In pop culture, when something gets really hot, it can be classified as either "the next big thing" or a simple fad. If last month's numbers are any indication, Draw Something falls into the latter category.
Six weeks after Zynga plopped down $200 million to acquire Draw Something developer OMGPOP, there are reports that number of daily active users has fallen by nearly 5 million, around one-third of the total. Was it a fad? Does it have anything to do with the CEO tweeting ungraciously about an employee? Will Zynga regret their decision?
The answer to all of these questions is "yes," and it does not speak well for a company that recently launched a $1 billion IPO that has been underperforming. What lessons can businesses learn from this debacle?
Hear the Hype but Don't Listen to It
There's a difference between making decisions based upon the latest trends and being led by them. Great leaders in business know that it's important to stay on top of what's happening now and how it will affect what's going to happen in the future.
Following trends is different from chasing them. The wild popularity that Draw Something was gaining was likely perceived as a threat to Zynga. Here was a game that had come out of nowhere to top the charts; Zynga is not used to seeing names other than their own making that type of run.
While hindsight is 20/20, many were saying that it was a premature move from the beginning. The trending growth was strong, but that was it. There was no evidence that it would sustain. It did not have a revenue model. It was hot, but there wasn't even much in the way of user feedback through which to base a decision.
It was hype, and that's what led Zynga's decision. It wanted to own it before it got too big to buy. There are times when companies are forced to take such risks, but they rarely end well and they should never be taken by a company that isn't doing badly. Desperation is only suitable when warranted.
Test Revenue Models in Safe Environments
The best ideas for generating revenue for a business are often born from innovations within any given industry. Google innovated the advertising game in search and turned it into tens of billions of dollars a year. Apple did the same thing with the music industry, then again with the phone industry, then again with the tablet market.
The difference between what these companies did and what Zynga did is that they spent months, even years researching and developing a model through which to make their money.
Zynga had a good idea. Not great, but good. Most of their games rely on in-game purchases of virtual goods to drive revenue. Some games rely on in-game advertising, but this has yet to prove to be reliable. Zynga decided to insert the advertisers into the game itself by having people draw "Cheetohs" or The Avengers. It was a good idea. It might even work (or, it could ruin the experience and result in some really bad art).
The problem is that they decided to test the model on a new product that required a $200 million payout before the testing could even begin. Perhaps they felt that if they started testing the model elsewhere before making the purchase, that OMGPOP would take the idea for itself and make Draw Something too profitable to sell.
If that had been the case, there would have been regrets, but not nearly as big as the regrets of paying that kind of money for a game that's already in its decline before hitting the mainstream.
Make Big Moves Based on the Worst Case Scenario
Again, it comes down to being smart versus being desperate. It's one thing to be aggressive. It's another thing altogether to jump into something that has an upside but that's also associated with tremendous risks.
Draw Something is not like Farmville. It's not like Angry Birds. It doesn't evolve and change based upon growth or updates. In Draw Something, you literally draw something. Then, you do it again. And again.
It was very clear to Zynga that the game didn't have the staying power of other gaming successes. Angry Birds has been innovated four times already with the latest variation, Angry Birds Space, turning the game on its head by adjusting the physics that propel a bird launched from a slingshot into the various gravitational pulls of round space objects.
Farmville and the like are growth-based. Someone can get on a build something that continuously needs to be tended to and improved. There is a world within the world that makes the games addicting and continuous.
Draw Something is one dimensional and Zynga knew it. Their hope was that it would spread indefinitely at the pace it was spreading when they bought it, that it would reach a tipping point of popularity that didn't depend on daily use. 300 million occasional users is better than 30 million daily users.
In reality, it could have happened. Technically, it still could, though the numbers aren't encouraging. They bought OMGPOP based upon the possible scenario that it would grow beyond the need for passionate users.
They should have decided to not buy OMGPOP based upon the potential that it could be viewed as mundane before hitting the tipping point.
When a company is not in a position of desperation, it shouldn't make big bets based upon potential. In poker, you become more aggressive when you have a "short stack" of chips or when you feel you have the winning hand. Zynga had a big stack and they had a decent hand, but they got too aggressive for what they had to play.
It should have folded this hand and either built a clone or waited a couple of months to see more data.