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By Kim-Mai Cutler

Screen Shot 2012-05-09 at 3.19.48 PM

Draw Something, the game that could do no wrong now seems like it can do little right, at least according to the blogosphere. There's been a string of stories from virtually everyone saying that the OMGPOP acquisition is "haunting" Zynga (NASDAQ:ZNGA) because Draw Something's daily active usage is down to 9.1 million daily active users from its peak of 14.6 million daily active users.

It's funny how the press turns (and we know this too well). On the day we broke the story that Zynga was about to buy OMGPOP for what turned out to be $180 million, Business Insider said that our rumored price range was way too low. When the company sold, they then wrote a story citing Flurry's CEO that OMGPOP had left $800 million on the table.

But now, the story is totally opposite! "Interest is fading!" The deal was a debacle! This chart below from AppData is getting rehashed over and over again.

It looks dismal. But while Draw Something's decline seems a little scary (as it should be), there's a lot of context to keep in mind -

1) Zynga raised its bookings guidance by around $50 to 75 million for the year, mostly on OMGPOP. Zynga said late last month that bookings for the year would come in at between $1.425 billion to $1.5 billion, up from $1.35 to $1.45 billion. They said on the earnings call that the $50 to 75 million bump was mostly because of Draw Something. While that seems high, it's not out of line if you look at other comparable company monthly revenues. Funzio was making $5 million a month at the time of its sale to GREE. Glu Mobile, a publicly-traded company, did $17 million in Android and iOS gaming revenues in the first quarter.

2) Games usually peak and then taper off in usage. But revenue sometimes goes in the opposite direction with optimization and improvement (like with Farmville). Zynga probably knows the natural lifecycle of freemium game better than most other companies. Games peak early and then taper down over long stretches of time.

Even hit games often contribute the majority of their revenue to the company after they peak. Farmville was still Zynga's top game by revenue last quarter even though it's several years old. It made up 29 percent of the company's online game revenue, followed by Cityville which had a 17 percent share, according to an SEC filing today.

Here's the life cycle of Cityville, Zynga's top game on the Facebook canvas by monthly active users:

Here's what Farmville looked like:

If you zoom out, here's what Draw Something's life cycle looks like. Kinda familiar?

True, mobile is a little bit different. The titles that were first to market like Angry Birds and Zeptolab's Cut The Rope, have managed to last longer than your typical social game on the Facebook (NASDAQ:FB). There are also exceptions like Words With Friends, which has a very unusual curve and Zynga Poker. But life cycles for mobile games are getting shorter every quarter.

3) OMGPOP's price may seem high, but the deal was far from the most aggressively priced one in recent social gaming memory.

Remember when Disney paid up to $763.2 million for social gaming startup Playdom in 2010? At Playdom's peak, the company had 7.3 million daily active users. When the deal finally closed, they had about 5 million. Even if you exclude the $200 million earnout, Disney paid more than three times as much as Zynga did for one-half of the daily active users. And that's factoring in Draw Something's recent declines.

Or how about the time when DeNA paid up to $403 million for Ngmoco in 2010? When DeNA won the bidding war against Zynga for this company led by former EA execs, they got 12 million registered users. That's registered, as in people who touched Ngmoco's Plus+ gaming network maybe one or two times (not people who used it every month or every day).

OMGPOP had peak usage of 14.6 million users every day. Up until now, Ngmoco has mostly been a source of costs for its Japanese parent as it only launched its Android-based mobile gaming network last fall. If they start materially adding to revenues, it won't be until now or later in the year, two years after they were acquired.

Or how about the time when GREE paid $104 million for mobile-social gaming network OpenFeint even though it lost more than $6 million on $282,500 in revenue the year before? OMGPOP made about that much revenue per day when it sold to Zynga.

4) There are a lot of other conflating factors that have driven the stock downward over the past few months:

The lock-up period for Zynga's employees ended a week ago, so now the company's rank-and-file can sell their holdings. Pincus himself sold close to $200 million in stock at the beginning of last month through a secondary offering. Both Pandora and LinkedIn, which went public last year, matched or found new lows when they hit their critical lock-up dates.

Maybe there are some underlying concerns about where Zynga will find new growth as the company's business on Facebook seems mature. Draw Something might tie a little bit into that as it's part of Zynga's mobile strategy, but it's not just the game itself. It's hard to envision a gaming business on iOS or Android that has the market share that Zynga has on Facebook. Furthermore, many standalone Android or iOS gaming companies trade or have been sold at somewhere between $200 million and 400 million.

At a $5.89 billion market cap, Zynga is aggressively priced for growth and is worth about four times its projected revenues this year. Meanwhile, Electronic Arts trades at not much more than what it will bring in revenue for this year. Zynga is also changing a lot internally as early employees, many of whom didn't have a genuine gaming background, phase out. The company is now pulling in a lot of EA's middle management. That could bring some creative firepower but it could also create internal culture clash.

But OMGPOP? That's just one game. And the title's decline, while fast, mirrors what you see with other hit games.

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Source: Was Zynga's Deal To Buy OMGPOP That Disastrous?