A conversation between Fortune's Adam Lashinsky and Zynga CEO Mark Pincus at Fortune's Brainstorm Tech Conference in Aspen. An unedited video and transcript are below.
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MODERATOR: Okay. Now is it my great pleasure to introduce to you a man who needs no introduction in this room, because he has been with us for many years. The founder and CEO Of Zynga, Mark Pincus, in conversation with our own Adam Lashinsky. Main stage.
ADAM LASHINSKY: Welcome, Mark. Thank you very much Jessie, and you know, Mark, you really are, did we lose something? You really are the prototypical brainstormer, in that you’ve been coming to this conference almost since its beginning, and not only is it great, I think, that Zynga is going to be on stage to conclude our conference, but I want to — I’d like you to tell everybody that Zynga has been to this conference before, and I don’t mean the company Zynga. Could you tell everyone?
MARK PINCUS: Well, am I on?
ADAM LASHINSKY: Yes, you’re on.
MARK PINCUS: Zynga, the dog, excuse me.
FP: You’re not on.
ADAM LASHINSKY: You’re not on.
MARK PINCUS: I’m not on. I have a cold, so I really can’t shout. Can you hear me now? Yes. All right.
ADAM LASHINSKY: Yes.
MARK PINCUS: Okay. Now you can really hear my cold. Zynga the dog, I think, is probably the only dog that’s ever participated in Brainstorm, and we have pictures of her sitting in the chairs in one of these tents.
ADAM LASHINSKY: I have fond memories of Zynga, the American bulldog, attending Brainstorm. Okay. So we’re going to talk about Zynga. It’s a dynamic company. It’s funny to me that it’s five years old.
It was founded in 2007. In 2011, you had revenues of $1.1 billion. You have around, you have almost 300 million monthly active users. You have about a billion dollars in cash. You went public in December at $10 a share, and the stock today is at $4-1/2 a share. You’re right in the middle of a public market storm.
So let’s talk about the business. Can I just get a quick show of hands, how many people are Zynga users?
(Show of hands.)
ADAM LASHINSKY: Cool, okay. So you have some work to do in the room, but I think that’s — you know, this is not your core demographic, right?
MARK PINCUS: No. You are my core demographic. That’s why I think we have a lot of growth opportunities left.
ADAM LASHINSKY: Really, why is this your core demographic?
MARK PINCUS: Well, we’ve taken a fundamentally different approach to gaming. We approach gaming as — we saw gaming in 2007 as an activity that wasn’t mainstream, and it didn’t fit easily into all of our lives, and our fundamental premise was that all of us have an interest in having some kind of gaming or play in our lives.
But we want to connect with other people, and so we needed it to be smaller and bite-sized, and we needed it to be social. So where we’ve seen this as a growth market for the last five years, where gaming prior to that wasn’t a growth market, is that there’s so many people like us who up until recently, didn’t have the time, couldn’t fit it in, and we tried to make it something that you could multi-task and rationalize, and it didn’t ask much of you.
We wanted to get to things like, you know, and you should be able to understand and play one of our games in three clicks. You shouldn’t have to learn; you shouldn’t have to over-engage.
ADAM LASHINSKY: So these are far simpler than a traditional console game, or even an arcade game that we would have played in our childhoods. It’s a lot easier. You also pioneered something that I think five years ago most people in this room would have said was a completely cockamamie idea, which was virtual goods.
Where did you get the notion that people would buy something that has no intrinsic value, to the tune of a billion dollars in revenue?
MARK PINCUS: Well, I’ll take issue with your “no intrinsic value.”
ADAM LASHINSKY: Please.
MARK PINCUS: Our idea was one of the biggest barriers to all of us playing games was starting off asking for money, and so we wanted to make the on-ramp just zero friction, so we wanted it to be free. We believed that from the beginning, we thought that some percentage of our audience would deeply engage, and I saw this as Tribe, at my prior company.
We had a small percentage of people who were just incredibly passionate and deep on the product, but we didn’t have a business model that went along with that. We had an ad model, where we needed people to click and leave our site for us to make money. So the people who were most deeply engaged were the ones who cost us the most and had the least business value.
