Zynga Needs More Words With Brands

Despite missteps, is social gaming company an untapped ad market?

Zynga put its investors on edge earlier this month after lowering full-year 2012 revenue projections. That clinched a new low for the social gaming darling’s stock, which dropped more than 70 percent since going public last December.

The company’s third-quarter earnings report to be released later this week is shaping up as a bloodbath, but Madison Avenue may give the social gaming market reason to be bullish.

According to gaming executives, investor analysts, advertisers and agencies, Zynga and its ilk are sleeping revenue giants.

By most estimates, only 5 percent of Zynga’s gamers ever buy anything in its games, which include FarmVille and Words With Friends. And these days, Zynga’s growing problem is that its core and newer games aren’t monetizing as well as in the past or as expected, said Wedbush Securities analyst Michael Pachter. “The perverse result is that the overall number of [monthly unique users] has grown by 50 percent in the last year, but their revenues are declining [in terms of growth],” he said. To remedy matters, he advises the company to run more ads “and tell users if they don’t want ads then they need to spend money in games.”

Currently Zynga earns most of its revenue from sales of games or in-game virtual goods, with advertising chipping in a measly 12 percent, or $40.9 million. But the growth of Zynga’s ad business—170 percent year over year—has eclipsed its slowing sales stream. In the next two years, advertising revenue for social gaming should meet if not exceed company revenues from micro-transactions, said Jeff Karp, Zynga’s former chief marketing and revenue officer, who left last month to head Game Show Network’s mobile and social gaming business.

In-game sales will buoy Zynga’s business for now, but the company and its competitors will need to erect an ad platform that is both scalable and takes advantage of its social gaming nature. To date, the approach seems to be serving more banners to Zynga’s 311 million monthly active users, or running custom, high touch integrations. The company did grow Q2 ad revenue by $25.8 million year-over-year, but to do so it added $26.0 million worth of in-game display ads.

Yet for brands still testing the waters, a splashy, unsustainable one-off sponsorship seems the strategy of choice. Real estate company Century 21 began testing in-game sponsorships last May with ngmoco’s We City game—which generated a 93 percent engagement rate and 48 percent increase in positive brand perception—following up 17 months later with a similar campaign recently launched through EA’s SimCity Social.  Though enthusiastic about the channel, Century 21 CMO Bev Thorne said her team will evaluate the campaign’s three-week pilot run before reinvesting in the space.

“In the short term, Zynga’s challenge is to determine which approach works best for them to build [their advertising] revenue stream,” said BBDO’s director of digital strategy Zach Pentel.

To some observers, the larger executive exodus at Zynga—including Karp’s departure—raises questions about the company’s prospects. Still, Zynga’s ad business may hinge on Julie Shumaker and the new team she’s been building since joining as vp of North American sales in April. At least one large consumer packaged-goods company has already included Zynga in its 2013 ad budget, according to a social advertising executive. 

“If the audience exists and we have a measurable way of reaching them, advertisers will be there,” said Pentel.