Zynga's move to create its own platform and Web service for game developers will be a big test for its cloud computing infrastructure.
The game company on Thursday outlined its new platform. In a nutshell, Zynga.com will become a destination for games. The company will also diversify away from Facebook, which accounts for most of Zynga's distribution. Zynga will also open up its platform to third party game developers.
None of those items would be possible without Zynga's Z-Cloud infrastructure. That infrastructure relies heavily on Citrix software and virtualization technology.
The launch of Zynga's platform is notable because the company has totally revamped its approach to cloud computing. In July, Zynga said it would file for an initial public offering and noted that Amazon Web Services was its background. On July 1 Zynga said:
A significant majority of our game traffic is hosted by Amazon Web Services, or AWS, which service uses multiple locations.
On Feb 28, Zynga's annual report was filed with some word tweaks:
In the fourth quarter of 2011, AWS hosted approximately one-third of our game traffic.
Zynga executives highlighted the move from AWS on the company's fourth quarter earnings conference call. Zynga operating chief John Schappert said:
We have built our own infrastructure, the Z-Cloud, to handle the tens of millions of players we serve each day. We migrated a number of our key games over to the Z-Cloud, which provides ongoing network savings and enhanced performance for our players. By the end of the year, nearly 80% of our DAUs (daily active users) were hosted in the Z-Cloud, compared to just 20% at the beginning of the year. Our technology sets us apart from other companies in our space and helps our games scale higher and perform faster while keeping costs down.
In other words, Zynga is controlling more of its own destiny. With the launch of its game platform it diversifies away from Facebook. With the scaling of Z-Cloud, Zynga controls its infrastructure fate too.
Between 2009 and 2011, we increased our physical server capacity by two orders of magnitude. We turned zCloud into a faster and more automated system. For social games specifically, zCloud offers 3x the efficiency of standard public cloud infrastructure. For example, where our games in the public cloud would require three physical servers, zCloud only uses one. We worked on provisioning and automation tools to make zCloud event faster and easier to set up. We’ve optimized storage operations and networking throughput for social gaming. Systems that took us days to set up instead took minutes. zCloud became a sports car that’s finely tuned for games.
As for vendors, Citrix gets the biggest win here. Citrix executives have been talking up Zynga as a reference customer for quite some time. Why? Zynga is using Citrix's XenServer and Cloudstack to deliver its services. Sameer Dholakia, general manager of cloud platforms at Citrix, outlined some of the Zynga economics at a Pacific Crest conference Feb. 15. Dholakia said:
Zynga was Amazon's single largest customer. They were spending literally north of a $100 million a year renting infrastructure from Amazon. They needed it for elasticity. What they didn't know, if I put out a game, was I going to get a million users, 10 million users, 50 million users? They had no idea. But once they did know, then you can actually build capacity to it. And so they have basically built what they call a Z-Cloud, a Zynga cloud, that is an Amazon style cloud on premise on our stuff. And they needed CloudStack and XenServer and all this stuff underneath it. And so this is where all of our suite comes together and this is how we make money.
Overall, Zynga found it more cost effective to build out its cloud capacity internally once it could benchmark its traffic spikes. In addition, Zynga is now a cloud provider. Piper Jaffray analyst Michael Olson noted:
We believe Zynga.com could alter the Zynga growth story going forward. Importantly, Zynga.com represents a reclassification of Zynga’s business model by adding other small-to-mid sized developers as customers. We believe the Zynga.com service is analogous to Amazon Web Services and Fulfillment by Amazon as it opens Zynga’s existing technology infrastructure to third parties. This new model is also consistent with Zynga’s core competency of analytics and cross promotion.
The economics for Zynga go like this:
According to Dave Wehner, CFO of Zynga, the company will lower its cost of revenue over the next 18 to 24 months as third-party hosting costs decrease. Wehner said that Zynga plans to "roll off the majority of those third-party hosting arrangements."
Zynga's capital expenditures in the fourth quarter were $50 million, down from $63 million in the third quarter. Most of that spending is focused on Z-Cloud. For 2011, capital investments were $238 million.
The building of its own infrastructure will help the bottom line. Zynga can depreciate its gear and lower quarterly expenses. "We believe this investment will have a short payback period and enable us to expand gross margins in the long term," said Wehner.
Now all Zynga has to do is keep Z-Cloud humming so it can handle traffic spikes. In any case, Zynga now controls its own fate---distribution and infrastructure---much more than it did a year ago.