Zynga Virtual Coins May Bring Higher Revenue Than The Illusive U.S. Casino Chips

| About: Zynga (ZNGA)

Zynga's gold isn't necessarily hidden in real coins. True untapped potential lies in Zynga (NASDAQ:ZNGA) virtual games, ripe for release should Zynga manage to get its core gameplay right.

When the Q2 earnings call came, the new management ditched US real gaming pursuits as Zynga share price proceeded to dive in head first. However, the move represented the level of Zynga's management attentiveness to its shareholders (with the exception of the main shareholder). Had a complete shareholder consensus been considered, Zynga's strategy might have taken a more rational appearance, more closely reflecting the realities of the US market.

Following are some important online gambling industry facts that Zynga can't ignore:

  • In the US gambling arena, all eyes are on the slow dance around online real money gaming regulation. Regulations are progressing at a snail's pace with state-by-state implementations. So far only three states have enacted legislation: Delaware, Nevada and New Jersey. Two of the three states deal only with online poker, while the more lucrative profit generating segments of casino and sport-betting are not an action item. At this rate, and given the usual political agendas, it could take years before a meaningful number of additional states, with their bastardized versions of online gaming, jump on the online gambling train.
  • Poker is a great game for player acquisition and retention. However, as a standalone it generates for most small to medium operators minimal profits (if any). This is even truer when not combined with side bets (casino, soft-games, and sport-betting which are the real profit generators). In 2012, sports betting was worth €11.5 billion, casino €5.5 billion, poker €3.1 billion, and bingo accounted for € 1.6 billion of the global online market.
  • The market leaders - Pokerstars, iPoker (OTC:PYTCF), 888 (OTCPK:EIHDF), Bwin.Party Digital (OTC:PYGMF) and others, cover a broad moat of high liquidity paying users communities.
  • The affiliate industry plays a significant role in driving players to online gambling sites. Up to 50% of traffic for major gambling sites is in fact generated in this way, with over €2.1 billion of gross wins across sports-betting, casino, poker and bingo in 2012. Zynga's massive user base can be leveraged for considerable affiliation revenues (30 to 50% of the gross player profit) working across the full industry spectrum, regardless of when and where it will launch its own branded operations.

So in fact, what Zynga will probably do, regardless of its public announcements, is carefully watch the US market for true signs of life. Once the opportunity presents itself, Zynga will launch its business model based on real experience gained in the UK and other future markets. The US online train may have started its engine but it's certainly not pulling out of the station just yet. In my view, that's the announcement Zynga's management should have made. But as it seems, the discouraging announcements during the earning call were published without taking proper consideration of the market perceptions.

Social Gambling

H2 Gambling Capital estimates that the social casino gaming industry generated a gross win of €1.25 billion in 2012. This is anticipated to increase to €2.12 billion by 2015. A number of indicators supporting this have been published recently, including DoubleDown Casino's (NYSE:IGT) daily 0.40$ bookings (DARPU) out of its social casino operations. These are incredible figures when considering that Zynga's average daily bookings (DARPU) are 0.055$ and industry wide, the normal DARPU for social casinos ranges from 0.12$ to 0.17$.

Currently Caesars Acquisition Corporation (CGP) is the social casino market leader, more specifically the Caesars interactive unit which emerged from Caesars Entertainment (NASDAQ:CZR). The spin-off's SEC filings reveal that the social casino/bingo generated $66.6 million in the first quarter of 2013. By extrapolation it's fair to estimate that social casino bookings could reach $48 million per quarter. CGP DARPU is 0.12$ on the web and 0.17$ on mobile platforms.

Unfortunately, Zynga social gambling products are not on a par with that of market leaders. Ironic, when considering that on Zynga's acquirement of DNA Games back in 2011, the games developed by this company placed them shoulder-to-shoulder with market leaders in a still spacious market. For some unknown reason, best understood by Zynga's management, Zynga chose to phase out all these games, just in time to miss the social gambling money-train. Currently its DAU figures are low (except in Poker), while DAU/MAU rates indicating user churn and loyalty are less than half of the market leaders. Adding insult to injury, Zynga slots products are not performing well. Nor did Zynga manage to produce an integrated suite of poker-casino-bingo - the top social gambling predator and probably the hottest upcoming trend in the social gambling market. Disappointingly, the low production quality of Zynga social gambling games prevented Zynga leveraging its existing pot of gold for this market - the substantial user base. (See table comparing market leaders and Zynga).

I would propose Zynga BOD put some reasonable objectives to the new CEO with regards to social gambling. It may even be a good opportunity for him to earn the generous compensation pack given by the company. Apparently, social gambling can contribute much higher player value than the other social games. According to my estimations, even modest objectives for the contribution in FY 2014 could be $320 million ($80 million per quarter).


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US Real-money Online Gambling

Real money gambling is not a low hanging fruit. The main Zynga competitive advantage lies in reduced acquisition costs achieved by leveraging the user base. 60% of Zynga users are US-based, with 66% older than 18. Let's assume (optimistically) that Zynga's databases include 600 million users, from which 60 million are active. Hence the US target audience stands at about 240 million dormant and 24 million active. An optimistic projection sees 15% of that population residing in those states where poker will be regulated during 2014. This narrows the target population to 36 million dormant and 3.6 million active.

It is hard to predict what is the convergence of "Farm games" players with real money poker, although it is clear that social poker does carry a certain affinity. One can assume conversion rates of 0.1% to dormant users and 2% to active ones which puts the potential poker players who will actually engage in real money poker at about 100,000. The poker sharks will also be looking to join the Zynga fish party, so let's assume 120,000 players in FY 2014. The lifetime value of a casual real money poker player can be estimated at $350 (without any side-games to thicken it) so the contribution in FY 2014 could be $42 million (or $11 million per quarter).

Meanwhile, Zynga can be credited with making the correct move into the UK market: A high value market, with a stable regulatory environment and clear marketing and sales path. The UK market allows the provision of a full suite of gambling products thus generating much higher player lifetime value. Prudently, Zynga joined an online gaming veteran BWIN Party. This way Zynga can launch any assets onto stable platforms which comply with the specifics of on-line gambling. This will save expensive mistakes and build crucial experience so that once the US market opens, Zynga will be ready.


A suitable social gambling offering may generate an additional $320 million for Zynga in FY 2014 revenues. If Zynga's announcement about focusing on its social games will be followed through, we can expect a significant contribution to their top line. Coming up with the right kind of offering doesn't take 2,300 employees. Probably only 100 to 200 employees would suffice, together with some content acquisitions or license deals. Much more important is for Zynga to concentrate on producing top quality content and apply rigorous marketing and optimization activities. The key to success lies with those people in the driver seat, in so far as their ability to take lessons learned and corrective actions: Zynga's miserable failings in product development, or worse in recognizing and using purchased assets, should pave the path ahead and balance some of the more ultra-egos currently guiding the company.

Disclosure: I am long OTC:PYTCF. 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.