King reigns as Zynga slumps - but why?

Here's a quandry for you. Over the past week, two major game companies, operating in the same sector, reported their fourth-quarter results. One of them reported higher revenues. The other reported lower revenues. The company with the higher revenues was booed by analysts and saw its share price tumble. The company with lower revenues was lauded and enjoyed a healthy bump in its share price.

If you're thinking, "well, the stock market is damned weird", then you're not entirely wrong. The company with higher revenues was Zynga, whose bookings (that's actual consumer purchases of in-game currency and items, and therefore the most important figure for a free-to-play business' finances) were up 24 percent year-on-year. That growth earned the company a significant stock tumble and one analyst went so far as to call for CEO Don Mattrick's head, arguing that the turn-around promised by Mattrick when he took over 16 months ago has failed to materialise. On the other side of the table we have King, of Candy Crush fame; their bookings actually fell around 7 percent annually, but their share price shot upwards by around 13 percent. Granted, King's stock is still not much of a looker, having failed thus far to exceed the price it commanded at the company's much-publicised IPO - but nonetheless, its price is rising and nobody has called for anyone's head.

"Mattrick's pledge that 2015's new launches will be mobile-first, while absolutely the right thing to do, is bizarre in its very existence"

The reason for the different reactions in these cases is straightforward - analysts predicted that Zynga would do better and King would do worse, so the former is seen as under-performing while the latter is perceived as exceeding expectations. In and of itself, that's just another reminder to wary news-watchers that what reasonable and rational people might expect stock prices to respond to is often very different from what stock price movements actually reflect; revenue growth and business stability are generally far less important than sentiment and expectation.

There's more to this story, though, because a deeper dig into the figures of both companies reveals that investors made exactly the right call in pulling out of Zynga while boosting King. Neither business has had a stunning year; each of them has faced significant challenges, but buried in their financial results are the data points which show a pretty wide gap in the success with which they have confronted those challenges.

For Zynga, the challenge remains the same as it has been for several years - the company was painfully slow to respond effectively to shift of consumers away from Facebook games and onto mobile devices. This year, it boasts that mobile made up 60 percent of its revenue; that's a high water mark for the company, so I hope they're not too upset that the universal response to this seems to have been "wait, only 60 percent? In 2014?". Mattrick hopes to grow that number to 75 percent by the end of next year, which is more respectable but still highlights the fact that Zynga is a backmarker in this regard - many of the world's most successful new game companies are 100 percent mobile, and Mattrick's pledge that 2015's new launches will be mobile-first, while absolutely the right thing to do, is bizarre in its very existence. The notion that a social and F2P game company even needs to highlight that its new games are mobile-first merely draws attention to how slow and clumsy Zynga has been at adapting to a world that isn't even all that new any more.

That's a view compounded by frequent references to the fact that even though Mattrick's turnaround of the company is going much more slowly than investors or analysts would like, it's apparently gone a bit too fast for the firm's games. Poorly executed software, bad launches and underspecified or underperforming games, including some from expensive licenses like NFL, have marred and slowed Zynga's progress. An utterly ill-advised dalliance with gambling games also seems to have served as a distraction from fixing the company's real problem; it's still not great at mobile and still too heavily reliant on Farmville. Even if what Mattrick says about progress in 2014 is true (and in his defence, I do think the figures show signs that his turnaround is bearing fruit), the progress is too slow and the future too uncertain.

The contrast with King is interesting. Both of these companies have essentially under performed on the stock market since their IPOs, a result in part of investor skepticism about the long-term health of the F2P sector (which I'm absolutely certain is here to stay, but equally certain is shooting its growth forecasts in the foot on a daily basis thanks to abusive, stupid business practices on the part of unscrupulous operators, which do undermine the prospects for more creative, conscientious businesses). A larger factor than broad sectoral concerns, though, was the heavy reliance of both companies on core franchises - Zynga on Farmville, King on Candy Crush Saga. Investors quite rightly hate companies that rely on a single tentpole to keep the canvas off their heads; the markets were deeply wary of Take-Two's heavy reliance on GTA for many years as a consequence of this.

"Both companies face the same challenge in 2015 - they both need a break-out hit. Zynga needs a hit to prove its relevance; King needs a hit to prove that it's capable of bottling the lightning that generated Candy Crush Saga"

Here, then, is the most interesting way to read King's financial results - yes, bookings fell by about 7 percent year on year, but in the fourth quarter last year, Candy Crush accounted for 78 percent of all bookings. In this most recent quarter, only 45 percent of bookings were Candy Crush. What that actually means is that bookings from Candy Crush, the company's most successful franchise by a country mile, declined by over 46 percent year on year, but the firm was able to effectively shore up its figures with revenues from other games so that the overall decline wasn't remotely so bad. That might not sound like much, but it's a bloody hard thing to pull off; in general, the fall-off in revenue of a company whose sole mega-hit product has come off the boil tends to be pretty awful. Avoiding that drastic fall is a good achievement on King's part, and much of rise in its stock price can be attributed to a murmur of appreciation for that achievement; a company capable of that, the logic goes, must be set for pretty decent success in the future.

King's position looks much healthier than Zynga's; it's a mobile-first company with a bona fide mobile smash hit under its belt and a clutch of smaller but still very profitable games in the stable. Candy Crush Soda Saga, an attempt at franchise expansion, also doesn't seem to be doing badly so far (though it seems unlikely to repeat the success of the first game, despite expensive advertising campaigns to support its launch). Zynga, on the other hand, is still playing catch-up on mobile long after it ought to have become native and settled on the platform, and its top franchise, Farmville, is both somewhat long in the tooth (by the extraordinarily rapid standards of this new market) and as yet not entirely proven on mobile.

Yet ultimately, for all that King is in a better place than Zynga, both companies face the same challenge in 2015 - they both need a break-out hit. Zynga needs a hit to prove its relevance; King needs a hit to prove that it's capable of bottling the lightning that generated Candy Crush Saga. King is better placed to execute on the creation of a new hit product, for sure, but that doesn't guarantee anything; the elements which create a break-out success in this new, fickle market aren't yet understood, and for all the data-heavy approaches taken to these games, the fundamental spark of creativity and artistry that resonates with audiences and turns something from a moderate success into a viral hit is still absolutely necessary. Whether either Zynga or King are still good places to nurture such a spark remains to be seen.