Secret Stash ep 5: Justin Waldron on Zynga's rise from Facebook app to gaming empire

It was the summer between freshman and sophomore year of college in 2007 when Justin Waldron got a few friends together to build an app that would change the future of gaming as we know it. Soon, that app would go on to become Zynga - the social gaming company that, just a few years later in 2011, would have the biggest-ever IPO since Google. 

In this episode of Secret Stash, hosts Archie Stonehill and Justin Kan sit down with Justin Waldron to talk through the: 

• origins of Zynga and the edge they found in the market
• innovative business model that helped Zynga win
• the company’s love/hate relationship with Facebook
• rise and fall of social gaming (and who’s to blame for the fall) 

Listen now for behind-the-scenes stories that shaped an era of social online gaming, as well as Justin Waldron’s own secret for scaling up Zynga and setting it apart from the competition. 

Tune into the latest episode below or wherever you listen to your podcasts. Or, keep reading for the highlights.

The origins of Zynga

“The first day the Facebook platform came out, I put out an app … And the app basically let you connect with your friends to play games together on the Nintendo Wii. The Nintendo Wii had this number code system, and it was almost like a phone number. But I realized none of my friends were sharing them because it was too much of a pain. So the app made it simple - you just put in your number and then it would tell you what all your friends’ numbers were. It was just a database so you could learn what your friends’ Wii numbers were so you could actually play with them.” 

“I got excited about it and saw the potential - but didn't know exactly what I wanted to build on it. I just knew it was in this area of entertainment games and letting people play together.” 

“It started as a sort of simple experiment saying, ‘hey, college kids love poker, why don't we figure out a way to put that into Facebook?’ … Then we immediately realized, ‘oh, okay, what we're doing with this poker game and the way people are connecting could be applied to pretty much any game.’ Then we sort of said, ‘this should be a company.’” 

The missing piece of the puzzle: social interaction

“We noticed that there was an empty space on the social platforms. You had a lot of people and they were looking for something to do. On Facebook, you could poke each other back and forth, you could leave a message on somebody's wall, but there wasn't really that much to do … because there wasn't enough actual content to do anything.”

“So we were saying, ‘okay, this is like a cocktail party, right? What is the thing that people can do that breaks the ice and actually makes conversation start?’ And poker is exactly that. People have conversations at a poker table.”

“The single thing that I noticed was that on these poker sites that people were playing, like PokerStars, they had free poker chips, and you could play a free game, but no one was really playing them. I think a big part of it was they weren't interested in interacting with the people around them. There wasn't enough social context. To understand the motivation behind why people were doing this, it's not about just cashing out - even cash players sit down with friends and strangers and enjoy the social interaction and the thrill of winning a hand, whether there's real money involved or not.”

“I think what we did was just realize that earlier than a lot of other people and then lean into the social interactions like crazy. Right away we had these features to send gifts across the table … There was no ability for you to send some ridiculous flamingo across the table and any of these other poker clients, it was like a brand new sort of thing.”

“We realized that that's actually what people wanted, and that type of gameplay and that philosophy could be applied across many, many more games.”

Browser power and the freemium model

“The real story of Zynga is not just about  playing games with friends, there's actually a tech revolution that happened in the background - a business model revolution.” 

“Flash was sort of this over-the-weekend-indie-hacker type of game environment. It wasn't something where people had enough money to go build teams and go build big games. Once we figured out the business model, where we could reinvest the money back into building bigger and better games, you saw Flash start to get pushed to its limits. This technology that may have been out for a little bit before then started to actually show what it could really do. People just never had experiences like this inside of a webpage before.” 

“All these poker clients were downloadable clients on the PC. So what people don't realize is that the Zynga Poker client inside of Facebook was literally the first experience most people ever had with a fully functional poker client that they just hit a webpage and it loaded up.”

“There was like addictinggames.com and Newgrounds and these places where people would play these Flash games. But they were stuck on a business model that didn't allow them to actually scale it. So the way they scaled their businesses is by having lots of different games, and every individual developer would make a very small amount of money.”

“The business model affected what the games could actually become. You didn't go back to Newgrounds to play another session and another session of a continuing game. Newgrounds was just wanting to spread you around the different games that they were publishing. So no one had really figured out what is a game that tries to keep its customers and monetize those customers on the web.”

“We did start seeing it happen outside of the web. You had stuff like World of Warcraft that was really taking off a few years prior to this, and it became very clear that MMOs led the way in terms of what a service oriented gaming business could be. But they really missed the boat on freemium.”

“I think that they didn't realize the demand for the currency and the items in the game. But at that point you could see it happening. You could see people farming gold on World of Warcraft. And the same people that were farming gold on World of Warcraft, were taking poker chips from Zynga Poker and selling them on eBay. And then we said, ‘there's a ton of demand for this. If they're going to sell it on eBay, we should probably just sell it ourselves.’ And that's kind of how it started.”

“Everybody thought this thing didn't work. Virtual goods seemed ridiculous. You couldn't really get good information on how much money any of the companies were making. I remember TechCrunch articles saying, ‘there's rumors that Zynga's making $10M a year.’ But we were making $100M a year. That's how far off expectations were on what was actually going on.”

