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Zynga's Troubles Underscore Need For Facebook To Innovate In Mobile

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This June 26, 2012, photo shows Zynga CEO Mark Pincus walking off the stage after an announcement of new games at Zynga headquarters in San Francisco. The company announced layoffs Monday in a signal to Facebook and other tech companies. (AP Photo/Paul Sakuma) | AP
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As Zynga on Monday announced plans to lay off roughly one-fifth of its workforce and shutter three offices, the technology world absorbed a warning that applies near-universally: Those who fail to lead customers from the desktop computer experiences of the past into a future focused on mobile devices may well be doomed.

That warning applies with special force for Facebook, whose enormous social network has delivered tens of millions of avid players to Zynga’s online games. Facebook has long acknowledged that it has been slow in the transition from the desktop to smartphones and tablet computers. Zynga’s struggle underscores the potential consequences of failing to master the way.

"I think what happened with Zynga today is a clear sign that everything is shifting to mobile," said Andrew Daily, managing director at MGI Research, an independent research and advisory firm. "It intensifies the pressure on Facebook to come up with new ways to do more and more with mobile and to come up with more ways to monetize mobile."

It is fair to say that Web companies need to shift to mobile for the simple reason it's how increasing numbers of people get online. The number of American mobile Internet connections is expected to reach 204 million this year, up from only 24.3 million in 2008, according to IBISWorld, an industry research firm.

"The writing is now clearly on the wall and the paint is dry," said Daily.

Zynga now stands as a prominent cautionary tale in what happens to tech companies that stumble in this transition. The company logs most of its sales from virtual goods, such as unicorns, in online games. As of the first three months of this year, Zynga was deriving less than one-quarter of its bookings -- revenue from virtual goods -- from mobile, though that was up from 7 percent a year earlier.

Unlike Zynga, Facebook has managed to make significant money -- and increase its share of mobile revenue -- as its users have shifted to connecting to the social network with smartphones and tablets. Last quarter, roughly 30 percent of Facebook's $1.46 billion in revenue came from mobile, up from 23 percent in the previous quarter, according to Bloomberg.

That represents a turn in mobile fortunes. Just over a year ago, as Facebook was preparing to sell its shares to the public, it said in a regulatory file that it did "not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven."

For Zynga, the shift to mobile has proven uniquely tough, because it has deprived the company of a strong suit -- the network effects of friends recommending its games to other friends via social media, said Ben Schachter, a senior Internet analyst at Macquarie Group, which has worked for Facebook in the last year.

"If you remember early days, your [Facebook] news feed was filled with achievements of your friends in games," said Schachter. "There's nothing analogous with that in mobile."

Facebook's purchase of Instagram -- the photo-sharing service that began life as a mobile experience -- was a clear sign of its urgency to remain connected to its users as they find their way to the site by mobile pathways. Daily said he sees the deal as an indication that Facebook understands the challenge, even though there's no guarantee Facebook will succeed.

"Just because they've done well so far doesn't mean that they've completely transformed their business and internal focus from desktop to mobile," said Daily.

Indeed, other Facebook efforts in mobile have fared poorly. The company released Poke, a Snapchat-like messaging service, but it has failed capture significant market share. And Facebook Home, the company's "apperating system" that takes over some Android phones, has gotten poor reviews.

Zynga’s strains seem likely to intensify the pressure, as major Web services seek to figure how to make it across the chasm to mobile without surrendering revenues they managed to secure in their desktop-centric incarnations.

"We have yet to see if the dollars in mobile can replace the dollars from the desktop," said Schachter. "And I think that's what a lot of the investment community is waiting to see."

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