So we wanted to have an aligned business model, where we had a deep incentive to offer highly engaging experiences to people, and opportunities for them to pay. I know virtual goods sounds like something foreign to people, but we all probably by now have tried an app purchase.
So the idea of getting an app on your iPhone or android device, having it be free to get on and use it and maybe always free. But then the developer showing you enough value in that app that you want to go deeper, and you decide you want to pay for it.
That’s a fundamental premise of this, and then there’s many forms of ways that you might choose to pay. A lot of our games are energy-gated. So we actually turned on energy-gating, and what we meant by that is limiting the time or clicks that you can play in a session.
We didn’t do that to drive revenues; we actually did that to drive retention. So this was an unintended consequence of that.
ADAM LASHINSKY: But you have to pay for juice, in other words?
MARK PINCUS: You have to pay for juice. But we found that if we lowered your average session time, you’re more likely to come back and play more, because people can binge on games and spend more time than they would like to. But we found that some people didn’t want to do that and they would spend to go past it.
What we’re really trying to do from a business model standpoint is deliver on — we feel like maybe a third or half the rooms, we have further to go with you, but 70 percent of Americans are playing games now. So we feel like where the last five years our mission was to try to convince everyone to play. We think people get it; it is a mainstream activity now.
ADAM LASHINSKY: When you say 70 percent, do you mean web-based social games, or do you mean all games?
MARK PINCUS: No. 70 percent of Americans are playing games of some form today.
ADAM LASHINSKY: Okay.
MARK PINCUS: We think there’s a big growth opportunity to get more people, to make more of those game experiences social. But beyond that, we want to deliver the next generation of deeper social, deeper content value, more engagement and broader categories of play.
ADAM LASHINSKY: So I want to get, you know, really quickly to what’s on the horizon for Zynga, because on the one hand, you have this business that’s worth today 3-1/2 billion dollars. You’re still growing really well, what 30 percent your annual revenue growth in your last quarter approximately?
MARK PINCUS: Can’t make public statements, but if that’s what.
ADAM LASHINSKY: I think that’s what I read, and yeah, 92 percent of your revenues are on Facebook, are on the web, and the market believes this is a problem. This is one of the reasons why your stock is below where it was when you went IPO. So talk about first of all, your opinion about being reliant on Facebook, and what the game plan is going forward.
MARK PINCUS: Sure. From the beginning, we’ve wanted to bring social gaming to all of you, similar to the beginning of TV. There might have been one network or one or two channels. But I think there was an inherent mass market opportunity to create compelling TV and get it in people’s living rooms.
We’ve gone anywhere that social gaming could exist. We’ve tried to plant the seeds. We were at one point twice the size of My Space that we were on Facebook. So we’ve gone anywhere that we thought that social gaming could grow.
Facebook has been, by far, the biggest accelerator of growth because we’re all on Facebook. So it was — for the last five years, has been the number one growth engine. Today, we’re seeing Smart Phones be a new booster rocket on social gaming, because if you think about what’s driven our market penetration, it’s making games more accessible, more free and more social.
ADAM LASHINSKY: More free.
MARK PINCUS: There is a concept of more free that I can talk about. But mobile is massively moving the dial on accessible. So we see a whole new growth opportunity for social gaming, you know, in your pockets.
ADAM LASHINSKY: Okay. So mobile means an app, a game as an app on Apple’s app store or on Google’s android market, I think it’s called, right? And you’ve been far and away the leader on Facebook. The (inaudible) essentially are a lot lower on mobile, and you have far more competition. Do you agree with both of those assertions?
MARK PINCUS: Yes. Mobile is much more fragmented. We believe that we’re the largest, not just social gaming network, but gaming network on mobile today, and I think our last reported number was something like 22 million daily active users on our mobile gaming network.
So we think that the same principles and we’re not just driving great gaming experiences; we’re driving a network effect that makes your experience on a Zynga game always much more social. So we think that there’s even more need for that experience on mobile.
