Game Over: Zynga drastically misses earnings, stock down %40. Costs, Mobile to blame.

It’s that time of year again: tech companies wrapping up their 2nd quarter and broadcasting earning reports and overall performance. While this has been a tough season for many of the techno-staple producing giants out there (AAPL missed earnings – but still made a killing), few took as much damage as social gaming juggernaut Zynga (NASDAQ: ZNGA). Zynga – creators of many popular social games like “FarmVille” and “Draw Something” – reported their 2nd quarter earnings at only $0.01 per share – quiet a slip from Wall Street’s expectations of closer to $0.26/share. The after-hours announcement sent their stock plummeting down by 40% in minutes.

How could the owner of some of the most popular games suffer such a blow? Let’s break it down:

1.) Fewer people are playing Facebook games:

Farmville alone accounted for 30% of Zynga’s revenue, and Daily Average Users (DAU) for FarmVille has contracted by 75% from its peak. When almost 1/3 of your revenue contracts to 1/4 of its peak, you have a serious problem on your hands.

2.) Draw Something was an expensive mistake:

Draw Something – the social doodling game – experienced a meteoric rise to popularity in a very short timespan. This impressive rise, however, was immediately accompanied by a disastrous fall – Draw Something has very few DAUs still.

Why? Simply put: It’s fun, but it’s not a very good game.

While all of us enjoyed the 3 weeks we spent playing Draw Something, it cripplingly limited in its functionality and completely lacked most traditional game dynamics (ie: narrative, epic scale, optional challenge, tangible reward, increasing difficulty, ect…) that make for rich, engaging game experiences. Essentially, Zynga paid millions to acquire an overhyped, overpriced fad.

3.) Gaming is shifting to mobile, Zynga isn’t pivoting fast enough.

A great company pivots (adapts and shifts strategy) before the market changes drastically enough to hurt it. The shift to Mobile-based gaming has come on too rapidly for Zynga to prioritize development of its (narrow) suite of mobile games – and it’s paying for it. As more and more people leave Facebook games for iOS or Android based mobile games, Zynga finds its hands tied with its massive stake in Facebook games and meager offering of mobile entertainment. Why did this happen?

4.) Zynga can’t keep costs down

Recent numbers have shown that Zynga is spending more than its making. While lots of startups and massive megacorporations can stand to bleed cash for development every now and then, this is a problem for a small public company like Zynga. This problem is made worse when we factor #s 1.) 2.) and 3.) above. Not only are they burning capital – they’re burning it on the wrong projects.

5.) They failed to make lowered expectations for earnings.

Not only did they fail to make Wall Street’s earning predictions, they failed to make *lowered* expectations for earnings. It would have been bad enough to fail to make expectations, but the stumbling gaming giant failed to make compromised projections for earnings.

By the numbers, they didn’t even break even last quarter: they contracted. Red flags are going off at trading desks all around the world as projections for Zynga become toxic.

What role does Gen Y play in social gaming? When was the last time you milked your digital cows or Drew Something with your friends? Is it our job to keep bad products alive as compulsive consumers? Or – as I believe – is it our job to build a better game experience?