Do Zynga’s Troubles Mark the End of the Latest Tech Bubble?

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Oct. 9 2012 6:27 PM

Hard Times in FarmVille

Do Zynga’s troubles mark the end of the latest tech bubble?

Farmville.
A scene from FarmVille

Screenshot FarmVille via Facebook.

Nobody in Silicon Valley respects Zynga. Sure, the prolific developer of Facebook games has long been considered a “hot” startup, one that hit all the early markers of success. Zynga was founded in 2007, and within a couple years it was one of the world’s biggest game companies. Its titles—including FarmVille and CityVille and Words With Friends—have won hundreds of millions of players, a small number of whom spend vast sums to purchase virtual items that improve their standings in the games. These virtual items make for real money: Zynga’s 2011 revenue topped $1 billion, and its initial public offering last December was one of the most anticipated tech debuts of the past few years.

Yet despite its blistering early fortunes, I’ve never spoken to anyone outside Zynga who considers the company’s rise a positive development for the tech or gaming industries. Instead, it’s more common to hear grousing about how the company treats its employees poorly; that it, ahem, draws inspiration from other game makers’ ideas; and that its ultimate prospects may not be that bright.

Zynga CEO Mark Pincus has defended the company’s game development strategy by arguing that the company’s versions of other people’s games are better: “We don’t need to be first to market. We need to be the best in market,” he told employees in a memo earlier this year. He has also said that some employee complaints stem from “growing pains”; many of the company’s current employees love working at the firm, he has said.

Despite Pincus’ statements to the contrary, Zynga feels like a firm without a purpose. The major difference between today’s Internet companies and ones that were founded during the dot-com bubble of the 1990s is that modern firms believe they’re changing the world. Though their claims may be dubious, Facebook and Twitter genuinely believe that they’re going to make a killing and they’re going to improve the lives of billions. By that standard Zynga is an unfortunate throwback to the best-forgotten bubble years. All the gaming company does is convince suckers to spend a lot of time and money tending virtual flowerbeds—and it didn’t even invent those virtual flowerbeds. If you’re looking for this generation’s Pets.com, Zynga is pretty much it.

Now Zynga has entered what looks like a death spiral, and nobody is surprised. This week the firm announced that users aren’t flocking to its latest games, and as a result it’s lowering its revenue expectations for the year. The announcement sparked another brutal slide in Zynga’s stock price; shares are now trading for less than $2.50 each, more than 75 percent less than at Zynga’s IPO. Zynga has enough cash in the bank to stave off immediate panic, but now that the possibility of earning stock-market millions is looking dim, a number of the firm’s top employees have left.

During the last few months, the company has lost its chief creative officer, chief operating officer, marketing chief, the general manager of CityVille, and the creators of Words With Friends. This week Laurence Toney, the former manager of Zynga Poker, also quit. That doesn’t bode well for Zynga’s last best hope—gambling. The company is launching a “real-money” version of its poker game outside the United States next year, and it’s also pushing for a federal law to legalize online gambling in this country. But if it can’t stop its top employees from departing in the meantime, it might not get that payoff.

It’s difficult to muster much sadness about Zynga’s troubles. I’m not making a moralistic argument about the merits of casual gaming. I don’t think there’s anything wrong with the good fun people have playing Zynga’s titles, and if some people are spending too much money and time on them, that’s true of a lot of pastimes. The problem is Zynga itself. The company finds itself in a hole because it has never created anything truly novel. Its biggest titles were either modeled after other people’s games or (as in the case of Words With Friends) purchased through acquisitions.

In some ways Zynga’s demise—along with Facebook’s IPO fizzle and investors’ newfound distaste for advertiser-driven consumer sites—is a good sign for the tech industry. There was a moment earlier this year when Silicon Valley threatened to return to the unrealistic go-go years. The high-water mark was the early summer. Around that time a delivery man knocked at my door bearing a package from Zynga. It was about the size of a shoebox, but it weighed nothing. And that’s pretty much what it contained—I opened the box to find a folded-up paper airplane sitting in a wad of packaging tissue. The airplane was an invitation to an upcoming Zynga press event. I found the whole thing distasteful. Like the million-dollar rooftop launch parties and the Super Bowl sock puppets that defined the last boom, the invitation was a waste of money and creative energy that should have been used for something more productive. (It was also a horrendous waste of paper. I didn’t go to the press event.)

Zynga’s seeming decline marks the end of the bubble. It suggests that investors and customers can’t be hoodwinked for long. Now, if the company has any hope of surviving, it’s going to have to do something that it’s never done before: start building amazing things the world hasn’t seen before.

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