Zynga not losing money, but rather making $30 on every new paying user, reckons NaturalMotion's Torsten Reil

Don't forget about churn

Perhaps intentionally, Sterne Agee analyst Arvind Bhatia's suggestion that social gaming giant Zynga is losing $150 on every new paying user it acquires was always likely to prove controversial.

Bhatia's allegation – which illustrated his belief Zynga is spending too much on user acquisition – was loosely based on Zynga's own figures for the September quarter.

The studio spent a total of $120 million on sales and marketing, according to Bhatia, attracting a net total of 400,000 new paying players, each spending an average of $150 – a figure that, in theory, means Zynga is spending $150 more than it gets back per user.

It's a formula that plenty have already taken issue with, and NaturalMotion CEO Torsten Reil has gone even further to suggest that, rather than losing money, Zynga actually makes $30 from every new user it attracts.

Figures don't figure

Reil claims Bhatia has made a fundamental error when it comes to calculating just how many new users Zynga's games acquired.

"Over a period of nine months, Zynga – like all social games companies - will lose a proportion of paying users through normal attrition," Reil told investor website Founderware.

"Let's say that this attrition rate is approximately 20 percent - may actually be higher or lower. With a base rate of 3 million users, that’s a loss of about 600,000 during the period."

Reil therefore concludes that, given Zynga ended the September quarter with 3.4 million paying users, it actually attracted 1 million new players rather than the 400,000 Bhatia originally suggested.

User issues

Such a miscalculation completely distorts the picture as to how much return Zynga makes per users, says Reil.

"With a $120 million marketing spend, this obviously equates to an acquisition cost of $120 per new paying user. And with an average revenue per paying user of $150, it means Zynga are actually generating $30 of net revenue per user," he concludes.

"Obviously, all of these calculations are back-of-the envelope. Not all of the $120 million marketing spend will be for user acquisition. And not all of the new users are acquired through marketing - Words With Friends being one example of a successful non-marketing acquisition channel."

Others have backed up Reil's view that Bhatia's understanding of marketing spend is flawed, highlighting the misnomer that all such funds are solely spent on acquiring new users.

[source: Founderware]

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