Saturday, July 9, 2011

More Zynga Analysis - Profit margin

One of the unanswered questions for a long time has been "how much money does Zynga actually make?" They have been happy to release gross figures, but not net. What is their actual profit margin. A friend of mine used to joke "We lose $10.00 on every sale but we make it up in volume!" Obviously, it doesn't matter HOW much money comes in the door if it costs you more then you are taking in to get it.

This is particularly highlighted by the revelation of my last blog. Zynga is taking in about $3.00 per active user account per year. Now, the economics of online help here a little. Your operational costs are mostly based on concurrently connected users, or CCU. Each concurrently connected user has a cost associated with supporting that user's online session. So its really the return per CCU that matters in your final economics.

It is a rule of online entertainment that your peak CCU is 5% to 10% of your total active user population. So, lets be generous and multiply Zynga's $3.21/yr/active account by 20. That gives an actual income of $60/peak CCU/year or $5.00 per peak CCU/month.

Thats *not* a lot of money to runa service on. A $5.00 per month subscription MMO generates $100/peak ccu/month by the same math. a $15.00 one generates $300 per peak CCU/mo. So, how much of that $5.00 a month is beign spent to get support that user? What is left is what is called the "margin", and thats where your profit comes from.

We can get a rough guess from this, more complicated chart from the S1:

In particular we are interested in this line, gross revenue:

And this line, which is profit after operating expenses:

What we can see from these charts is that, in 2010, Zynga took in $597,495K or just about $597.5M.
Not bad, but what was left after expenses? from the second line we see that, before taxes, it was $127,059K or about $127M.

From that, we can compute a rough margin, using the formula margin% = 100*net/gross. Thus Zynga had a profit margin in 2010 % of about 100*127/597.5 = 21%. Thats not a great margin, but its not razor slim either. As long as they can hold their costs even they aren't in a bad place.

And there is the rub. Because entertainment that stays the same bores its audience and dies. Every other platform and niche in game playing has seen a fairly rapid escalation of complexity and cost in games. The casual space is not likely to be any different. So, can Zynga meet the future challenges it faces on $5/ccu/month? Its a good question. if i had the answer I'd be making a lot more money then I do now (which isn't too shabby as it is.) One thing is for sure, you cant run a game as complex as a modern MMORPG on that. Not without drastic compromises in security.

Another interesting thing emerges from the Zynga documents however, which is that in 2009, with $127M of income, they actually *lost* money. Now a lot of that may be attributable to marketing spends to get themselves to their current $600M of revenue. But if 2010 is benefitting from last 2009's deficit, it calls into questions how sustainable the current margin really is.

No easy answers, but an interesting read. One thing is for sure-- this is not a financial model that supports server-heavy game designs. Unfortunately, those server heavy designs are also the only way to make complex games secure.

All in all I suspect it will be an interesting future for Zynga.

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