Bwin.Party (OTC:PYGMF) launch their joint venture, catering to the U.S. will not be an option anytime soon.

It's true that Zynga are in pretty good financial shape and have a healthy bank balance. But, as I mentioned in the comments of my last article, despite streamlining its operations and cutting down heavily on costs, it's still spending more than it's earning. It may have cut off an arm to save the body, but the blood is still pumping out.

The Nokia (NYSE:NOK) deal to have two Zynga games rolled out to 100m users starting from last fall has not actually received too much attention since the launch began. It will be interesting to see if there is a mention of this in tomorrow's call. The two games are Texas Holdem and Draw Something. Personally, every time I upgrade my smartphone, Texas Holdem is one of the first things I ensure is on my new handset. As for Draw Something, I think it had its moment but it's over now. I'm sure that no one will doubt that Zynga's acquisition was not the best move in the world. As a regular player of Zynga Texas Holdem, I ask myself would I play for real money. In all honesty, the answer is no.

These points are just some of the key indicators to watch out for in tomorrow's earnings call, but the real crux is the launch of Zynga Plus Poker. Zynga's future is now dependent upon this huge step as it goes all-in to real money gaming.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.