Zynga has often been the target of criticism. They’ve been accused of copy-cat game design, using Pavlovian psychological tricks to addict people to their games, and facilitating scams through their offer walls. Whether or not these accusations are true or not, well-founded or not, is frankly irrelevant at this point. That’s because they’ve built a sustainable competitive advantage in the social games space, and they’re using this advantage to create genre-dominating properties that fund their growth and acquisition of new talent.
The secret to Zynga’s success isn’t necessarily their ability to design compelling social games or their ability to optimize new features for monetization, though these skills certainly help. Having played CityVille to level 65, I can attest that Zynga knows how to create a game with masterful game mechanics. They also regularly refresh their games with new content and new mechanics that keep it fresh. Their target audience, casual gamers that average out to 40-year old Midwestern housewives, is also a good audience to have because of its vast size and low level of gaming sophistication. But Zynga’s capabilities and their focus aren’t the reason that they dominate the space right now. No, the reason for Zynga’s great success is that they were the most aggressive in customer acquisition when it was easy to do.
Before Facebook shut off the viral marketing spigot for applications, Zynga was one of the most aggressive companies in the utilization of this marketing channel. This viral marketing channel was essentially free and they designed their games to exploit it mercilessly. They were also big spenders in Facebook advertising, which primed the viral marketing pump further. This dual focus on viral marketing and advertising, coupled with their push into every major casual gaming genre on Facebook, led to massive customer acquisition. When Facebook took steps to minimize the ability of social games to market through viral channels, customer acquisition costs for social games rose dramatically. This coincided with a wave of me-too companies entering the space with similar offerings, which raised the competition for new users and further drove up costs. Zynga, however, had already won a vast audience that was much larger than that of the next largest competitor.
With this large audience and a comprehensive portfolio of games, Zynga gained several advantages. Instead of acquiring new, expensive customers for games, they can simply recycle old customers to new games or revitalized games. RewardVille, a meta-game for their entire portfolio of games, does an excellent job at this. Instead of borrowing money or raising funding to fuel customer acquisition, they can simply tap their revenue streams for advertising dollars and promotions. Because they are the largest player, they have access to partnerships with movie studios, music stars, and other celebrities that augment their games with new features, positive brand associations, and healthy amounts of PR. Because of these advantages, Zynga’s cost to acquire new customers is dramatically lower than anyone else’s. This allows them to funnel relatively higher amounts of resources into product development, product maintenance, and corporate acquisitions. These activities, in turn, become advantages for Zynga that make it even more difficult for competitors to win market share. This is an example of a self-reinforcing business model. Self-reinforcing business models such as those created by Southwest, Intel, and now Zynga, are very powerful and difficult to assail.
The danger for Zynga at this point is that their audience will tire of the core game mechanics or will be entranced by innovative new game mechanics. We’ve seen this before in gaming, which is a hits-based business that can be very cyclical in terms of what genre dominates. A couple of years ago, the music genre was huge but received too much investment, causing later products to flop. Interest in the genre has since waned. Zynga is battling this kind of market transition by continuing to develop new games and working to keep their existing portfolio fresh by introducing new mechanics. They’re also acquiring talented developers and promising new properties, squelching future competition early.
Other players in the social gaming space are circumventing Zynga’s advantages by aggressively attacking specific market niches (e.g., Kabam) or by focusing on mobile platforms. These strategies can be successful because the business model is very different and Zynga isn’t a direct competitor (yet). The companies that operate in the fringes still face the customer acquisition problem though, and that requires either a very compelling offering that grows organically or lots of money to pump into marketing. The conclusion I draw from this is that well-funded competitors such as those owned by large publishers will remain relevant in the social gaming space. Start-ups that hope to make it big have to innovate in terms of market niches, develop compelling new forms of gameplay, or get sufficient funding to out-market competitors.
At the end of the day, Zynga is the clear winner in the first generation of social gaming. This win has created a sustainable competitive advantage that, in turn, reinforces a set of other advantages. However, competitors can still emerge and challenge Zynga. They will simply need to be: a) very innovative b) very well-funded or c) very lucky.
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