takingpitches

The Zynga revenue model, dependent as it on the sale of virtual goods, is driven by the following variables:

• Number of overall users,
• Percentage of overall users who buy virtual goods, and
• Amount spent per spending users.

This post looks at the first variable: number of overall users.  There is data in the Zynga S-1 for the last year and a half.  The general pattern is that the various measures of users (all of which overstate actual unique users, see S-1 for definitions), peaked in 1Q of last year, dipped for the balance of 2010, and rebounded to approximately the 1Q 2010 peak at the end of 1Q 2011.  One of the factors listed for the rebound this quarter is the launch of Cityville in December 2010 supplemented by adding content to existing games and the launch of certain mobile initiatives.  The chart below has the average daily average users, monthly average users, and monthly unique users.

The question is whether there is much growth left in the number of overall users.  Is there an upper ceiling?  The short answer is that we don’t know, but one hypothesis is that the most recent numbers are not far off from the peak of overall usage, given the numbers have peaked at about the same levels twice.

Another related possibility is that the pattern in users is one that fades – represented by the drop from the period from 3/31/10 to 12/31/10 – and which needs to be refreshed by the release of hit games.  It appears on an aggregate level that usage drops until something new is introduced to refresh interest.  This is also clear from an individual game level, as shown in the table below which combines disclosure of individual game MAUs as of June 2011 in the S-1 and all-time peak MAU as available on the Appdata website:

One would expect that interest in individual games would fade over time — think Pacman, Donkey Kong, or any other game you have ever played. Consistently, the MAUs for individual Zynga games show a peak and a deterioration over time.  (It would be interesting to know what the rate of fading of interest for a Zynga game is, and I suspect one could rather easily figure this out using AppData.)

But the ultimate question in terms of maintaining high levels of overall user engagement is whether Zynga or any other company can continually pump out hit games.  The experience from other hit driven business models such as movies and video games, suggest that it is hard, and some companies can and some cannot.

So the questions in terms of overall users are how much room there is to increase the peak usage levels from the 1Q 2011 levels, how the inevitable fade in MAU levels can be managed, and how well Zynga can continue to churn out hits and refresh those usage levels.

This is one category of risks in the Zynga business model.