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Zynga Defends 'Draw Something' Online Game, Aided By DreamWorks

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05/23/2012 | 08:19pm CEST

--DreamWorks to be first ad deal for "Draw Something" since acquisition

--Comes as Zynga faces concerns over "Draw Something" usage

--Ad deal among many efforts to grow revenue and number of users

   By Ian Sherr 

Zynga Inc. (>> Zynga Inc) has faced plenty of questions since buying the maker of "Draw Something," an online game for mobile devices whose rapid rise and sale seemed a symbol for the social networking boom. Now it is trying to provide some answers.

The San Francisco-based company on Thursday plans to announce its first deal since the acquisition to place additional advertising in the game, an agreement with DreamWorks Animation SKG Inc. (DWA) that Zynga believes is just a sign of the revenue-generating possibilities of the controversial transaction.

Zynga, known for developing some of the most popular games played by Facebook Inc. (FB) users, has seen its stock fall by nearly half in the past two months. One factor is the company's dependence on Facebook, whose own growth and valuation has come into question since its initial public offering Friday. But the decline began around the time of its March 21 purchase of "Draw Something" creator OMGPOP Inc.

The $183 million deal, though not expensive by many measures, was Zynga's largest to date and came when the game may have hit at least a temporary peak.

"Draw Something," which is a bit like Pictionary, asks players to make sketches that illustrate words and have others guess what they drew. It had been downloaded 50 million times in its first 50 days, making it one of the fastest growing games to date.

Players posted images of their drawings on Facebook and Twitter, where the game quickly garnered a following. At peak times, players were creating 3,000 drawings per second, helping to push it to the top of Apple Inc.'s (>> Apple Inc.) mobile application store's rankings as the most downloaded game, as well as its highest grossing.

But the excitement around the game appears to have quickly worn off. As of Tuesday, "Draw Something" had slipped to the 18th top paid app on Apple's App Store, and the 23rd highest grossing. And although Zynga hasn't said how many people play the game, the number of people who log into it using Facebook has fallen by nearly half from a high of about 14.5 million per day when the company was purchased to roughly 7.6 million on Tuesday, according to market researcher AppData.

The trajectory underscores the hits-driven nature of social games, and the concerns of many investors that Zynga paid too much for the game.

Zynga has defended the purchase, pointing to the game's extraordinary growth and arguing that the millions of customers who still play the game makes it a strong franchise upon which the company can build.

"We think of it as a game that's an evergreen franchise," John Schappert, Zynga's chief operating officer, said in an interview. "It's a game that will live on for years."

"Draw Something" comes in a free version, supported by ads, and a paid version. Players can purchase virtual "coins" they then can use to get additional colors for drawing with, and tools to help them guess whatever has been drawn.

Zynga has already added social features to the game to allow players to send messages to one another. It also plans to expand the game's audience by translating it into 10 languages. Currently, half of the game's players come from outside the U.S., Zynga says.

Another revenue-generating plan is bringing in more advertising.

The agreement with DreamWorks, which has advertised inside Zynga games before, will feature banner ads, video trailers and puzzle words related to the animation studio's new movie, "Madagascar 3: Europe's Most Wanted," for a week leading up to the movie's launch. The value of the agreement was between $250,000 and $500,000, which is about the same size as DreamWork's earlier deals with the company.

"This is the largest place where we can have this type of interaction," said Anne Globe, who heads marketing for DreamWorks. She said she was interested in "Draw Something" because she had seen both her 10-year-old daughter and some friends playing it recently. "It seems as though everywhere you go, everyone is drawing something."

Zynga has made more advertising deals for "Draw Something," a person familiar with the matter said, but they have yet to be announced.

Zynga has also signaled that it plans to expand its newly minted rewards program with American Express Co. (>> American Express Company), which gives players who spend real-world money with a pre-paid American Express card virtual-world cash and other items to use in some games, to potentially include "Draw Something."

Aside from those efforts, Zynga still believes "Draw Something" will have an almost immediate effect on its top line. During its recently reported first- quarter earnings, the company bumped up its full-year total sales guidance by about 4% based on its financial projections for the game.

Zynga also plans to grow "Draw Something" into a multi-title franchise similar to its well-known "With Friends" and "-Ville" franchises. "FarmVille," one of Zynga's first big games, has grown to include "CityVille," "CastleVille" and others. Similarly, Zynga has grown its initial purchase of Scrabble-like "Words With Friends" to include hangman-like "Hanging With Friends," and the word search-like "Scramble With Friends."

To analysts, such as Colin Sebastian of Robert W. Baird & Co., growth of the franchise would underscore the value OMGPOP and "Draw Something" will be to Zynga. "What Zynga's trying to do, is not just get that usage number going up and to the right on the chart, but also find people willing to pay," he said. "If you look at the absolute number of users, you'd probably miss monetization."

-By Ian Sherr, Dow Jones Newswires; 415-439-6455; ian.sherr@dowjones.com;

Twitter: @iansherr

Stocks mentioned in the article : Zynga Inc, Apple Inc., American Express Company
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Financials ($)
Sales 2016 745 M
EBIT 2016 34,7 M
Net income 2016 -78,8 M
Finance 2016 640 M
Yield 2016 -
P/E ratio 2016 -
P/E ratio 2017
EV / Sales 2016 2,59x
EV / Sales 2017 2,19x
Capitalization 2 567 M
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Mean consensus HOLD
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Average target price 3,19 $
Spread / Average Target 9,6%
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Frank D. Gibeau Chief Executive Officer & Director
Mark Jonathan Pincus Executive Chairman
Matthew Bromberg Chief Operating Officer
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Dorion Carroll Chief Information Officer
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