The 7 Ticking Timebombs That Could Kill Zynga

Last Updated Sep 23, 2011 9:21 AM EDT

When Zynga filed its Q2 2011 disclosure the other day, the business press focused on a reduction in its profit and a slowdown in its user base, both of which reduce the likelihood the gaming company will go public. My BNET colleage Erik Sherman believes Zynga can work its way out of its troubles. Perhaps.

I respectfully disagree. Zynga contains seven different timebombs that could take the company down swiftly and suddenly, wiping out anyone vested in its stock. It is bizarre that the business press hasn't paid attention to this, the fact that the company's business model consists almost entirely of Damocles' Swords (excuse the mixed metaphor). They include, according to the company:

  1. The company remains entirely dependent on Facebook for its revenues and as a place to publish its games. It is exclusively bound to Facebook, but Facebook isn't bound to it: The social network can develop competing games if it wants. Meanwhile, Facebook takes 30 percent of the revenue Zynga generates, forcing that revenue through its Facebook Credits system just to complicate matters. It's similar to the relationship between pimp and prostitute: The pimp gets money mostly for doing nothing but can force the hooker off the block, or take on competing girls, if she doesn't behave.
  2. Less than 5 percent of players actually pay Zynga to play its games. That's just 11.4 million of its monthly active users. How stable can can such a small user base be?
  3. Advertising: dropped $12.9 million to $23 million in 2010 in an attempt to improve player experience, presumably by decluttering the games of product placement (most recent numbers available). There is a ceiling, apparently, on Zynga's ability to earn non-Facebook revenue.
  4. A small number of games produce a majority of Zynga's revenue. No details given, but again, think of all the games you've ever played and suddenly abandoned because you got bored. Still play Tetris? Bejeweled? Quite.
  5. All Zynga's traffic is hosted by Amazon. If Amazon gets a cold, Zynga gets pneumonia and must wait for Amazon's doctor for treatment.
  6. People are still trading Zynga poker chips on unauthorized third party sites despite the company's attempt to ban that.
  7. And, my favorite, Zynga's facilities are located on an earthquake fault zone, which the company says could wipe it out. Seriously. It's a virtual game -- which could be hosted inside Yucca Mountain -- and it's resting on the least-stable section of the U.S.
So, yes, Zynga -- which is profitable -- could indeed work its way through this soft patch and go on to greater things. As long as none of those other seven things goes wrong...