I often feel like my iPhone or iPad is a lonely experience. When, if you think about what we’ve done, we’ve tried to put social gaming in places that you’re hanging out, and for the last five years, everyone was hanging out, first on My Space and then on Facebook, and I think now, and I can see a lot of you doing it now as I talk, were hanging out on our iPads and iPhones.
ADAM LASHINSKY: You’re talking about us on those devices?
MARK PINCUS: You’re tweeting every great sound bite. But so I think that when you’re hanging out, I think we’re kind of looking for a little bit of serendipity and a little bit of fun and play, and mainly I think we all want to be social.
ADAM LASHINSKY: Mark, put on your business hat and very quickly convince us of how you’re going to monetize mobile. You crushed monetization on Facebook, on the web, but you cited a statistic about the downloadedness of your apps on mobile. But you don’t have much revenue to show for it so far.
MARK PINCUS: Yeah. It’s definitely earlier stage in mobile becoming a significant market. But we’re encouraged because you’re all holding these Smart Phones in your hands. You’re all playing — half you are playing games today. We’ll get to the other half.
And we all now can do an app purchase. So the friction of it’s all there. All the components are there. In some of our deeper engagement games, what we call “invest and express games,” the games like Farmville and Cityville, on mobile they actually monetize at a higher dollars per daily user than they do on the web.
ADAM LASHINSKY: Why?
MARK PINCUS: I think there’s two main reasons. One is the demographic mix, that Smart Phones are more concentrated in North America and western Europe, and Facebook is more evenly dispersed, and secondly, I think that the friction around spending, not just the physical friction but the behavioral friction, is much, much lower on mobile.
So that’s encouraging. What we still need to do is create repeatable, scalable distribution for high engagement games on mobile. So we have some games that have very high daily active users, Words With Friends and Draw Something, but they don’t monetize at the rate of our higher engagement games, and then we have games that have high revs per DAU (ph) that don’t have the level of distribution.
So that’s, and we kind of are a — we are kind of a proxy for the whole developer ecosystem.
ADAM LASHINSKY: Perfect. So talk about what you’re trying to accomplish, both with Zynga.com and with Zynga Platform Partners.
MARK PINCUS: Yeah.
ADAM LASHINSKY: What is it and how far along are you, and how satisfied are you with your level of development there?
MARK PINCUS: So we announced earlier this year, what we’re trying to do, in a lot of ways similar to what Amazon did with both AWS and —
ADAM LASHINSKY: Amazon Web Services.
MARK PINCUS: With Amazon Web Services, where they provided this really magical service for start-ups. We built our, we scaled our traffic on AWS. Still many do today, and what they’ve done with their marketplace.
We see a similar opportunity in social gaming and gaming, to take — we’ve built, we believe, the industry’s leading infrastructure for hosting, not just hosting high availability, high band width, you know, interactive experiences games, but even more importantly, the levels of software services we built on top that, that give data and analytics, and really a dashboard that lets a game designer make their game social.
ADAM LASHINSKY: So have you lit that up?
MARK PINCUS: So we are this year making that infrastructure available to the whole industry, and we’re opening our network. So we’ve announced that we’re going to light up the Zynga With Friends network on the web and mobile, and let the rest of the game developers connect into that, so that we solve the problem of network effects and distribution mainly on mobile.
ADAM LASHINSKY: But it’s in toolkit stage at this point, is that right? Are people, they’re looking at the software, but they haven’t —
MARK PINCUS: We have some beta partners. We have some — we’re at the stage that we’ve taken all of our services to APIs. So inside our company, all of our studios operate like third parties. We’ve just turned on a handful of third party game developers, and by the end of the year, we want to make that open to anyone on a self-service basis.
ADAM LASHINSKY: Can you give an example or two of a game developer you’ve turned on already?
MARK PINCUS: Well, the game developers that we’ve turned on, we haven’t taken any of them up to scale yet.
ADAM LASHINSKY: I see.
MARK PINCUS: So I don’t have a scaled example.
ADAM LASHINSKY: And is it a fee metering revenue model like Amazon Web Services?
MARK PINCUS: We haven’t announced what all the particulars of the business relationships are, but we will.
