The Silent Canary

As much as I'm an avid supporter of the social gaming movement - which is bringing a vast new audience to the gaming medium and providing opportunities for a host of innovative new creative ideas and business models - I've hardly been a lone voice in arguing that valuations in this sector have become insanely over-inflated. In the past year, billions of dollars have changed hands in acquisitions or funding rounds for companies whose true worth is a long way from being proven, operating in a market whose true scope and potential is little understood.

Throughout all of this, one firm has stood head and shoulders over the rest of the sector, and has rebuffed all acquisition bids in favour of positioning itself for a stock market IPO. Yet as the sector's most successful and most valuable firm, Facebook game giant Zynga is also the canary in the coalmine.

This week, that canary's song faltered. Zynga's most recent financial report makes for slightly grim reading, and should serve as a warning sign to investors and executives - perhaps even casting doubt on the value of Zynga's much-delayed IPO, when and if it finally happens.

It's not that the results are utterly terrible - profits fell off dramatically, dropping almost 95% compared with the same period last year, and revenue growth slowed down but still almost doubled year-on-year. Digging deeper into the figures in the company's S-1 filing, however, reveals a somewhat deeper malaise than the headline statistics suggest.

Zynga has been shuffling the same 200 million consumers around its various new game launches, not really attracting a wider audience.

Due to a quirk of how Zynga recognises revenues (basically, it doesn't record purchases as revenues instantly, instead spreading them out over a period of time), it's important to look at a second figure in the company's filings - "bookings", the actual measurement of money changing hands between customers and Zynga in the reporting quarter. By that measurement, Zynga's sales to customers are almost completely flat. In the past three months, Zynga stopped growing.

That's actually not all that surprising if you look at the company's figures for Monthly Active Users (MAUs), which, in spite of the firm's dramatic growth in other regards, have remained largely flat for quite some time. It looks for all the world as if Zynga has effectively been shuffling the same 200 million or so consumers around its various new game launches, getting better at monetising them (hence the revenue growth) but not really attracting a wider audience.

Which is not to say, of course, that 200 million consumers isn't already a wide audience - it's huge, obviously. However, this isn't the position that one would want or expect a top-flight start-up to be in at this point in its development, especially with an IPO potentially around the corner. Right now Zynga only seems to be growing by raising ARPU, not by growing audience, and there's fairly obviously a cap on how high the ARPU of a videogame can go. The company's most recent S-1 filing suggests that they might be reaching that cap.