Just under a month ago, the games world gasped when Zynga spent $180 million for Draw Something
developer OMGPOP (plus a reported $30 million in employee retention payments). While the game was dominating the app store charts, that was still a shocking amount for a company with just one hit.
It turns out, though, that may have been just the beginning. In an interview with Bloomberg
this week, Zynga CEO Mark Pincus said he's hoping to do "a few" more deals for that amount or higher. And that's when the klaxons in people's heads should have started sounding.
With $1.8 billion burning a hole in its pocket from its recent IPO (coupled with its complete lack of debt), there's no arguing that Zynga is cash rich. But by flashing that cash wad so prominently, it's unnecessarily inflating the price it will ultimately pay for other companies, and causing the tech bubble to expand at a rapid clip. And when that bubble ultimately bursts, Zynga might wish it had kept a little more of that cash in hand.
The spending concerns started, of course, with OMGPOP. Despite having just one hit game and a so-so track record of other, rather generic, games, Zynga paid more for the company than it did for its past 22 acquisitions -- combined. Draw Something
certainly has earned the right to sell at a premium, but not that much of one -- and if the team behind it can't sustain that level of success with future titles (or if Draw Something
turns out to have less staying power than Words With Friends
), the sale price -- possibly driven upwards thanks to a bidding war
-- is going to seem even more outrageous.
The Motley Fool
did the best job of putting the OMGPOP buy into perspective. Draw Something
brings in an estimated $250,000 per day. At that rate, it will be more than two years before Zynga breaks even -- and that's not even factoring in the niggling detail that the $250,000 figure is revenue -- not profit.
Zynga, of course, essentially owns the social games scene, but the company's over-reliance on Facebook has long been a concern -- especially as the mobile market continues to grow at a faster pace.
Games like the With Friends
franchise have helped Zynga get its foot in the mobile door, but the company is still one of several names fighting to break through. And that's why we're seeing it so aggressive on buyouts. With the OMGPOP acquisition, Zynga isn't just buying a game, but its massive pool of players that can be pulled into other Zynga games.
The dream acquisition, of course, would be Angry Birds
developer Rovio, but that company reportedly turned down Zynga's $2 billion-plus offer
. (That's understandable, given Rovio's oft-stated goal of going public itself.)
ZeptoLab might make sense as well, given the longevity of the Cut the Rope
franchise, but once you get past that, the number of game makers that justify a nine figure buyout virtually disappear.
Buying your way to the top of the charts is a strategy that works in the short term, but is often less successful in the long run. While it makes sense that Zynga does not want to be upstaged as it continues its expansion into the mobile space, there are other ways to guard that position.
The company is full of top tier developers. In fact, it arguably has one of the biggest talent pools in the industry these days. Lately, though, its biggest hits have come through buyouts. Ultimately, that's going to raise questions about what the talented people who work there are doing with their time – or worse, it's going to cause them to leave and either start or join competing companies,
Talent retention has already proven to be a weakness at the company. And as the tech market evolves, that's something Zynga will need to shore up – 'cause when this bubble does burst, having a collection of fading hits and diminished prospects for new ones isn't going to help the company advance.
What's truly alarming about Zynga's recent largesse, however, isn't so much the fact that it's on a buying spree – or even that it's shelling out amounts that make EA's purchase of PopCap and Playfish and Disney's takeover of Playdom seem moderate (well, not entirely, at least).
Rather, this spending spree increasingly looks like the company's way of compensating for deals it desperately wanted in the past, but was unable to secure. PopCap. Ngmoco. Game Closure. Rovio. Any would have been a feather in the company's hat, but it fell short each time.
Zynga, seemingly, doesn't want to go through that again -- so it's willing to spend whatever it takes to make a deal happen, even when the smartest thing to do is walk away.