Zynga Inc. (ZNGA - Snapshot Report) recently announced that it is acquiring its rival social game developer OMGPOP. Though the company did not provide any financial details, Reuters reported that Zynga is paying approximately $200.0 million for the deal.
New York-based OMGPOP had started off as ‘iminlikewithyou’ in 2006, a social network where people could play games. The company launched its website OMGPOP.com in 2009 and currently has 40 employees. Till-date, OMGPOP has published 36 social games including its most popular mobile game - Draw Something.
OMGPOP’s popularity has soared in recent times, thanks to the stupendous success of Draw Something, which is available on Apple’s (AAPL - Analyst Report) iOS, Google’s Android and Facebook. According to data available from Zynga, the game has been downloaded over 35 million times in the last six weeks. Being a freemium (free-to-play) game,Draw Something earns money through advertisements and selling in-game items such as colors. The game has a premium version which is available for 99 cents.
According to data available from Apple’s App store, Draw Something is currently the #1 word game in 84 countries across the world. Most importantly, Draw Something tops both free as well as the pay list at iTunes. Reportedly, the game earns approximately $250,000 per day, which is a significant amount for a casual free-to-play game.
Over the last couple of years, Zynga has been focusing on expanding its mobile gaming portfolio through acquisitions to grab the tremendous growth opportunity that mobile gaming sector has to offer over the long term. ABI research noted, mobile gaming is expected to generate $16.0 billion in revenues by 2016, a massive increase from approximately $5.0 billion reported in 2011.
Zynga expanded its presence in the mobile gaming sector by acquiring a number of companies including Newtoy in 2010 and Five Mobile in 2011. We believe that Zynga will continue to pursue acquisitions in the mobile gaming segment going forward. Although mobile gaming currently accounts for only 7.0% of Zynga’s total revenue, the company expects it to play a bigger role going forward. In the last six months the company has launched 15 new mobile games to improve its market share.
We believe that the acquisition will not only expand Zynga’s mobile gaming portfolio, but will also lower its dependency on Facebook. Zynga primarily generates revenues 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 Zynga’s revenues, which has been a bone of contention for Zynga over the last couple of years. To reduce its dependence, Zynga launched its new platform Zynga.com that will allow third party developers to showcase their games and advertise. The company also unveiled a new service called zFriends, which will allow users to play with friends whether they are connected through Facebook or not.
Although Draw Something is currently the #1 game on Facebook, OMGPOP does not use Facebook Credit as its virtual currency. Moreover, Facebook does not earn any revenue from games originally developed for standalone apps. This bodes well for Zynga, as it will boost its top-line growth and at the same time it will continue to enjoy the huge subscriber base of Facebook going forward. Besides, the addition of OMGPOP’s games will also boost Zynga’s monetization efforts going forward, in our view.
We also believe that the acquisition will boost Zynga’s competitive edge over Electronic Arts Inc. (EA - Analyst Report), its closest rival in the mobile gaming market.
We remain Neutral on the stock over the long term (6-12 months). Currently, Zynga has a Zacks #2 Rank in the near term.