Can Microsoft's games whisperer save Zynga?July 2, 2013: 12:33 PM ET
Don Mattrick may be the troubled game maker's best shot at coming out on top again
FORTUNE -- Desperate times call for desperate measures. In the case of flailing casual gaming company Zynga (ZNGA), that meant installing a new CEO. Earlier this week, the company announced founder and long-time CEO Mark Pincus would step down, making way for Don Mattrick, the former president of Microsoft's (MSFT) Interactive Entertainment unit, which includes the best-selling Xbox video game console.
"Zynga is a great business that has yet to realize its full potential," Mattrick said in a letter to Zynga employees. Perhaps. Though Zynga rose to success with hits like Farmville, many newer releases have underperformed, resulting in disappointing revenues and layoffs. Last month, the company laid off 18% of its workforce, including most of the team from Draw Something-maker OMGPOP, for which the company reportedly paid $200 million early last year, according to reports.
In Mattrick, Zynga has a new leader with a proven track record for revitalizing ailing properties. The Xbox 360 has remained the number-one selling console in the U.S. for 29 months consecutively. But when Mattrick joined Microsoft in 2007, from games publisher Electronic Arts (EA), the Xbox business was unprofitable. That was also the year hardware defects caused up to 24% of all Xbox 360 consoles to fail, leading to a $1.15 billion write-off to extend warranties and reimburse disgruntled owners.
Mattrick drafted and successfully executed a three-year plan to turn the business around, which included hiring new talent and investing in technologies like Microsoft Kinect, the full-body, motion-sensing controller which was largely credited with driving console sales up. Indeed, at least one Microsoft executive has said that without Mattrick, Kinect wouldn't exist. Mattrick assembled the Kinect team, recruited outside talent like creative director-turned-corporate vice president Kudo Tsunoda, and set goals such as reducing costs to reach that affordable consumer price point. "I keep the team engaged, to find a vision for what we're going to create, make sure we have a strong culture and identity, and have fun blending our art form with the signs of creating technology," a humble Mattrick told Fortune in 2011.
Dennis Durkin, former COO and CFO for Microsoft's Interactive Entertainment Business, credited Mattrick as a stabilizing force amid the department changes. But more importantly, Mattrick was a relatively unsung visionary. "A lot of people can see trends, but Don also formed a team that could execute against a vision," Durkin told Fortune then. "That's where he's really changed the trajectory of our business."
The rest is history as far as the Kinect is concerned. Kinect sales topped 24 million as of February, and hackers have programmed countless applications for it, from 3-D doodling to controlling robots. Even more telling of Mattrick's contribution: a more advanced version of Kinect will come packaged with each new Xbox One console when it arrives later this year. The device is believed to be a central part of the new Xbox experience.
Despite the success, Mattrick's departure Microsoft may not come as a surprise. "I think Microsoft was probably a bit of a frustrating environment for him because, let's face it, the Xbox business is viewed within Microsoft as sort of an ancillary business," says Van Baker, Vice President of Mobility at Gartner Research. Given the tech giant's main business remains software like Windows and Office, Baker argues Zynga offers Mattrick the opportunity to run his own show at a company where his actions will always be front-and-center. Not to mention the launch of new console hardware is likely to lead to a set of bruising battles with rival Sony (SNE), maker of the Playstation 4.
But Mattrick has similarly difficult tasks ahead of him at Zynga, which has seen its stock drop nearly 40% overall year-over-year. Zynga rose to success atop games like Farmville which were largely played within the framework of another company's product, namely Facebook (FB). "That's not a formula for success going forward, because you're going to want to expand outside the social network environment but also expand outside those initial titles, which is where I think they're struggling," says Baker.
Trouble is, the landscape for games has changed dramatically, even since Zynga's founding seven years ago. Mobile devices, rather than social networks, are now driving innovation in new titles. The costs to produce highly polished games and services continue to rise in casual games, much as it has in so-called tiple-A blockbuster titles like Call of Duty. And competition has spiked. Consider this: Supercell, the Finnish maker of titles such as Clash of Clans, made $104 million in profit on $179 million in revenue in the first quarter. It has about 100 employees. Zynga, by contrast, has about 2,400 workers and made $4 million in profits on revenue of $264 million in the first three months of this year.
Can Mattrick, a gaming industry veteran with a proven track record in traditional videogame hardware and software, do the same for Zynga, an entirely different kind of gaming business? Equally as important: will Pincus, a majority shareholder, relinquish enough control so Mattrick can do what's needed? Those are questions everyone, Zynga insiders included, will have the answers to soon enough.