ADAM LASHINSKY: Okay, and I don’t say this — I don’t mean for this to sound naïve, but you do intend to make money on that?
MARK PINCUS: Yeah.
ADAM LASHINSKY: Because conceivably you could do it as a way to bring more people into the network.
MARK PINCUS: Well both. I think that all large consumer applications today have these opportunities, to both API and open up your audience and your network the way that Facebook did, and if you’ve really invested in infrastructure, to make that available also.
I think we’re going to see tiered services, like what Amazon pioneered from many companies, where there will be a free API that is available self-service, and it helps a developer and it helps the network. It will be curated, promoted, applications and services. So I think you’ll see all of it.
ADAM LASHINSKY: So you referred to your studios a moment ago. So when you talk about studios, you refer to the organization that is responsible for a game or a franchise? You liken it to a movie studio, right?
To what extent are your studios developing games across these platforms that you’re discussing, mobile, Facebook, elsewhere?
MARK PINCUS: I’d say we’re going through a transition this year as a company. So prior to now, we had primarily mobile-focused studios. We had a few that crossed over and primarily web, and we are transitioning. Because we think mobile and multi-platform is so important, we are transitioning to a model where all studios will be taking their IP across all platforms.
ADAM LASHINSKY: Why can’t you just snap your fingers and do that?
MARK PINCUS: I am.
ADAM LASHINSKY: But you said you’re transitioning, and you’ll be doing it over the next year?
MARK PINCUS: Well I snapped, and then the transition happens.
ADAM LASHINSKY: The point is it takes time. They can’t start — a talented web design team can’t start doing the mobile app tomorrow?
MARK PINCUS: It does take time to do it right, and when you have franchises that have high consumer value and expectations like a Farmville, we’re not going to — we want, there’s an expectation of a level of quality when the consumer actually sees it in the market.
So we’d rather be a little late to market, but maintain the quality. So it’s not discordant.
ADAM LASHINSKY: So I’m not going to waste your —
MARK PINCUS: And I’d also say, without going in, some of you probably are very familiar that there’s a lot of technology issues that are making it hard and expensive for content creators to go multi-platform today, that the best iPhone experience is native, (inaudible) iPhone-developed.
And the best android is native, and you know, the best web apps are native web, whether it’s Flash or PHP, HTML-5. And so we’re as an industry in a state of transition as well, where we would like to write it once and distribute it everywhere. But you know, the technology isn’t there.
ADAM LASHINSKY: So this sort of in the weeds commentary really is a proxy for the discussion of how to broaden your revenue stream beyond Facebook, and the message is this is very much a priority and you’re not there yet. A fair statement?
MARK PINCUS: Broadening revenue streams are, we’ve turned on advertising, which allows us to make revenues across all of our user base, and that’s been growing quickly. Mobile has been growing, and we’ve previously said that we are actively exploring adjacent markets like real money gaming.
ADAM LASHINSKY: Real money gaming, otherwise known as legalizing gambling?
MARK PINCUS: Yes.
ADAM LASHINSKY: Not legal in the United States today; correct?
MARK PINCUS: No.
ADAM LASHINSKY: Do you think it will be?
MARK PINCUS: I think it has a good chance of being, but I am not a good predictor of politics.
ADAM LASHINSKY: All right, but there’s many markets where it is legal.
MARK PINCUS: Yeah.
ADAM LASHINSKY: You’re not currently doing that, are you?
MARK PINCUS: No, but it is — it’s a $15 billion industry in legal, regulated markets around the world like the UK and EU countries.
ADAM LASHINSKY: So you do have plans to introduce products around that?
MARK PINCUS: We’ve said that we’re actively exploring the opportunity. Given that our poker game is the largest poker game in the world; we probably have the largest bingo game now in the world. I think soon we’ll be the largest slots provider in the world for free gaming.
ADAM LASHINSKY: So when are you going to announce this product that you’re actively considering?
MARK PINCUS: I will tell you when we will announce it.
ADAM LASHINSKY: Okay. So Mark, given what’s happened with Zynga’s stock price, a couple of quick questions. One, do you regret going public when you did?
