Zynga Launches New Gaming Platform

Social gaming company Zynga Inc ( ZNGA - Snapshot Report ) recently came up with its spanking new gaming platform, putting an end to earlier rumors. With the break of this news, shares of Zynga soared approximately 10.0% to close at $14.48. The new platform is seen as an attempt on Zynga’s part to reduce its dependence on Facebook.

The platform called Zynga.com is expected to be launched later this month on a trial basis. On one hand, Zynga.com will allow third party developers to showcase their games and advertise, and on the other, through a new service called zFriends, it will allow users to play with friends irrespective of whether they are connected through Facebook or not.

Zynga primarily generates revenue through the in-game sale of virtual goods in exchange of Facebook credits, which is a form of virtual currency. Much of Zynga’s success is attributed to the massive popularity of Facebook, which generates more than 90% of Zynga’s gross revenue.

However, Facebook charges a hefty 30% of its revenue, which has been a bone of contention for Zynga over the last couple of years. It is rumored that in light of such a scenario, Zynga launched its standalone portal Farmville.com in an attempt to distance itself from Facebook.

The new platform is somewhat similar to Zynga’s direct-to-customer platform “Zynga Live” or Project Z, which was unveiled in October last year. Zynga Live allows customers to play games from anywhere (web or mobile) without accessing Facebook or any other social networking site.

It may seem that with the launch of the new platform, Zynga is trying to curb its dependence on Facebook, particularly for the sale of virtual goods. However, this is not possible in the near term owing to a five-year exclusive agreement signed by both the companies back in 2009.

Under the terms of the agreement, Zynga is bound to use Facebook credits in any games or service it launches on the web. As such, on the new platform, users will have to use their current Facebook logins and credits for buying virtual goods for the time being.

Although the new platform will not significantly lessen Zynga’s dependence on Facebook in the near term, we believe that the idea of foraying into the publishing arena will diversify its revenue base going forward. Zynga will charge third party developers a percentage of sales for its services, which is expected to drive its top-line growth over the long term.

Further, through the new platform, Zynga will be able to expand its existing game portfolio, without incurring significant in-house game development costs, which will further boost its subscriber base and profitability going forward.

The new platform will also consolidate Zynga’s position in the social gaming market over the long term, especially after the expiry of its exclusive five-year deal with Facebook. Other than subscriber expansion and portfolio enhancement, we think that the company will also be able to better monetize its services through the launch of its own virtual currency, over the long term.

However, we believe that publishing is an uncharted area for Zynga and the company will face stiff competition from Electronic Arts ( EA - Analyst Report ) , which is already a dominant player in the publishing space. Moreover, we believe that Zynga needs to monetize its services and games faster in order to remain competitive going forward.

Until this happens, we remain Neutral on the stock over the long term (6-12 months). Currently, Zynga has a Zacks #2 Rank in the near term, implying a Buy rating.