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Don Mattrick Doesn't Make Zynga a Buy

Saturday - 7/6/2013, 2:44pm  ET

Zynga shares have been on a tear in recent sessions, rallying 23% in just three days. The company’s decision to hire Don Mattrick as CEO has been the primary catalyst behind the move.

While the decision to go with Mattrick might give the company a chance to move forward in a different direction, it does not alone solve Zynga’s problems. Unless Mattrick can articulate a reasonable turnaround strategy, investors should stay away.

Don Mattrick is a great hire

Most agree that Mattrick is well qualified to lead a gaming company. He has been at Microsoft since 2007, mostly responsible for the Xbox brand. He’s credited with growing the Xbox’s market dominance and getting the Kinect to market -- one of the only successful video game add-ons in the history of the industry.

Prior to Microsoft, he held a variety of positions at Electronic Arts . In fact, in an interview with Bloomberg, Wedbush’s Michael Pachter said that he was expecting EA to consider Mattrick for the company’s CEO position.

What happened to the real money gambling?

Mattrick’s video game resume is impeccable, but his hiring seems to weaken a favored argument among Zynga bulls -- what happened to Zynga’s shift towards real money gaming?

With Zynga’s bread and butter social gaming model in a state of crisis, some had argued that the company was well positioned to capitalize on the coming legalization of online gambling in the US.

So far, three US states have legalized online gambling (Nevada, Delaware, New Jersey) and it’s believed that, in time, most of of the other states would as well. Given Zynga’s expertise in creating simple, web-based games, and the popularity of Zynga Poker, the social gaming company has been seen as a play on online gambling. Moreover, Zynga hired Maytal Olsha last August -- a former executive at a UK-based online gambling company.

After Nevada legalized online gambling in February, Zynga shares spiked.

But Mattrick is a video game guy, not a gambling veteran. While his hiring certainly doesn't preclude a foray into online gambling, it suggests that gambling won't be so important to Zynga’s future after all.

That could be a good thing -- at this point, legalized online gambling is far from certain. But anyone holding Zynga shares based on online gambling alone might wish to rethink their position.

The problems with social gaming

Mattrick’s hire, then, suggests that Zynga will stick to its gaming roots -- but that’s the problem. To date, Zynga has struggled to turn a profit, and if it sticks to social gaming, it might never.

Social games are inherently prone to fads. They can emerge from nowhere, and like a pandemic, attract a massive user base seemingly overnight. But their shallow gameplay and viral nature means that they can lose their user base just as quickly as they acquired it.

The classic example is Draw Something, which garnered 35 million downloads in less than two months. Zynga bought the game’s parent company, OMGPOP, for nearly $200 million -- only to see the game’s user base collapse shortly thereafter.

Blowing millions chasing the next viral hit doesn't seem like the best strategy for a gaming company. Mattrick’s former company, EA, decided to back out from the social gaming space back in April, shutting down three of its Facebook games.

Mobile vs social gaming

Many investors might not understand the difference between mobile and social gaming. Although there’s a fair overlap, the two are distinct spheres within the gaming world.

Social games, by nature, thrive off social interaction and multiplayer gameplay. The more people are playing, the more attractive the game is. Zynga’s Words With Friends and the aforementioned Draw Something are entirely dependent upon multiplayer gaming -- if your friends won't play, you likely won't play either.

By contrast, mobile games are just games developed for smartphones and tablets. Given the increasing popularity of these devices, games specifically developed for them have exploded in popularity -- and some of them are quite profitable.

Plants vs Zombies is one of the most successful mobile games ever. EA bought the company that made the game -- PopCap -- for nearly $1 billion in 2011. And though EA has backed away from social gaming, it remains committed to the mobile space.

The sequel to Plants vs Zombies is set to be released later this summer on iOS, with an Android release to follow. As it has no direct social aspect -- and thus does not rely on fads -- it will likely end up benefitting EA far more than Draw Something benefitted Zynga.

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