In this article, I'm going to show you why Zynga (NASDAQ:ZNGA) won't buy Glu Mobile (NASDAQ:GLUU) for three obvious reasons. While Zynga is calling itself "the world's leading provider of social gaming," Glu Mobile is defining itself as "a leading global developer and publisher of freemium games for smartphone and tablet devices."
First Reason: Different Market Spaces
The two companies operate in different market spaces. According to this article, mobile gaming is not the same market area as social gaming. The first difference is the audience -- you can see that most iPhone owners ($100k+, 47%) are richer than most Facebook users ($26k-$50k, 34%). Therefore, Glu Mobile is targeting richer people for its iPhone games than Zynga does with its Facebook games. The second point to look at is the monetization. The model applied by Facebook social games is to sell virtual goods to users in order to monetize the game, while in the mobile gaming market it is more usual to pay for something before playing the game (even if there are an increasing number of "freemium" games released in the app store). On the contrary, you won't see any social games with something to pay for before playing.
This is the first reason why Zynga won't buy Glu Mobile. The company won't go into another market area in such hard times. The company will stay focused on the social gaming market where it leads, and will develop its games through mobile platforms by itself. Zynga doesn't need Glu to develop its business.
Second Reason: Zynga Is Focused on Cost Reduction and Cash Preservation
Three months ago, the company reported that it has closed the Zynga Boston studio and Zynga Japan. CEO Mark Pincus has fired 150 full-time employees to reduce the cost structure in order to improve profitability. Pincus said:
These reductions, along with our ongoing efforts to implement more stringent budget and resource allocation around new games and partner projects, will improve our profitability and allow us to reinvest in great games and our Zynga network on web and mobile.
If the company wants to reduce the cost structure, it won't be buying a new company like Glu Mobile because it represents a big and expensive transaction. If Zynga were to buy Glu at a good price ($6 with a market cap of $400 million), it will have to spent one-third ($400 million) of its treasury ($1.28 billion).
Third Reason: Real-Money Gambling
Zynga is currently entering the real-money gambling space with its Bwin partnership in the U.K. Also, it has applied for an online real-money gambling license in Nevada. The company stated:
Zynga has filed its Application for a Preliminary Finding of Suitability from the Nevada Gaming Control Board. This filing continues our strategic effort to enter regulated RMG markets in a prudent way. We anticipate that the process will take approximately 12 to 18 months to complete. As we've said previously, the broader U.S. market is an opportunity that's further out on the horizon based on legislative developments, but we are preparing for a regulated market. We've also recently partnered with bwin.party to bring the highest quality real money gaming experiences to our UK players in the first half of 2013.
At the moment, real-money gambling is the main opportunity for the company. It will have a positive impact on its profitability and it will increase revenues with lower expenses compared to traditional social gaming business. Glu Mobile is also entering this new market area in the U.K. In my opinion, the company is late. In fact, the company didn't apply for a license in Nevada, which is the biggest market for online real-money gambling right now.
Moreover, Zynga's social games are very popular (millions of players). For example, Zynga Poker has 10 million monthly users on Facebook. One thing I want to point out is that Zynga already has its audience, while Glu has to find its gamers for its real-money gambling.
In my opinion, those are the three obvious reasons why Zynga won't buy Glu Mobile in the short or mid-term. Glu Mobile isn't a target for Zynga because the company will stay focused on social gaming and will be preparing its arrival in the online real-money gambling space.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ZNGA over 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.