by Chris Holt, Marketing

What’s the fastest growing segment of the entertainment industry? And what industry has increasingly become the focus of not only the media, but Hollywood actors and technology giants? The answer to both questions is the video gaming industry, and like many industries, it’s in the midst of transformation thanks to the subscription economy.

For decades, the video game industry has utilized the conventional single-purchase model. Customers buy $59 retail games, and your profits are measured by your units shipped minus your cost of development. But with the advent of the Internet, games shifted from being single purchases to subscribable services. While most game publishers still operate under the old model, several pioneers have already leveraged the superior customer relationships afforded by the subscription model to very lucrative enterprises.

Zynga is at the heart of this debate, with many critics and industry insiders saying that it’s both the wave of the future and a flash in the pan. Here, we take the latter position. To see the former position, click here.

Zynga utilizes a freemium business model and offers a variety of social-strategy games (such as Farmville, CityVille, and Mafia Wars) on the Facebook platform. The games are free to play but often require social actions (such as partner purchases) or in-app purchases to progress faster in the game (usually requiring the player to obtain “energy”). Their business model is derived from both in-app credit card purchases and partnerships. Let’s take a look at why Zynga is so poorly positioned to ultimately win the Subscription Gaming Wars.

1)  Zynga doesn’t own the customer, Facebook does

Zynga’s success can be partly attributed to being on the Facebook platform, the most popular social networking site in the world. Until very recently, in order to access Zynga’s games, players had to log onto Facebook to play. Zynga doesn’t own the customer, but Facebook does. All of the information, revenue, etc is partly tethered to Facebook, who takes a cut of all of Zynga’s revenue and has just as much access to their customers’ data.

And while buying virtual goods is all well and good, players can still walk away from Zynga’s games– as about 41 million did between the third and fourth quarter of 2011. Zynga uses the freemium business model to great success, but unlike MMORPGs like World of Warcraft, they don’t lock customers in for longer experiences. Customers could walk away at any time, they do not “own” the customer.

2) Their reputation among developers is terrible

Failed acquisitions and headline news decrying your labor practices are not the way to create confidence in your company. The stories about Zynga’s labor practices suggest that the company doesn’t treat its employees well, fostering a competitive and often destructive environment that has left many former employees bitter. Their reputation for “cloning” games and their lack of quality in gameplay has also furthered their negative reputation in the game community. Some of the best apps on the iTunes and Android markets have watched as Zynga has imitated their work and then made them more profitable– meanwhile Zynga has taken legal action against games it deems too similar to its own products.

But a bad reputation isn’t poisonous to success. The issue is that Zynga needs some of the people they may have alienated. If Zynga wants to succeed and ultimately win the subscription gaming wars, they need to be able to attract the top talent in the industry to come work for them. That begins with treating their employees better. Zynga also needs to work on its image, repairing its damaged relationship with the gaming community. They’ll need allies, creative talent, and the best in the industry if they’re going to succeed. It’s much tougher to win the war when the best talent in the industry won’t work for you and many are gunning for you to fail.

3)   Their business model isn’t sustainable

A great deal of Zynga’s success can be traced to their games appearance on the Facebook platform. But the social networking giant has shown signs of slowing its expansion, tapering the flood of new customers that Zynga could reach. Recent news reveals another alarming problem for Zynga: Facebook has become saturated, meaning Zynga needs to find new pastures to explore. According to one report, at the end of 2010, about half of Facebook’s monthly active users were gamers– a very healthy number of Zynga as the most popular game developer on Facebook. But by the end of 2011, that number had dropped to twenty-five percent. Monthly active users for Zynga declined in the fourth quarter of 2011 by about 41 million.

If Zynga is going to succeed, it needs to reach new audiences. While Facebook has been eager to keep their business, Zynga’s move to create their own gaming site underscores the storm clouds on the horizon. Zynga’s leaders know that their numbers will continue to decline on Facebook and that the tide is going out. They’re hoping a new platform will help, but ultimately, their long term success won’t be based on the platform they exist on: but by the quality of their games.

4)   Their IPO landed with a thud

Zynga was one of the most talked about companies in Silicon Valley a short year ago. Everyone was predicting the death of the old gaming luminaries at the hands of this innovative upstart. But a myriad of PR disasters and a lack of consumer confidence has led to a terrible launch for the company’s IPO. The company was valued at much less than previously predicted, and then the stock basically hovered at around $10 since its December launch– not exactly confidence instilling.

Even more damning, business leaders all similarly diagnosed Zynga’s problems: they need to keep coming with new games, they need to innovate or be swept aside by the next “time-suck” and they need to treat their employees better. The fact that Zynga’s profits fell 50% in the most recent quarter is also bad news for an IPO launch.

If Zynga is going to win the subscription gaming wars, it needs to right the ship: and quick. It’s rare in this market to have a second act.