Even Zynga’s Ad Business Is in Decline

Ad revenue follows daily user free-fall

Like a fiduciary Frodo, Zynga’s advertising business was supposed to be its unassuming savior. Zynga’s former chief marketing and revenue officer Jeff Karp recently told Adweek that he expects advertising to become a primary revenue stream for social gaming companies within the next two years or so.

While only 10 percent of the Zynga’s overall revenue, the segment saw 170 percent year-over-year growth in the second quarter, showing huge promise just as Zynga’s traditional cash cow of users paying for virtual currency or goods stagnated.

But that was last quarter. Things have changed.

Advertising failed to keep pace in the third quarter, dropping 24 percent from Q2 to $31.1 million; though the segment was up 64 percent year-over-year, which nonetheless pales in comparison to the previous quarter’s growth. Compounding matters, Zynga’s online game revenue—from the sales of apps and in-game items—finally slipped into the red, falling 1 percent to $285.6 million.

Overall Zynga’s quarterly revenue inched up 3 percent year-over-year to $316.6 million, but—following the trend—that number fell 5 percent from the previous quarter.

Zynga CFO David Wehner chalked up advertising’s sequential decline to a couple of causes: the timing of certain deals and declines in daily active users. The latter reason would seem to be the bigger long-term growth killer. But the suddeness of the ad dip would also seem to indicate that advertise interest in the once red-hot company has cooled considerably.

At first glance Zynga’s life raft appears to be its user base. During Wednesday’s earnings call, Zynga CEO Mark Pincus touted the company’s 311 million monthly users. But only a fraction of those users play games daily. Zynga may have added 10 percent more daily active users (DAUs) since last year, but it lost 12 million DAUs from the previous quarter, ending up with an average daily user base of 60 million consumers in Q3.

Overall, Zynga is simply having a hard time monetizing its user base, either by selling virtual goods or getting folks to check out ads. Of its monthly unique users, only 3.0 million pay to play, which is down 28 percent from the second quarter and “largely due to declines in Draw Something,” said Wehner, referring to the Pictionary-like mobile game Zynga took ownership of after acquiring its developer OMGPOP in March.

Bur perhaps even more troubling than Zynga’s shrinking pool of paying users is the declining amount of money the company is able to earn from each individual daily user. That figure dropped 19 percent to an average of just $0.047 per user.

However Pincus did squeeze out a few bright spots from Zynga’s ad business. He said the company has added 12 members to its sales team and that video advertising has emerged as its games fastest growing segment, increasing by 142 percent from Q2 to Q3 (though he didn’t denote whether that growth was in revenue, ads served, clicks or any other metric). Those new hires better get busy attracting advertisers to the ad platform Zynga’s reportedly building.