Mon. 11/4 - "Zynga"

CASES EXHIBIT 2 Zynga Balance Sheets ($ thousands, except par value) December 31, December 31, 2016 20 15 CASE 4 Assets ZYNGA: IS THE GAME OVER?' Current assets: Cash and cash equivalents $ 852.467 $ 742,217 In 2017. Zynga not only struggled to remain relevant in the in March 2016, Zynga announced the replacement of Pincus 245,033 gaming industry but fought to seem attractive to investors. by the new CEO Frank Gibeau, another 20-year employee of Marketable securities During the previous four years, the company had a new CEO Electronic Arts, again expecting to turn around the company. Accounts receivable 77,260 79,610 almost every year. In 2013, the founder Mark Pincus stepped Zynga's lack of consistent leadership has been critical down and handed the charge to Don Mattrick, a 15-year to not formulating an effective turnaround strategy that Income tax receivable 296 5.233 employee of Electronic Arts expecting to turn the company might have led to progress. Throughout the revolving door Restricted cash 6,199 209 around. In April 2015. Don Mattrick left the position, and of CEO replacements, Zynga has not developed a substan Pincus returned as CEO for the second time. Just a year later cially successful new game. Consequently, its revenues have Other current assets 29.254 39.988 been falling over the past years accompanied by consistent Total current assets 965,476 1,112,290 This case was developed by graduate students Eric S Engelson, Dev Dus. net losses. Though Zynga's revenue rose by $53 million by Goodwill 613,335 657,671 Sand Noric and Professor Alan B. Einer, Pace University. Material has been the end of 2015. it still posted a net loss of $121 million drawn from published sources to be used for class discussion. Copyright ( 2017 for the year (see Exhibits I and 2). The primary reason for Other intangible assets, net 25,430 64,016 Alan B. Eisner the increase in 2015 revenue was a surge in the number of Property and equipment, net 269,439 273,221 EXHIBIT 1 Zynga Consolidated Income Statements ($ thousands, except per-share, user, and ABPU data) Restricted cash 3,050 986 Year Ended December 31: Other long-term assets 29,1 19 16.44 2016 2015 2014 Total assets $ 1,905,849 $ 2,124,630 Liabilities and stockholders' equity Revenue: Online game $ 547.291 $ 590,755 $ 537.619 Current liabilities Advertising and other 194.129 173,962 152,791 Accounts payable 23,999 29.676 Total revenue 741,420 764.717 690.410 Income tax payable 1.889 Costs and expenses: Other current liabilities 75,754 77.691 Cost of revenue 238,546 235,985 213,570 Deferred revenue 141,998 128,839 Research and development 320,300 61,931 396,553 Total current liabilities 243,640 236,206 Sales and marketing 183.637 169,573 157.364 General and administrative 92,509 143.284 167.664 Deferred revenue 158 204 Impairment of intangible assets 20.677 Deferred tax liabilities 5,791 6,026 Total costs and expenses 855,669 910,773 935, 151 Other non-current liabilities 75,596 95,293 Income foss) from operations (114,249) (146,056) (244.741) Total liabilities 325,185 337,729 Interest income 3.057 2.568 3.266 8,248 Stockholders'equity: Other income (expense). net 6.461 13,306 (104,731) (130,182) (233,227) Common stock, 3,349,714 3,234,551 Income foss) before income taxes 50 09000625 par value, and additional paid in capital . authorized shares: 2,020,517, shares outstanding $86,850 Provision for benefit from) income taxes 3.442 (8,672) (7.327) shares (Class A. 770,269, Class B, 96,064, Class C. 20.517)as of December 31, 2016 and 903,617 Class A Net income foss) $( 108,173) $(12 1,5 10) $(225,900) 769,533, Class B, 113,567, Class C. 20,517) as of December 31, 2015 Net income foss) per share attributable to common stockholders Treasury stock (98,942) Basic (0.12) (0.13) (0.26) Accumulated other comprehensive income (loss) (128,694) (52,3 88) Diluted $ (0.12) (0. 13) (0.26) Accumulated deficit (1,640,356) (1,296,320) Weighted average common shares used to compute net income (loss) per share attributable to common stockholders: 1,786,901 Basic 878,827 913,511 874.509 Total stockholders' equity 1,580,664 913,511 874,509 1,905,849 $ 2,124,630 Diluted 878,827 Total liabilities and stockholders' equity CASE 4 :: ZYNGA: IS THE GAME OVER? C13 C14 CASE 4 : ZYNGA: IS THE GAME OVER?mobile users, accounting for 73 percent of the company's many people find these online games fun and, better yet. EXHIBIT 3 Monthly Users of Facebook Gaming, as of October 2016 revenue in 2015. However, year-over-year decline in revel therapeutic, others can't understand the hype. The best way hues has been primarily attributable to the innovative prod- to understand the sudden infatuation is to view online gam- Candy Crush Saga 149.57 uct pipeline, which Mr. Gibeau has tried to turn around ing as simply a means of relaxation. by focusing on development of