Zynga’s investors worry about the company’s dependence on Facebook. So it’s no wonder they warmly greeted the company’s plans to diversify away from the social network, currently the source of more than 90 percent of Zynga’s revenue. But one trend affecting its giant symbiotic partner shouldn’t worry them much – the shift to mobile devices. Ad-dependent firms like Facebook, Pandora and Yelp could lose out, if only temporarily, but Zynga’s revenue model is different.
More and more people access the Internet on smartphones and tablets. Sales of these devices have now eclipsed desktops in the United States. Yet advertisers haven’t yet followed, for reasons ranging from conservatism to a lack of tools to measure the effectiveness of mobile advertisements. Facebook and Yelp, for example, still receive almost no revenue from mobile advertising even though half Facebook’s users access it on the go and about 6 million people use Yelp’s service on their phones.
Fortunately for Zynga, only about 7 percent of its revenue came from ads last year. Instead, the company gets nearly all its income from selling virtual goods like swords, tractors and power which users buy to advance in games. For customers, it doesn’t matter whether they are playing on an iPhone or on a desktop computer. They pay the same. Indeed, people twiddling their mobile device thumbs waiting for the start of a meeting or the arrival of a delayed bus could be more inclined to buy such items. According to the company, some games now take more revenue from mobile users than desktop ones.
Zynga isn’t getting a free lunch. Relying on virtual goods has its own problems. Virtual goods face the risk of illegal copying. So far at least, all purchasers must use Facebook credits, which results in the social network taking a 30 percent cut of each purchase. And, of course, Zynga will miss out when advertising dollars eventually follow eyeballs onto mobile devices. Zynga doesn’t look a bargain at more than 50 times estimated 2012 earnings. And Facebook has at least the safety of scale. But Zynga may be less risky than smaller, loss-making, ad-dependent rivals like Pandora and Yelp.