What Does Google’s Rumored $100m Investment in Zynga Mean for the Industry?

If you missed rampant rumor that Google has invested between $100 million and $200 million in social network Zynga, creator of popular Facebook games Farmville, Texas Hold  ’em Poker and Mafia Wars (all among the top applications on Facebook), you would be excused. After all, currently the scoop comes in the form of a uncorroborated rumor from Michael Arrington, and like Christopher Dawson over at ZDNet we take what Michael says with a grain of salt.

It does make for some fun speculation and of course if the rumor is true you might stop breathing for a minute thinking of the ramifications. I’m sure Mark Zuckerberg did.

But to think that Zynga’s bottom line contribution is going to make a significant contribution to Google’s financial results is to be overly simplistic. A number of Zynga’s games, especially Farmville with more than 80 million active players, are reported to make more than $1 million each month. But seen against Google’s 2009 income statement showing revenue of $23.65 billion (that’s 23,650 million…), it looks like a drop in the bucket.

Google’s Power Play

It’d be childish and ignorant to make the statement that “search engines are dead”, but with the increasing role of social media I’d say that they are less important compared to 10 years ago because web users expert sources to get recommendations. Users may end up on a website because of a product review, a forum posting, or sometimes a Twitter tweet.

I’ve heard speakers at conferences estimate that search engines are responsible for originating about 15% of all traffic on a website. Increasingly, social networks and referred traffic are taking a big chomp out of the balance of traffic sources.

With rivals Yahoo! and Microsoft teaming up, Google lags behind pretty badly in the content stakes. Metrics like time on site and low bounce rates have led to their dominance in the “content network” side of things when compared to big bad Google.

But Google’s move with this investment, isn’t aimed at Yahoo or MSN, it is a aimed directly at Facebook and the escalating war between the two. This is a way to mitigate Facebook’s edge in content while diversifying Google’s footprint.

It is also a clear indication that Zynga’s 5 year treaty with Facebook simply buys them time while they look for ways to diversify their business model out of Zuckerberg’s hands. In many ways Zynga can be credited with bringing the lion’s share of stickiness to Facebook and it is the type of stickiness that Google would like to leverage.

After all, Google’s strength in content is YouTube which dominates as the 800 pound gorilla in such areas as video sharing and increasing the content hosting/content delivery role, but it’s sitting pretty lonely at the top.

So it makes sense that Google is focusing on launching a social gaming network, given that its social network/widget Buzz hasn’t been the spectacular success hoped for.

Is Zynga a smart investment?

Is paying the $100 million to $200 million for Zynga a wise move? On a return on investment (ROI) basis, it is be difficult to reach a satisfactory conclusion, given that Zynga is a privately-held company and earnings estimates are at best guesses by the Internet fraternity.

But I think it’s sensible. If it’s going to take too long to build something, it just makes sense to buy it. Zynga is a smart buy. It’s got a proven history of operating destination sites with high user stickiness (games are right up there in user addictiveness, together with adult entertainment/pornography and gambling). Some of its games make that magical $1 million per month in revenues and 80 million Facebook game players can’t be wrong. In the Internet world of projected/hypothetical earnings based on vaporware, Zynga is already miles ahead with a proven business model.

But wait, there’s more!

So what’s not been mentioned yet in the hasty retweets of the rumored Google’s investment? Google stands to benefit greatly from the knock-on effect from the acquisition.

The domino effect that analysts have voiced are the exponential increases in usage of Google’s services like YouTube (great for game replays), Google Talk (great for chatting with your gaming teammates), Images, and Buzz (great for bragging about your most recent frag/game kills). Not to mention that Blogspot and Google Pages might be good for setting up a quickie clan page. There is also the potential for stealing some clout from PayPal, with whom Zynga does a lot of business, and transferring that business to Google Checkout.

What this means is a hefty bump in traffic for its services and greater advertising inventory on the AdWords Content Network. This could very well be Google’s smartest investment yet.

About Andrew Wee

You can find Andrew Wee on Twitter @andrewwee

5 Responses to What Does Google’s Rumored $100m Investment in Zynga Mean for the Industry?

  1. Pat Grady says:

    "I’ve heard speakers at conferences estimate that search engines are responsible for originating about 15% of all traffic on a website. Increasingly, social networks and referred traffic are taking a big chomp out of the balance of traffic sources."

