Why Zynga was Right to Buy OMGPop and Words With Friends, And What it Means for SaaS

Zynga just keeps getting hammered.  The latest was on preannouncing a big miss for Q3, and an almost complete write-off of its $183m acquisition of OMGPop, the guys behind briefly ultrapopular Draw Something.  Next up may well be a complete write-down of  the $200m+ for Words with Friends.

The OMGPop acquisition was called “catastrophic“, for example, by SiliconBeat.

Here’s the thing, and I can say this was some confidence as both having been a start-up CEO and a VP at a Fortune 500 technolgoy leader.  The big guys have to do something when the landscape changes.  Zynga is caught up in the dramatic change of social gaming from Facebook-browser based to mobile.  You have to make a play.

I’m not smart enough about mobile gaming to know if these were the two best mobile acquisitions Zynga could do, but I do know some really smart guys there including the CEO though it was.  And these mobile apps are still 2-3 of the top 5 mobile games on the AppStore.  Good enough for me.

Some of those plays just won’t work out.  You make the best bets you can in the fact of dramatic change.  And if these plays don’t ruin you/the company — you just move on.  Doing nothing though is worse.  Even Kodak and Blockbuster at least tried.

So what does this mean for SaaS?  Well, if any internet company could be less like a typical SaaS company, it’s Zynga.  Zynga is all hits-driven, with very short bursts of success and then a very small, long tail where revenue falls off dramatically per title.  The exact opposite of SaaS, where you slowly build scale, and then maintain the same customers for a very looong time.

But what is similar is what’s going to happen in 2-3 years.  There are going to be a lot more SaaS acquisitions.  All the old, big stuff already got bought up — Ariba, Taleo, Succesfactors, Rightnow, etc. There’s no more old SaaS stuff left to buy.   And as the world continues to change, the Big Guys will have to make more plays.  Even if the odds are against them.  You can see this early with Salesforce’s acquisitions in 2011/12.  There may be a pause, but this will accelerate again in a few years when all the big guys have to make a play or three.

So look for a lot more M&A acquisitions of the next generation of leaders in SaaS in 2-3 years.  If you want to sell, be the OMGPop of your SaaS space.  You may get a great deal in 2014.

3 comments

  1. Positioning a SaaS company to be a strategic acquisition in 2-3 years is a canny move. First, because you’re right, the big guys do have to do something. They have to enter new markets and find new ways to differentiate and delight their customers.

    Second, because there will be a drastic shortage of these kinds of companies. As you and I have both written, the funding scene changed fundamentally for seed funding Enterprise software. SaaS for any big ideas couldn’t get enough funding to get started. So we have a lot of little ideas.

    I talked to several VC’s about this 3 or 4 years ago and told them, “Guys, you’re creating a real scarcity of SaaS deals by not funding seeds properly.” The response was, “Well our firm isn’t, but that’s just our strategy. I’m sure someone is because it makes sense.”

    Don’t you just hate the herd mentality sometimes?

    Cheers,

    BW

  2. Sanjay Khare

    Jason – this whole blog is a great read. Honestly – the only one I make sure to read without fail whenever a new post goes up. Keep it up…

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