high-quality mobile applica- In the movies, at least, large executive offices are often Candy Crush Soda Saga 38.78 tions that had helped to shrink the net losses in 2015. In response to the wildly successful Clash of Clans by shown with putting greens, dartboards, or even a bar full of alcoholic beverages. These amenities are all meant to serve Farm Heroes Saga 30.53 SuperCell. Zynga released a new mobile game. Dawn of the same purpose: to relieve stress during a hard day's work. Titans, at the end of 2016. Dawn of Titans features high. We've all been there and looked for a way to cope. However. B Ball Poll 26.03 quality graphics and options to play with other users in real few of us have the opportunity to use such things as putting time. The 3D strategy game also allows user to create their greens to unwind at the workplace. And even if we did, how Clash of Clans 24.04 own fantasy kingdoms and develop strategy to stay ahead long could we afford to engage in such an activity before of the other players. Prior to the introduction of Dawn of being pulled back to our desks? Criminal Case 22.2 Titans, the company had launched a new version of Zynga Poker, which includes a sophisticated design and feature Stress reduction at work is one of the many purposes set that inspires more competition, authenticity, and social that virtual games fulfill: no need to leave our desks; no Pet Rescue Saga 7.47 connections between players. Zynga also launched NFL need to make others around us aware of our relaxation Subway Surfers 6. 14 Showdown at the beginning of the NFL season with the periods, and, better yet, no need to separate the task of intention of adding new features based on customer feed- relaxation from sitting at our computers while we work. Dragon City 12. back and play patterns. However, the new product-driven The ability to play these games on office computers and growth was not able to reverse declines in the existing relax" now and then as the day goes by makes online gam- Trivia Crack 10 online games." ing enticing. This, of course, is just one of many uses for the games. Some people play them after work or at the end 20 40 60 80 100 120 140 160 Zynga's Background of a long day. With the onset of smartphones, people of all Monthly active users in millions ages play these games on the go throughout the day-sitting At the time it incorporated in October 2007, Zynga had on the bus, in the waiting room of a doctor's office, or at Source: Statista 2016. become a dominant player in the online gaming field. the Department of Motor Vehicles. Diverting game play is almost entirely through the use of social media platforms. readily available with the click of a button. Located in San Francisco, the company was named by EXHIBIT 4 Top 5 Virtual-Gaming Developers of 2016 CEO Mark Pincus to pay tribute to his deceased beloved Market Size pet bulldog Zynga. Although this might have seemed Compared to other game developers with games present on Rank Company 2015 Revenue ($ millions) Key Games whimsical. Zynga was actually a quite powerful company. the Facebook platform, Zynga had once been a dominant Machine Zone $1,000 Game of War, Mobile Strike Exemplifying Zynga's prominence, Facebook was reported to have earned roughly 12 percent of its revenue from the Force, but by 2016 it failed to surface in the top 5 virtual- gaming rankings (see Exhibits 3 and 4). The King Company Supercell 2.300 Clash of Clans, Clash Royale, Boom Beach Hay Day operations of Zynga's virtual merchandise sales.' appeared to rule with its numerous popular games, include EA Mobile 504 Star Wars Galaxy of Heroes, NFL Madden Mobile, The Simpsons: Tapped Out No other direct competitor was close to this revenue. ing the billion-dollar Candy Crush Saga. Zynga's collection of games continued to expand, with more Zynga's virtual games provided the opportunity for Mixi 2,000 Monster Strike and more success stories emerging. A relative newcomer constant buildup and improvements, offering users virtual Com2us 369 Summoners War to the market. its quick success was astonishing. However. goods and services to increase their gaming experience. Zynga's impressive financials were possibly at risk because of what some considered questionable decision making. These items could be purchased using a credit card and were often needed to accomplish fast progressions in the Sauce: www.pocketgamerbiz. 