Are Zynga Layoffs The Start Of Dot-com Crash 2.0?

on October 24 2012 8:17 AM

With an imminent expected weak third-quarter earnings report, former online games poster boy Zynga (Nasdaq: ZNGA) laid off more than 100 employees on Tuesday morning.

The layoffs, which came during Apple’s (Nasdaq: AAPL) high-profile iPad Mini announcement, were swift.

Employees were given “under two hours to pack up and vacate the offices,” according to one person who spoke anonymously to Forbes from Zynga’s Austin offices.

The news comes after the struggling San Francisco-based social game developer released a gloomy preliminary quarterly earnings report, in which it cut its outlook for the third quarter and beyond.

Citing “reduced expectations for certain Web games, including 'The Ville' and delays in launching several new games,” the company said that it now expects full-year bookings to be between $1.085 billion to $1.100 billion, down from the previously projected $1.150 billion to $1.225 billion.

Its business model, which is centered on producing basic, highly addictive games for social networks such as Facebook and selling ad space and virtual goods for real world money, began to fail in the past year.

But while trouble at Zynga has been brewing since at least the second quarter, analysts are wondering if its current woes herald a second dot-com bust.

“In a lawsuit filed in August, investors sued Zynga for failing ‘to fully disclose the true extent to which it had been experiencing a sharp drop-off in users of its most profitable Web games and delays in developing new games to launch on social media platforms," Telegraph journalist Willard Foxton said.

“It's all very reminiscent of the kind of lawsuits that flew at Pets.com and Boo.com in 2000, at the time of the last dot-com crash,” he added.

“Wall Street has fallen out of love with these Internet stocks and badly," Stephen Foley, in the Independent, said. "They have poisoned the prospects for others, like Twitter or Foursquare. ... If excitement over the arrival of these social media companies last year threatened to bring on a new dot-com bubble, it shows serious signs of popping.”

“Zynga’s seeming decline marks the end of the bubble," Farhad Manjoo, in Slate, agreed. "It suggests that investors and customers can’t be hoodwinked for long.”

Following on the coattails of Facebook’s disastrous IPO and continued trouble at Groupon, could this be the end of the second wave of overhyped and overvalued Internet start-ups that seem to hoodwink Wall Street once every decade or so?

Foxton concluded that unless the beleaguered Zynga gets another hit product soon, it’s “finished.”

“And when one big dot-com goes over, others will inevitably follow, as investors rush for the exits," Foxton said. "We've all known the second dot-com burst is coming. Could this be it?”

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