After posting an average first quarter revenues and $46.5 million losses, Zynga Inc (NASDAQ:ZNGA) has realized that its $100 million worth of data centers are turning out to be revenue erasers. Though the company reported 9% growth in its revenues,the overall costs associated with running its own data centers are huge and making less sense with each passing day.
As a result, the social game developer announced the wind up of its data centers, which cannot complete without the layoff of 18% of its workforce, which means that nearly 364 employees will be going home.
At the same time, Zynga is embracing its old strategy, as per which, it will re-transfer the data handling to Amazon.com, Inc. (NASDAQ: AMZN). The company’s CEO mentioned that having own data centers was not strategic for it, and hence it will go back to Amazon to take care of the same.
An industry expert with Gartner, Lydia Leong said that building own data centers was not one of the best moves for the company as gaming market being unpredictable did not meet Zynga’s expectations. Leong added that by building own data centers, the company estimated its costs to go down substantially, but it ended on the opposite side. The gap in the expectations and reality has led the company to turn back to Amazon now.
Change in plan
But, will these cost-reduction measures alone will change the fortunes of the company? The answer is negative as reducing costs can be only a small part of the strategy. The bigger portion leans on the possibilities of how fast Zynga can innovate with its game offerings, which currently comprises of safe clones of popular games. Zynga might have taken the risk of building data centers and failed at it, but it needs to give a try to its creative side, which otherwise could nullify its cost-reduction strategy.
Zyng itself knows this truth, which is why, it has expressed its will to scale up vertically in just five categories over experimenting with too many categories. However, this strategy could again either break or make the company in the long run.
Zynga’s constant struggles and management changes have erased most of investors’ faith in the company, and this cost-cutting strategy brings nothing that wasn’t previously expected. Zynga has been announcing various cost-cutting exercises since going public, but they’ve never resulted in a single hit game. The company’s shares closed on Friday at 2.86, up more than 2% on the cost-cutting news.