2016 top developers list. Many of Zynga's competitors, and even some partners. games. These goods were advertised throughout the games were displeased with the company's actions and began to is widespread. Creativity and innovation are accepted to be Toyland, Zoo World, Hero World, and MyCasino. Its most show it in the form of litigation. Agincourt, a plaintiff in a and the user was enticed by price cuts for larger purchases. Zynga's virtual games could be played both remotely and the grounds on which competing companies challenge each other. With all competitors after the same audience, the played game, Zoo World, was a free social media applica- lawsuit brought against Zynga, stated, "Zynga's remarkable through social media platforms, most commonly Facebook. tion whereby users tried to build the best zoo they could. growth has not been driven by its own ingenuity. Rather Five of Zynga's games, FarmVille, CityVille, Empire and industry is prone to a significant amount of head-butting The company underwent a phase of major layoffs but con- it has been widely reported that Zynga's business model is Allies, Castle Ville, and Texas HoldEm Poker, were among rivalry. tinued to work on new and improved games." to copy creative ideas and game designs from other game the most popular games on Facebook. CityVille had over developers and then use its market power to bulldoze the 100 million active monthly users within months of its Background of Competitors GameHouse, based in Seattle, Washington, was a developer, publisher, and distributor of casual games. games' originators." If lawsuits and ethical issues contin- release in late 2010.' On July 1, 2011. Zynga filed with the RockYou was founded by Lance Tokuda and Jia Shen. GameHouse was acquired by RealNetworks for $14.6 mil- ned to arise for Zynga, its powerful bulldog could start look Securities and Exchange Commission with intention of Their first product was a slide-show service, crafted to work lion cash and about 3.3 million shares of RNWVmmm. ing more like a poodle. raising up to $1 billion in its IPO, and its stock began trad- as an application widget. Rock You was one of the compa- stock, which had an estimated value of $21 mi The Products ing on NASDAQ December 16, 2011.* nies invited by Facebook to participate in the FS event, in time." Prior to its acquisition, GameHouse ge Of course, Zynga was not the only virtual-gaming com- which Facebook announced the start of an open platform impressive amount of revenue through the sal With an abundance of software developers, the ability to pany striving for this degree of success. There were and that would allow third parties to develop and run their own on its own website, www.gamehouse.com, ai create and distribute online games increases by the day, and are many others, in what seems to be one of the fastest- applications on Facebook. Rock You then shifted toward third-party affiliates and other distributors. the demand to play them is equally high. However, while growing industries. The capability to create online games producing more in-depth social application games, such as and RealArcade merged their websites into one CASE 4 :: ZYNGA: IS THE GAME OVER? C15 C16 CASE 4 :: ZYNGA: IS THE GAME OVER?effort to create one massive distribution center. RealArcade Background of the CEO of Zynga's operations, A former employee of the company begin creating true one-of-a-kind games-showing its capa- delivered its games on a downloadable demo basis, with a 60-minute trial time for most games. When the trial expired. Mark Jonathan Pincus was the entrepreneur behind revealed firsthand quotes from CEO Mark Pincus, such bilities as a leader in the industry rather than a follower? as: "You're not smarter than your competitor. Just copy With all eyes on the company, it is certain that it won't be the user needed to purchase the full version to continue Zynga. He was also the founder of Freeloader, Inc., Tribe what they do and do it until you get their numbers." One easy for Zynga to get away with some of its earlier stunts. playing. Users also had the option of purchasing a mem Networks, and Support.com." In prior years. Mark was bership package for a monthly fee. GameHouse later began named CEO of the Year in the Crunchies awards, " as contractor said he was presented with freelance work from especially now as a public company. As a public company. offering the full version of many of its games, supported by well as Founder of the Year. " Prior to his entrepreneurial Zynga related to imitating a competitor's application and Zynga needs to watch its step or prepare to feel the wrath the sale of in-game advertising." endeavors, Pincus worked in venture capital and financial was given precise instructions to "copy that game. "Other of its shareholders. EA Playfish, a subsidiary of Electronic Arts, began as services for several years. After graduating from Wharton. past employees, even those at the senior level, spoke out Playfish Lid., a developer of social network games that were he went on to obtain his master's degree from Harvard about the corrupt ways that Pincus had apparently decided ENDNOTES 1. Hip: //www.pocketgamer. biz/lis //627 73/ free to play. Who Has the Biggest Brain? was the first suc Business School. Soon after graduating. Pincus launched to