David Ko puts up the ‘guard rails’ at Zynga to keep costs under control (interview)

David Ko’s job is to get Zynga into fighting shape. The chief operations officer of Zynga is No. 2 in command next to chief executive Mark Pincus, and Ko has made some tough calls, like the announced closing of CityVille 2, The Friend Game, and Party Place. In a conference call with analysts on Tuesday, he described this process as “putting up guard rails” so that managers can pull the plug on games that aren’t working earlier.

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For CityVille 2, that meant pulling the plug on a game that still had millions of loyal fans. So far, the tactics are improving the company’s financial performance. Zynga’s bookings were much higher than expected at $261 million, and the company turned an unexpected profit (reporting a penny a share, compared to an expected loss of 3 cents a share) for the fourth quarter. Now it will focus on growing new franchises, building its network, shifting into mobile, and making money.

That’s not going to be easy with a sea of competitors who have been raiding Zynga’s employees. But Ko is optimistic that the San Francisco company, which still has 3,050 employees, will make a comeback and succeed in mobile. We talked with him on Tuesday afternoon after the earnings came out. Here is an edited transcript of the call.

GamesBeat: It looks like CityVille 2 didn’t get as large an audience as you guys wanted. I would think that many different companies out there would have loved to have the audience size that it did, though. Can you talk about deciding to close that down?

Ko: It goes back to the strategy I discussed with you on a previous call. The company’s now focused on franchises, network, and profitability. That means discipline and making some tough decisions to support that strategy. We saw FarmVille 2 exceed our expectations from quarter to quarter. If you’ve seen, our bookings beat expectations 100 percent. We first tested that for around six months in the Philippines. We tuned it to make sure it was social and fun. What we got out of that really pushed the envelope on 3D gaming. We were pleased with the results that we saw across the board with engagement and daily active users. We saw a resurgence of our players coming back due to FarmVille 2.

With CityVille… Everything we do, we want it to be a learning experience and build off it. We didn’t have some of those same guard rails that we put around FarmVille 2 in CityVille. It’s not just CityVille, too. We’re looking at all of our titles and seeing how they perform against things like NPS, engagement, and bookings. We’re looking at them across a number of different metrics. If they don’t meet our expectations after a reasonable period of time, we have to commit as an organization to making the tough decisions. Sometimes that includes closing games down, which we did. That puts us back to our focus as a company on delivering franchises.

There’s another good example in mobile of what we’re doing. I called this out in the earnings call. I’m really proud of what the company has done as we’ve laid the foundation in mobile. But it’s amazing when you look at Words With Friends and how, in December, it was the number one downloaded app on the iPhone and the iPad. It continues to lead in engagement four years after launching. That, to me, is the epitome of what we want to launch in these types of games. We want to create franchises that are almost evergreen. That’s what we’re focused on as an organization.

GamesBeat: The team for CityVille, do you reassign them to more successful franchises like FarmVille 2, then?

Ko: We’re continuing to look at all kinds of things with them. They are helping out in certain areas on some games. They’re looking at new IP. We continue to just look. The reality is, we do that with all of our teams. If we find games, for instance, that we think have great franchise potential, we’ve been doubling down on those games. One of the things we continue to say is, if we think this game may be a hit, maybe we can hold it for quality, for fun, for engagement. We may over-fund those games. But we want to make sure that they have that franchise type of potential going forward. We also support each other as a company making those decisions.

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GamesBeat: What do you mean, more specifically, by “guard rails?”

Ko: It’s about discipline as a company, and focus. Part of the guard rails that we look at are essentially in how we develop games. One of the things that we saw is that we had a process in place that was really about building web games. We had to look over that whole process from top to bottom. It’s going to be a continuous work in progress.

I’m not saying we have a final product in place. We have a final playbook. But what we are finding is that there were certain criteria that we have for funding games and how much we would budget for games. Those criteria are different on mobile. We can launch and fund games to get to a playable slice with smaller teams. Budgets may not necessarily be the same. We have to look at that with different types of guard rails.