MARK PINCUS: We always knew that we were — we would eventually go public. In fact, Colleen spoke yesterday, and Colleen and I and the team have —
ADAM LASHINSKY: This is your head of HR?
MARK PINCUS: Our chief people officer.
ADAM LASHINSKY: Thank you.
MARK PINCUS: It’s one of my two or three bosses in the world, and we’ve tried to act like a public company, because we have so many employees and stakeholders, long before we actually went public. We’ve had quarterly meetings. We were on a quarterly cadence with objectives and key results.
So we started acting like we thought we would post, and I think to be — to be an important consumer franchise company today, I don’t know if there’s any examples of companies that have figured out how to do that without going public.
You just have too many stakeholders from your employees to your investors, to your consumers. So we always thought we’d go public. We didn’t spend a lot of time trying to figure out the timing. We just, it was more of just we’re going to go public. Let’s just figure out when we can kind of organically do that and fit it in with everything else that we’re doing, and we had a clock, because there’s SEC rules that have recently changed.
ADAM LASHINSKY: Right.
MARK PINCUS: So I don’t think about regret for things that were always on my path, and not something really in my control.
ADAM LASHINSKY: And so given that you have a lot of employees who are under water on their stock options I assume, and we know that in Silicon Valley, a lot of people, you know, are chasing money. They’re chasing stock gains. Does the stock being down so much hurt morale inside Zynga?
MARK PINCUS: Well first of all, for a lot of reasons we had to move to RSUs.
ADAM LASHINSKY: Okay, restricted stock units.
MARK PINCUS: Restricted stock units that other companies have gone to previously. So people aren’t under water from an option exercise standpoint.
ADAM LASHINSKY: They have RSUs that aren’t worth what they had hoped they would be worth.
MARK PINCUS: I think that the number — when you think about the number one drivers that keeps people at companies, and Colleen’s more of an expert than I am, but I really think it’s more about believing in the mission that the company’s on, and believing in the future direction.
I think that you’re a start-up. You’re building a new industry. It’s going to be more volatile. Everyone wishes it were more of a perfect smooth line, and you really try to attract entrepreneurial people. I think people who are in it for the short term gains, you kind of hope that they find another opportunity.
I don’t think — we’re not spending our time trying to keep short-term focused people happy.
ADAM LASHINSKY: So if there are people whose morale is hurt, you’d rather they look for some place else to work?
MARK PINCUS: No. A big part of my job is selling the mission and the vision, and I am responsible for the morale and excitement level that people have. But what I’m saying is that the way that we go about moving morale is much more — what people want us to engage on is how we’re turning the mission into what you’re doing next week, and how what you’re doing next week is taking us to this better place next year.
ADAM LASHINSKY: Questions, please. All the way in the back. You have to wait for the microphone, Dan. You can reach out and speed the process up. There you go.
QUESTION: A quick question for you, Mark. You mentioned the potential move to real money gaming or as Adam said, legalized gambling. I’m curious. So far, there’s been a lot of talk about legislation about that over the years, and the big gaming companies in Vegas have spent a lot of money lobbying for it.
I’m curious. When you do get to the point where you have something to roll out or possibly earlier, is Zynga going to spend money lobbying for changes to U.S. legislation?
MARK PINCUS: I can’t say that we have plans on that, but I think — I think that we would like to participate in the conversation, because we have a different point of view. We come at real money gaming from an entertainment standpoint.
It’s an interesting business, but the first reason we want to explore it and possibly go there is because so many of our players really like gambling mechanics, and find it really entertaining. When you think about what makes virtual goods, virtual reality so exciting, it’s the feeling that the decisions I’m making in this game are impacting my life in some way.
That’s fun for all of us. My nephews told me that if they could grind all week in one of our games, and generate stuff that they could sell for $3, they would be over the moon. So the idea that they can do something in a game they love, and get $3 and have that impact their real world —
ADAM LASHINSKY: It sounds to me like you’re not opposed to participating in an industry effort to support lobbying.
MARK PINCUS: Well, my point is it can take a lot of forms, and I hope that it takes a form that is more mass market and consumer-oriented, and less — and not just focused around things that are more towards hard core style gambling.