“Peter Thiel says ‘ find a secret.’ The secret is people were very willing to pay for virtual goods.”

The first intermediary: Facebook  

“We did have tense moments with Facebook, in particular around credits. So you can imagine, we've been processing payments ourselves for years. Then Facebook was like, ‘hey, that seems like a good business, we want to do that. In order to be on our platform, you have to go through us.’ Our natural response was like, ‘okay, well, we can see why you'd want to do that. The problem is we have 70% market share and we're just giving you all these credit cards for free, so you can let other developers use these credit cards that we did the work to convert in the first place.’”

“We did have tens of millions of users that were now playing on Zynga.com in case Facebook ever shut off. There's a whole other separate story here about rebuilding a social network in 2010 to prevent the downside of a fallout with Facebook.”

The second intermediary: Apple

“Analysts were saying, ‘hey, actually, what's going to happen here is, mobile is going to add to the amount of time people spend a day computing and on the internet, but they're not really going to cannibalize that much. People are still going to sit down on their desktop for however much time they do each day.’ In 2009, most people actually agreed with this. So people weren't that worried about cannibalization, and Facebook was slow to get their mobile app working on smartphones.”

“When Facebook finally fixed up their app, people just started quitting the desktop version. This was the first moment where you saw a huge amount of cannibalization. And the problem for us was that our games were on the desktop. So it didn't matter how much Facebook and Zynga were aligned.”

“Naturally we started working with Facebook to make an app platform. So they put together a platform called Project Spartan. And TechCrunch put out this article that said, Spartan is going to kill the App Store. Immediately Apple just bans them. That was when you realize, ‘oh, wow, okay, this is interesting. How long is this going to take to play out?’”

Distribution through “real social” 

“There's this lack of detailed understanding of what happened there, where people are just like, ‘oh yeah, you just came in and you just set the dial to a hundred and the game just grows.’ That’s not really what happened. It was always trying to figure out how to make these actions socially interesting and relevant.”

“People felt like, ‘wow, you guys just overwhelmed the channels.’ But the reason we got to the volume of usage of the channels is because the things that people were doing with each other were relevant and they were clicking them and they were using them. So there was this virtuous cycle of sending more and more and the user base got big. So yes, there's going to be a lot of lonely cow posts in your feed. But you couldn't just go and make a Facebook app and say, post 10 million posts in the feed and just have it grow.”

“We used to call it real social. We had this whole movement inside the company where we were pushing back against anything - if it's not real social, we don't want to do it. The whole company is about how do you make games where people can spend time with each other. Words with Friends is about this. You want to play a game with your grandmother because you don't have anything to talk about. Now you have Words with Friends, and you can play every day, and then you can chat when you feel like it.”

The decline of social gaming on mobile

“We're mostly playing mobile games alone. So, what the hell happened? We went from everybody playing games together, like, I would go into FarmVille, and there'd be 80 people that I knew.”

“It’s a number of things - but the biggest thing on mobile is that the games are distributed through ads. They're not distributed through social channels. And there's a few different reasons they're not distributed through social channels. One of which is back to that story about Facebook and Project Spartan, which was to put the mobile game business on our game platform on Facebook. But Apple disallowed developers from monetizing inside of the mini apps ecosystem.”

“If you wonder why super apps happened in China and nowhere else, it's because in China, they didn't have the control over the ecosystem that they had in other places. So they're all looking at this WeChat thing, and they're like, ‘this is amazing, we want to do something like that, but Apple won't let us.’ Sometimes they would kind of get to the edge of building everything that they wanted to build, only to realize that in one moment, Apple could just shut the whole thing down.”

“For Apple, it comes down to switching costs. When you use your iPhone, you're using an Apple device and it has iOS, but you're spending almost all of your time inside of a Meta owned property. Probably 80% of their time on this piece of glass is in Facebook's products, not on Apple's products. So Apple may own the OS, but Facebook owns the user experience. Facebook owns the engagement. If you think about it, of course Facebook is the biggest distribution channel for games. Of course, their ad ecosystem is where everybody discovers a game. That's where people spend their time. Now, if the games were built into their platform and they could monetize, who would bother with the App Store? When it comes to switching to a new phone and all your games just went with you, and you are connected to all those friends on Instagram or Facebook or WhatsApp, then why would you really care which phone you bought? Because you're spending 80% of your time inside of a Meta property and all the apps just move with it.” 

“It all became about targeting … If we make a game that 9 out of 10 of your friends aren't interested in, and you send 10 invites, well, then that game is not going to be very successful as a social game, right? It has to be something that almost any of your friends would play with you.  Now with ads it's completely different. You want to find the exact person who's going to play the exact game you're advertising to them. And if you advertise to anybody else, it's a huge problem. One way that you get cheaper ad buys is by focusing on niche, which other people aren't focusing on. So you get this extreme fragmentation where the way that you make a game is you go find a way to advertise to some group of people that no one's advertising to yet. And you make a game that exactly those people want. And most of their friends don't want it. And you're not willing to buy ads for their friends to come in because they're not going to be profitable on a CAC LTV basis.”

“So there's literally an economic reason that people make games that you can't play with your friends anymore. It’s because it's not profitable with the way distribution happens on a mobile app store.”