Shout Out for Being Smarter, Part 2: Zynga

As the world becomes connected, unprecedented amounts of information is being created, shared and optimized. Analog devices are turning digital, and getting smarter along the way. Your house’s old electric meter is soon to be replaced with a small computer that will tell you in real-time exactly how much energy your home is consuming, as well as coordinate with small computers in your dishwasher and refrigerator to run them in the most cost and energy efficient way possible. Thus, saving you money and the world energy. Parking meters are being outfitted with sensors that can alert you when a space is available, as well as alert a traffic cop when a meter is overdue. This saves drivers from circling endlessly to find an open spot and allows police to dedicate man power to more high-value activities than aimlessly wandering the street looking for expired meters.

The successful companies of tomorrow will take advantage of new information and technology to do what they do today better, smarter. Over a series of posts, I’d like to highlight some media companies that are doing just that

Shout Out for Being Smarter, part 2: Zynga

(See: Shout Out for Being Smarter, part 1: Live Nation)

On Monday, Zynga’s stock touched a new low of $8.00 and is currently trading at $8.33, down almost 16% from its IPO in December. But I don’t want to talk about the company’s stock performance. I want to talk about how this company is able to convince enough people to trade real money for fake goods that they can command a nearly $6 BILLION market cap (whether or not $6B is a fair price is a conversation for another day).  They do it by being extremely smart. And I’ll tell you how…

For those that don’t know, Zynga is the Silicon Valley darling that makes “casual” games that are built mostly on Facebook and involve simple concepts like building a farm or playing a mobster. These games are free and simple enough that anyone can play. The company makes money (1) by advertising and (2) by selling “virtual goods”. Virtual goods are little in-game tools and trinkets such as a new shovel for your virtual farm or a horse for your virtual barn.  These virtual goods set you back a dollar or two. It all sounds a little unsophisticated, right? Well, Zynga made $600M in revenue last year and is currently worth more than video game giants like Electronic Arts and Take Two Interactive. The company’s approach is anything but unsophisticated.

Zynga makes money by utilizing massive scale analytics to understand every minute detail of how people interact with their games. They stream user data from the 10M a day playing a Zynga product and test and analyze every aspect of the game. They employ copious A/B testing to determine which elements drive the highest response and engagement. Every scene, every character, every color, every movement is tested. For anyone in web development, this is nothing new, but Zynga is able to do it at massive scale, with massive variety in the data they collect, and do it fast. When people talk about using Big Data, Zynga is a prime example.  Zynga really shines when it comes to knowing exactly where in a game a player is at anytime and offering the exact right incentive to buy just the right virtual good. This is how they’re able to generate an average of $0.06 per user per day. That may not sound like much, but remember this is 10M people a day, every day, playing a free game.

Zynga has famously said they are an analytics company masquerading as a gaming company.  In an industry that is dominated by creative license and gut reaction, they are using cold hard facts to make predictive decisions that drive real revenues. For any entertainment company there should be a balance between art and science, and Zynga has recently stated that they may over emphasize data at the expense of creative instinct. However, as Zynga’s phenomenal growth indicates, there is plenty of room for creative content companies to figure out smarter ways of running their business.