GamesBeat: With social games and mobile games, you can modify the games based on feedback. I guess there’s a certain point, though, where you must see diminishing returns on modifying a game, and that’s the point where you decide to shut it down?

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Ko: It’s a matter of calling the ball, is what I would say. Making tough decisions. We look at engagement. We look at the metrics. We look at the net promoter score. We look at bookings. That’s just a couple of things. We look at a lot of other metrics as well. The reality is that if we don’t think it has that franchise potential, we have to call the ball. That’s what we ended up doing.

GamesBeat: I think you ended the year with more than 3,000 people, still. It didn’t sound like you were doing any layoffs here. Or was that just something you didn’t mention? Are there layoffs associated with these three games being shut down?

Ko: It’s never our intention to do layoffs. What we’re seeing is we’re trying to be a lot more disciplined in our cost approach. One of the things we did do last quarter, and you probably picked up on this, is that we really did reduce our expansion above expectations. I think the street had an expectation of $15 to $20 million. We came in at closer to $25 million. We did that by being disciplined across a number of different areas, whether it was around what we spent on R&D, whether it was outside spent… We’ll take that same type of discipline going forward. It’s too early to say what we’re going to do per game. But we’re really focused on being disciplined in creating franchises and focused on profitability. That’s part of profitability.

GamesBeat: The India and China expansions, does that have to do with those areas being low-cost?

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Ko: It’s less about them being low-cost locations and more about…. India and China are very strategic to us, not only for the markets that they’re in today, but also for the talent and the quality that’s helping us to build global IP and support the studios here as well. There’s a lot of efforts where we have talents intermingled between two studios. We’re excited about our efforts in both of those markets today. We’re going to continue with that.

GamesBeat: You are doing more third-party publishing. Is that another way that you can lower the overall costs while still getting hits?

Ko: Yeah, I think that’s one way to look at it. We’ve got both. It’s still early. We’ve launched a number of titles on the Zynga network. It’s been great to see some things like Respawnables or Horn, for example. But we know that’s just the tip of the iceberg. We know it’s early, but we’re going to continue to evaluate that channel and those games, just as we do our other games. The thing about third-party is that we want to be as disciplined as we are with our first-party games. We want to launch games against our MAU, which is 72 million today, that have franchise potential, whether they’re third-party or first-party.

GamesBeat: You did have a lot of good news in your earnings results, but there was also a decline from the third quarter to the fourth quarter. Is there an explanation for the number of users that went down, in daily active users and monthly active users, from the third to the fourth quarter?

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Ko: We talked about this during the call. We increased our numbers as far as total MAU in mobile over the last year, year over year. That was a pretty substantial increase, to 72 million. I think we found that more of our players are coming to us from mobile, whether it’s on the phone or the tablet. There’s a sense of urgency there across the entire company. If you remember from two years ago, when we first started building up mobile, we had about 20 people in the division. Today the entire company is focused on bringing our content across different platforms. It isn’t a mobile division versus a web division. It’s everyone’s responsibility.

We’re seeing players respond when we offer cross-platform. We see a real focus there. The other part of that is coupled with just our focus on franchises. It’s not about the number of games that we publish. Some people go for quantity in terms of the number of games. We want more focus on games that we think will be franchises going forward.

GamesBeat: Are you seeing some benefits yet from the restructured deal with Facebook?

Ko: We now have our amendment to the agreement, from Q4 of last year. The primary changes start in April. That’s where you’ll see we have flexibility to grow our games on Zynga.com, as well as other distribution channels on the web. That’s the primary benefit. Facebook is a great partner for us. It’ll continue to be a great partner for us going forward, both on the web and on mobile if it proves out.

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GamesBeat: Can you summarize what you think of the results overall today and how the call went?

Ko: We’re all proud of our key financial gains in Q4. We had to make some tough decisions in support of our overall company strategy, which I feel that we’ve clarified for our employees in a way that hasn’t been there before — the focus on franchises, network, and profitability. I think the teams and the company are excited. We recognize it’s early for us right now. We want to play for the long game. But our goal this year is to mobilize and to win at it.