ADAM LASHINSKY: Actually, I think he already has begun lobbying. Up there, please.
QUESTION: Ben Bayer with Assina Money. Mark, with your acquisition of OMGPOP, the makers of Draw Something, there’s been a significant decline in users from its peak. Did you overestimate the appeal of that franchise, you know, as a lasting franchise, and at an estimated 200 million acquisition, did you overpay for it?
MARK PINCUS: It’s the second product line that we’ve ever acquired, so every other acquisition that we’ve ever made has been strictly for primarily teams, and sometimes technology.
When we green light a franchise, when we decide that we’re going to go all-in on a new IP category game, we hope that it’s something that we can invest in for the next five plus years, as we have with Farmville and Poker and that’s what we’ve really built our business on.
So when we acquired Words With Friends, the new toy, and that was a small fledgling game at the time, and similarly when we acquired OMGPOP and Draw Something, we thought that these could be mass consumer brands and core experiences that we could build off of for the next decade.
So I would say it’s very early. We didn’t, in either case, buy them for what we thought they’d do in the next two quarters afterwards. So I think that Draw Something has become, in the consumer conscious, and I think it’s up to us to extend that brand the way we have, we really have with Words With Friends.
We have Hang With Friends and Scramble With Friends and now Matching With Friends, and now Zynga With Friends. We hope to extend draw something in the same way.
ADAM LASHINSKY: So it the answer, no, you didn’t overpay?
MARK PINCUS: I’d say it’s too early to call it after one quarter.
ADAM LASHINSKY: Two more questions, here and here. Go ahead.
QUESTION: Miguel with Fortune. Hey Mark. So you’ve described Zynga often as a mission-driven company, and you’re generally known as a thoughtful guy who wants to do good in the world. There’s a lot of detractors to not only Zynga but the whole sort of mobile gaming, social gaming environment.
There was a cover story in the New York Times Magazine saying we’re all addicted to stupid games. It contributes to, you know, ADD, less connection among people. I suspect you don’t agree with that, but do you care about this? Is it all hand-wringing by a bunch of Luddites, or is there something real to that criticism, and how do you feel about it?
ADAM LASHINSKY: And I need to ask you to make your answer shorter than Miguel’s question.
MARK PINCUS: Okay, I’ll try.
MARK PINCUS: You want 140 characters.
ADAM LASHINSKY: A little more than that.
MARK PINCUS: I would say that that really gets to the fundamental mission that we’re on, is we want to make play more than single player gaming. I think that if we as an industry just deliver single player gaming, and ask a lot of your time and don’t give much back, that article will be right.
If we deliver on the promise of social gaming, and you find that you are sustaining real connections with people, and you’re doing it in a small amount of time, then I think we will have delivered something of real value.
ADAM LASHINSKY: Last question, please.
QUESTION: I’m Josh Stevens, CEO of (company name). I wanted to get your insight on engagement. One of the things that’s really amazing about your company is I believe you’ve widened the addressability of games from people in the population.
But at some point, there’s a number of levels that people reach. There’s fatigue in a given title, and just looking at people I know play it, you can get through everything, and then what do you do next?
What’s the way you keep people engaged? Is it more titles, or is it something else?
MARK PINCUS: Quick answer? There’s really — there’s three ways you keep your audience engaged. Number one is evergreen titles. Poker, our first game, is one of our biggest games today. We see a game like Words With Friends. There’s games that I think we will all come back to for the rest of our lives, and we hope to give you the network around those games.
Two, we do need to continue to deliver the next hits, but as opposed to the way the rest of the world sees it, to us, it’s about innovating on the mechanics. It’s the parts that make up the experience that we need to keep making more cool and exciting and social, and we do that.
That’s why we continue developing our games of service. Farmville today looks nothing like Farmville when we launched it. So we can extend the lives that way. But at a certain point, you need to come out with whole new games to refresh your mechanics. So we do both, and it’s my job.
ADAM LASHINSKY: Mark, please keep coming back to Brainstorm every year. Thank you very much.
MARK PINCUS: You’re welcome. Thanks Adam.