operate the business. One quoted the banter of employ- 1op-50 mobile-game-developers of-2016/entry/48/. cess of Playfish Lid and was the gateway to the company's his first start-up, Freeloader, Inc. a web-based push tech- ees in the office, "Do Evil," a twist on the Google motto. nology service. Individual, Inc., acquired the company only "Don't Be Evil."29 2. Zynga Q4 2014 earnings call transcripts. ability to raise funding. The company, like many of its com- A former high-level Zynga employee provided an insight iness/features/2011/06/ petitors, generated revenue by selling virtual goods inside seven months later for $38 million. Pincus later founded his third start-up. Tribe.net, one of the first social networks. into the company's culture, as regarding any emphasis on mark-pincus-farmville-2011 06. its games. Electronic Arts later acquired Playfish for $400 4. Mitp:/ews.cnet.com/8301-31001_3-20093473-261/ million. Soon after. Playfish drew approximately 55 million Tribe.net focused on partnerships with major, yet local. creativity and originality. According to the employee, a zynga-targeted in patent infringementlawsuit. users a month, with over 37 million of those users coming newspapers and was supported by The Washington Post. group of designers brought a new and innovative idea to com/apps/facebook/2915497051 19-cityville. Knight Ridder Digital, and Mayfield Fund. Unfortunately the table, only to have it turned down by Pincus because of 6. wwwreuters.com/article/2011/11/30/ from Facebook. " Users could purchase "Playfish Cards" at For him. Pincus's resume did not impress his competitors. his wariness toward a new idea that didn't fit the "tried-and- us zynga-ipaidUSTRE 7AT2F/201 1 1130. Walmart, Walgreens, and Toys 'R' Us stores, at which point irritated by what they viewed as his questionable busi 7. Mattp://techcrunch.com/ 2010/10/15/ they could register on the Playfish website to begin earn- true" mold of other successes." rock you-rocked by-layoffs as its witches.focus to-social games/. ing "Playfish Cash" that could be used to purchase virtual tactics, nor did it dissuade them from making their feelings Zynga was accused of taking advantage of its end cus goods within the games. Playfish announced the change known via a lengthening laundry list of threats and lawsuits. tomers, pertaining to a lack of security and safekeeping of K. Itp://investor.realnetworks.com/faq.clintfaqid=2. consumer information. The Norwegian Consumer Council 9. www.gamehouse.com/. from Playfish Cash to individual cash for all games (except Crazy Planets at that time) and allowed users to trade for Intellectual Property and Ethical Issues filed a complaint against Zynga to the Data Inspectorate 10. www.gamasutra.com/viewews/32496/ Playfish_Social_Games Reaching_55_Million Monthly_Players php. Nissan has claimed that its trademarks were used without 11. wwwimidesocialgames.com/2011/04/ 19/exclusiveplayfish-ending- the new cash."! concerning breaches of the Data Protection Act. According dallin on facebook-credits/. CrowdStar, based in Burlingame, California, was another consent in Zynga's game Street Racing. Zynga consequently to the Consumer Council, Zynga's terms of use "do not offer a clear description of what is being collected in terms 12. wwwappdata.com/devs/306 79-crowdstar. developer of social games. Founded by Suren Markosian and Jeff Tseng. it ranked fourth for most monthly active changed the thumbnail images and renamed all the cars that were branded Nissan and Infiniti to "Sindats" and "Fujis." of information or what this information is being used for. i wwwbusiness week.comews/20 10-03-31 /crowdstar-saidto-break-off. Nor do they state how long the information is stored for talks to-be-bought by microsoft html. users among Facebook applications. " Its most popular titles 14. Itp://ventureb om/2011/05/23/ were Happy Aquarium and Happy Pets. CrowdStar turned Zynga was criticized on Hacker News as well as other social media sites for filing a patent application involving the a bil- or how it is protected against unauthorized access." The social game-leader-crowdstar-raises-2 3m from-intel and time-warner/. 15. Itp://www.bloomberg.com/ down an offer from Microsoft to acquire the company for rity to obtain virtual currency for cash on gambling and other Consumer Council went even further with its forewarning: "Many of the gravest examples of unreasonable and one- asp?privcapld =127260687 esearch/stocks/private/ snapshot. more than $200 million." The company su sequently gaming websites. Many said that the concept was not new sided terms of use can be found in games providers such 16. Itp://www.gamespot.com/articles/1010-million people-play.clash-of. raised an additional $23 million and planned on using the sand that in fact significant prior art for the concept already as Zynga." clans-dev-games/1 100-6435433/ money to double its workforce and increase expansion on 17. Itp.