The Zynga Inc. (NASDAQ: ZNGA) workforce reduction, which hit about a fifth of its staff yesterday, could grow considerably if the company's hopeful forecast of its future turns out to be wrong. And its forecasts have been wrong several times, as the company's business model has become nearly a complete failure.
The evidence of Zynga's disintegration began last year, when revenue rose to only $1.28 billion from $1.14 billion in 2011. That was a pathetic performance, compared to the increase from 2010 to 2011. Zynga's 2010 revenue was only $597 million. The downturn was much evident in the first quarter, when revenue actually dropped to $264 million from $321 million in 2012. As Zynga's model deteriorates, annual revenue could drop to less than $900 million this year. And there is reason to worry that its game products could fare poorly enough that the $900 million figure is optimistic.
Zynga did what almost any other awfully struggling company does. It slashed costs in the first quarter to $268 million from $407 million the year before. In the process, because much of the reduction was in R&D and sales, it may have mortgaged its future. However, if it cannot produce new hit products, that mortgaging have been the most intelligent thing it could do. At the same time, it was a sign of capitulation.
The critical question is whether Zynga can replace its failed products with successful ones. The answer to that is no.
By itself, the announcement of the Zynga layoffs was vague. All the company said was the reduction would create $70 million to $80 million in case savings. However, Zynga is not cash poor - yet. It is "idea poor" for certain. Most of Zynga's corporate announcements over the past year have been about new products. None of the announcements have been about how those products have done, likely because they have been failures.
The reasons for the Zynga layoffs were articulated in a blog post by CEO Mark Pincus. The content of the blog was highlighted by the fact that it said nothing about how Zynga would turn itself around:
These moves, while hard to face today, represent a proactive commitment to our mission of connecting the world through games. Mobile and touch screens are revolutionizing gaming. Our opportunity is to make mobile gaming truly social by offering people new, fun ways to meet, play and connect. By reducing our cost structure today we will offer our teams the runway they need to take risks and develop these breakthrough new social experiences.
The announcement was long on jargon and short on specific plans, because Zynga has none.
It is not unusual for a market to pass a company by, either because of a tectonic shift in that market or a lack of imagination by management. Whichever the case is with Zynga, it has not demonstrated that it can face the challenge of either. That, more than any single thing, means the cost reductions at Zynga are not over.
Filed under: 24/7 Wall St. Wire, Jobs, Video Games Tagged: featured, ZNGA