Zynga's Four Biggest Problems

There's trouble in CityVille. Six months after Zynga said it would decrease its reliance on Facebook for the bulk of its revenue, the publisher of the social network's most popular games is still struggling. But Zynga's problems run deeper than over-reliance on Facebook. 

For one thing, the two companies can't even agree on the number of people playing games on the social network. Last month, Zynga told investors the tally shrank by 16% between April 1 and June 30. Facebook fired back, saying the number was keeping pace with overall user growth, jumping to 235 million in July, up from 205 million a year ago.

There's a bigger issue at play, however. Zynga still dominates the Facebook game market, having owned or developed six of the top 10 games in July. But those rankings mean nothing to Wall Street investors if Zynga can't convert them into revenue growth.

A lot has been made about Facebook's move to diversify its own revenue stream by making easire for other developers to offer games. But some of Zynga's biggest challenges cut to the core of the game maker itself. These are the most critical:

(1) Zynga Needs Another Hit

It's telling that the standard description of Zynga in the business press refers to the company as 'the maker of the popular Facebook game FarmVille.' Those journalists should be calling it the 'once-popular Facebook game.'

The number of monthly active Facebook users playing FarmVille peaked in June at 83 million. By the end of last year, it had plummeted to 33.9 million.

(2) Facebook No Longer Promotes Games on Players' Walls

That drop in monthly-active users is partly Facebook's fault, according to William Volk, chief creative officer of the social media game developer PlayScreen. More than a year ago, Facebook changed the way apps could promote their offerings through posts made automatically to users' walls.

'While users may have disliked all the wall posts about the games, they made the cost of user acquisition lower than the lifetime value of users on that platform. Both Zynga and Facebook are feeling the after-effects of these changes,' Volk said. 'It's simply very expensive to promote Facebook games, even with the benefit of a large user base.'

(3) Players Don't Pay

Zynga stuck with the freemium model when many other game makers went to the consumption model, making users pay for the time they spent playing. Volk doesn't see the freemium model as a viable option going forward, and Zynga's own numbers back him up: Fewer than 2% of players of all its games are paying customers.

(4) Zynga Lacks an Effective Mobile Strategy

Being bigger won't help Zynga as more eyeballs migrate to smartphones and tablets. Being small and nimble is often an advantage in the mobile game market, where some 250,000 games compete for attention.

And Zynga's one big chance to excel in mobile has become an afterthought. Zynga acquired the company that developed the mobile diversion Draw Something in April for $180 million, right when it peaked at 14.5 million daily users. Since then, Draw Something has steadily fallen in both popularity and potential.