Zynga Partners Martha Stewart

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Zynga Inc. (ZNGA) is setting up a new home for Martha Stewart in its popular Facebook game Castleville. Zynga recently entered into a partnership with Martha Stewart Living Omnimedia, to introduce an avatar of the American entrepreneur in the game from March 28 to mid-April 2012.

This will enable the Castleville players to interact with Martha as well as visit her kingdom.  Players will also be able to participate in different activities, such as Easter egg hunt and win special in-game goodies. This partnership is much similar to Zynga’s last year partnerships with companies such as Coca Cola (KO) and MasterCard (MA).

Of late, Zynga  has been looking for different ways to boost its sales, particularly from Facebook, which generates more than 90% of its gross revenue. Zynga primarily generates revenue through the in-game sale of virtual goods in exchange of Facebook credits, which is a form of virtual currency. However, Facebook charges a hefty 30% of virtual goods sales, which has been hurting profitability in recent times.

Apart from virtual goods sales, Zynga also earns revenue through banners and brand advertisings. However, advertisement (8.8% of the total revenue in fourth quarter) forms a very small part of the overall revenue. Further, Zynga also suffers from low subscriber monetization base.

Recently, the company has been toying with the idea of reward advertising. Reward advertising refers to a business model where companies are allowed to advertise in-game for a fee. In turn, the advertiser offers in-game items to the players, along with rewards and energy’s (in the case of CityVille). When the players reach a certain game level, they are asked to click on the advertisement to win these gifts in order to proceed to the next level.

This business model has been particularly beneficial for gaming companies such as Zynga, as the addictive nature of these games compels the players to follow the directives of the advertiser. The company earns a significant amount of revenue through this.

Moreover, the risk of losing subscriber remains minimum, as the game provider does not charge any fee. Through this innovative technique, Zynga has been successfully in generating incremental revenues from CityVille, which boasts of 26 million subscribers.

Zynga plans to roll out the reward advertising business model to its other popular games including FarmVille. We believe that reward advertising will significantly boost its top-line growth going forward. The partnership with Martha Stewart is also expected to boost Zynga’s subscriber base as well as its brand awareness, which will increase its monetization efforts going forward.

However, we believe that Zynga will continue to face stiff competition from Electronic Arts Inc. (EA) in the social gaming space. Further, we believe that Zynga needs to monetize its services and games faster in order to remain competitive going forward.

Until this happens, we remain Neutral on the stock over the long term (6-12 months). Currently, Zynga has a Zacks #3 Rank, which implies a Hold rating in the near term.

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