    When you say "search engines", do you mean organic + ppc?

    Got a quote or link to any speaker's ~15% number? That number seems way low compared to what I see in my own and my clients analytics accounts. But it does depend on your answer to my first question.

    Can you quantify "big chomp" a little further (I know that's a difficult thing to do, it varies wildly)? Not challenging this assertion much, just wondering if you have some stats or sources you can quote or link to.

    In any case, I guess my thinking is that…

    "but with the increasing role of social media I’d say that they are less important compared to 10 years ago because web users expert sources to get recommendations"

    1) we're not witnessing a zero sum game, users computer time has grown considerably

    2) recs within soc media are way over rated, most people are playing farmville

    3) a better metric than % of traffic from soc media might be % of conversions.

    Not pooh-poohing soc media (though I often do), just wondering if G's interest here is more about their interest in data mining, though not completely displacing their interest in display network (formerly known as content network) ad traffic.

  2. Hi Pat,

    Social media experts are always trumpeting how users are forgoing search in growing numbers for social recommendations. While I feel this is true I know conversion rates from social traffic are not nearly the same as they are from search traffic.

    Also, like you, I agree this is not a zero sum game, at least not yet. Computer use in households and time on computers is still growing considerably especially in developing countries

    I think you are right that Google is after the behavioral data that comes from such games. Such data is one of the few metrics Facebook may have an edge on. However I wouldn't discount the social gaming display network's value. MSNDR (MSN's remnant network) touts the amount of impressions it gets on Facebook frequently, much of that is within gaming. With Google stepping into remessaging tapping into that source has to be appealing.

  3. andrew wee says:

    @Pat – it was at one of the conferences, I believe it was Ad-Tech Singapore earlier this year.

    I tried to google up the reference, but wasn't successful. The speaker was refering to only organic search results, not PPC.

    By big chomp, I am refering to the trend where previously 90% of all web traffic was search engine-based, the skew has shifted towards Internet users going to authority sites (Question and Answers type sites like Ask, Yahoo answers, forums, blogs, twitter and Facebook to find answers. In some cases they'd have been directed there via a search engine result, so search engines still factor into the equation).

    As for stats, pending release of data from Google, Yahoo or Bing, any other stats I've seen have probably been colored by the presenter, whether they're in the SEO or PPC management game. But I've seen a distinct bias towards looking for recommendations vs combing through search engine results.

    I think social media is useful when you've got a credible expert using the channel to propagate his or her message.

    But if what results is just a bunch of clicks with no conversion, then the effort of bringing browsers and no buyers is kind of a wasted effort in my book.

    I'd rate buyers as a good target for any campaign, and repeat buyers/sticky customers even more highly.

    I think the data mining element is useful, although with Google Analytics, Google Chrome, iGoogle already having wide tentacles, I see the content element as probably being more strategic. If they wanted more data at their fingertips, they might've considered acquiring Omniture, rather than let Adobe grab ahold of it.

    So this is where the search vs content argument comes in, especially as they're going beyond desktops and their alternative platforms – netbooks, smart phones, tablet/slate PCs – need some content or applications (even if as trivial as farmville) to latch onto.

  4. Pat Grady says:

    "If they wanted more data at their fingertips, they might’ve considered acquiring Omniture"

    Omniture mainly collects data about how a site is used. Data mining what users themselves do, is different, and has a very different value to G.

    G knows hits & clicks measuring type ad tracking -versus- profiling and targeting users via deep demographic and behavioral data lead to two very different things they can sell to advertisers.

  5. CT Moore says:

    I think that this demonstrates how vulnerable Facebook is to competition. Through apps and Facebook Connect, Facebook is essentially "open" to let the competition in.

    In addition to investing in Facebook app companies, Google could also leverage Facebook Connect to their advantage. Just imagine if Google integrated Facebook Connect into Google accounts. This would allow them to access additional data (i.e. their social graph) on their existing users.

    In terms of competing with Facebook, doing so could help Google have their cake and eat it too.

    Granted, it might mean that neither could ever render the other obsolete. But it could foster a air of "co-optition" that the two would become mutually dependent on one another's success.