There is no joy in FarmVille

October 15, 2012: 7:30 AM ET

Changes in the way players play and a series of lackluster deals at Disney, Electronic Arts and Zynga has dulled enthusiasm for social gaming.

See correction below.

By Janet Morrissey, contributor

ZyngaFORTUNE -- The white-hot enthusiasm for social gaming has cooled considerably. Zynga's recent woes have capped a long-gathering storm. Analysts and investors are now frantically waving cautionary red flags. They're particularly bearish on companies paying big bucks for entities that have developed the latest hit game. "A lot of media companies have been burned by investing in this space," explains Richard Greenfield, an analyst at BTIG Research.

It's not that the social gaming sector is tanking. It's that competition has intensified and enthusiasm for the latest hit among gamers can increasingly be clocked with an egg-timer rather than an old-fashioned desk calendar. "The lifespan of individual games is getting shorter and shorter and having lower and lower levels of success," says Greenfield. "People are becoming more and more fickle and transitory."

Indeed, the time it has taken the number of active users playing Zynga's (ZNGA) games to drop 50% from their peak fell to 62 days on average in 2011, down from 164 days in 2010 and 223 days in 2009, according to tracker AppData. "Games are a hit-driven business and so it's really hard to have a crystal ball and know what games are going to be successful and for how long," says Colin Sebastian, a senior research analyst at Robert W. Baird & Co. Sebastian says the market is still growing, but at a slower pace. He estimates social gaming revenue rose north of 50% in 2011, but will likely be up only 20% this year.

MORE: For Zynga, it's not game over yet

All of this has made Wall Street bearish on companies that chase after firms for the sole purpose of adding the latest flash-in-the-pan hit to their rosters. The track record isn't very encouraging.

Zynga is still reeling -- both its balance sheet and investors -- from the acquisition OMGPOP for about $200 million in March. It thought it was buying a hit title, Draw Something. But the ink was barely dry on the purchase agreement when the game's popularity started tanking, forcing Zynga to write off about half of the game's value. "They bought it as the user base was peaking, and it fell off right after they acquired it," says Arvind Bhatia, a managing director at Sterne, Agee & Leach. (In July, Zynga chief Mark Pincus told the crowd at Fortune's Brainstorm Tech conference that it was too soon to judge the success of failure of the acquisition. Last week the company said it planned to take a writedown of as much as $95 million on the deal).

Zynga is, at its core, a social gaming company to its core. But even more diversified games firms have suffered. Electronic Arts (ERTS), whose long-term business strategy has been to grow through acquisitions, has stumbled. It acquired PopCap Games in July 2011 for about $1.3 billion in cash, stock and future performance-based payments. PopCap, which created such games as Bejeweled and Plants Vs. Zombies, has been struggling with declining revenue since the takeover, which recently prompted PopCap's founder, John Vechey, to slash 50 jobs and make other cuts as part of a restructuring. "We've seen a dramatic change in the way people play and pay for games," said Vechey, on the company's blog in August. "The change in consumer tastes requires us to reorganize our business and invest in new types of games on new platforms -- it's a completely different world from when we started."

MORE: What it's really like to work at Zynga

Media giant Walt Disney Co (DIS) has also faced challenges since moving into the sector with its $760 million acquisition of Playdom in 2010. "Playdom wasn't digested very well," says Greenfield. The deal was an "initial disappointment" that caused "earnings to drag in the digital media group," adds RBC Capital Markets analyst David Bank. But after rolling out a new set of games last year, Bank says, the group has seen some improvement. "The business has ramped to some success, but it's been a fairly long journey," he says. "I do think they probably got in at the top of the market, but I don't know that strategically it was a bad decision."

Some industry experts say companies need to sharply analyze valuations before pulling the trigger on an acquisition. "What's a hit today does not necessarily mean it's a hit tomorrow," says Sebastian. "So it's a difficult business to make acquisitions of one-game companies." Although valuations are coming down, he says, executives still need to be cautious. This is particularly true if the targeted company has a hot game on the market. "If they get caught up on a valuation updraft, you can end up spending too much," says Sebastian.

Some suggest companies simply hire individual game developers who can create titles for Facebook, mobile phones and other platforms, rather than entire companies. At least until the sector shakes out its troubles. This might be easier -- and cheaper -- in the current environment and would, ultimately, achieve the same end. The company that this might be particularly hard for? Zynga.

Gaming companies are openly trying to poach talent from Zynga, for example, as it struggles with earnings shortfalls, acquisition missteps and a mass exodus of senior executives. (The most recent of these include Paul and David Bettner, the brothers who created the highly popular Words With Friends.) Says Atul Bagga, senior analyst of internet and video games at Lazard Capital Management, "the biggest challenge for Zynga is going to be keeping their employee morale intact." And that very well could be its biggest headache of all.

Correction: A previous version of this story incorretly stated that John Vechey was PopCap's CEO. He is a founder and franchise director. The story has been updated with the correct title. Fortune regrets the error.

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