//companyzynga.com/about/leadershipteam/zynga-management a global scale. CrowdStar also planned to add about 100 existed."The unveiling of the game Mafia Wars generated a lawsuit from the creators of Mob Wars. An attorney of the 18. Hitp://venturebeat.com/2010/01/11/crunchies-winners-facebook-bing/. employees, including game developers, server developers. Zynga Going Forward 19. Itp://techcrunch.com/ 201 1/01/ 21/ artists, producers, business analysts, a ontent managers. parent company of Mob Wars said that by making Mafia Wars, Zynga "copied virtually every important aspect of the Although Zynga game users tend to be pleased with Zynga's congratulations-crunchies.winner stwillertakes best-startup of-2010/. 20. Mitp://startup2startup.com/2009/06/24/june29-mark pincuszynga/. Peter Relan, CrowdStar's CEO, said the company needed to games, many note there seem to be recurring obstacles raise money to exploit opportunities for global expansion in game." The lawsuit was later settled out of court for an amount between $7 million and $9 million." that limit that pleasure. Many Zynga users complain of lag 21. wwwnytimes.com/2007/03/03/technology/0.3social. time while playing the games. Even more complain that himl'pagewanted=1&_r=| kei=5068ken=1718518217067324 Japan, China, Eastern Europe, and Brazil." &ex=13 30578000. Supercell Oy operated as a subsidiary of Tencent California-based web developer SocialApps brought Zynga to court seeking damages for alleged "copyright when problems arise, Zynga support staff are nowhere to be found. The company has no customer service initiative 22. Mip://mafiawars.wikia.com/wiki/Zynga. Holdings Limited. Supercell Oy, based in Helsinki, Finland. infringement, violation of trade secrets, breach of written 23. Http://allfacebook.com/zynga patent-currency_b 20985. was another successful developer of mobile games with contract, breach of implied-in-fact contract, and breach of and forces users to resort to sending their claims through 24. wwwbizjournals.com/sanfrancisco/stories/2009/07/ 13/stary7.html. additional office locations in United States, Japan, South confidence." SocialApps claimed to have entered into an e-mail-which many believed is ignored, or never read. 25. Itp://techcrunch.com/ 2009/09/13/ Korea, and China." The initial hit for the company was its Further, many believe that the company makes it too dif- zynga-settle tion-as itsettles into-playdom-war/ browser game called Gunshine.net. In 2011, the company agreement with Zynga, allowing Zynga access to the source 26. wwwjoystiq.com/2011/07/18/ code for SocialApps' Facebook game MyFarm in exchange ficult for users to make real strides in the games without ver-farmville-source-code/ started developing games for tablets and smartphones, gain- spending ridiculous sums of money. Based on their experi- ing worldwide popularity over just a few years. The most for an undisclosed compensation. According to the suit. Zynga was given the code, but failed to pay SocialApps. ences, many users believe that Zynga is all about revenue 27. www.forbes.com/sites/insertcoin/201 2/01/06/ zynga-stock-fallsas-second-postipo-game failsto impress/. popular mobile games developed by Supercell included SocialApps claimed that MyFarm's source code was the generation and that everything else comes second. 2K. Http://blog.games.com/2010/09/08/ Clash of Clans, Clash Royale, Boom Beach, and Hay Day. foundation of Farmville, as well as many of Zynga's simi- As Zynga looks to the future, where might its next big zynga-ceo-to-employeesi-dant-fing want-innovation/ free to download and play. The company had annual rev. lar games. " Following Zynga's release of the game Hidden hit come from? With all the criticism aimed at Zynga's 29. Itp://blogs ofweekly.com/thesnitcly 2011/1 1/zynga_corp enue of about $2 billion, and its strategy game Clash of Clans was a leading competitor of Zynga's Dawn of Titans. Chronicles, Forbes' Paul Tassi wrote that Zynga "refuses to past behavior, will the company continue on the path it php. has become notorious for and reap further accusations of 30. wwwafweeklycom/2010-09-08ews/farvillains/4/ Supercell's flagship game, Clash of Clans, had approxi- innovate in any way, and is merely a follower when it comes to ideas and game design." imitating its competitors' games? Or will Zynga change its 31. Itp://forbrokerpartaken.no/Artikle:/2010/ mately 100 million daily users, which posed a big competi- tive challenge for Zynga's Dawn of Titans." Ethical issues, though less tangible and definable than approach, gain a reputation for intellectual integrity, and Facebook_and_Zynga_reported_to_the_Data_Inspector intellectual property, were equally troubling in assessments CASE 4 :: ZYNGA: IS THE GAME OVER? C17 C18 CASE 4 : ZYNGA: IS THE GAME OVER