Even as virtual farms lose their luster, Zynga is looking to rebound in greener pastures - ones lined with real cash.

Even as it suffers a spate of bad news related to its traditional social-gaming businesses, the company is now working on ways to throw its weight behind real-money gaming in the U.S. - in the hope of very real new revenue streams. 

Zynga's Silver Lining Playbook

On Monday, Zynga announced plans to close offices in New York, Texas and Baltimore. The Baltimore office will suffer about 30 layoffs, with the rest of the staff being farmed out to other Zynga HQs. The team in Baltimore was focused CityVille 2, a social game that the company axed earlier this month just five months after its launch.

That's a big come-down over the past year. In March 2012, Zynga shares were trading at a 52-week high of $15.91. They opened at $3.41 on Tuesday. Something has to change. The company may be synonymous with the advent of social gaming on Facebook - FarmVille, Mafia Wars, etc. - but its best hope now seems to shifting gears toward more lucrative real money games - assuming it can get legislators to go along.

In a way, getting its hands dirty in gambling is a return to its roots. Zynga's first game, Texas Hold'Em Poker (now known as Zynga Poker) launched way back in July 2007 - two full years before FarmVille started polluting our Facebook feeds. Now, Zynga hopes to benefit from the rivalry between revenue-starved states eager to legalize - and tax - online gambling.

Online Gambling Legislation Fast-Tracked

After signing a fast-tracked bill into law last week, Nevada is the first state in the nation to allow virtual gambling. New Jersey is right on Nevada's heels, and Governor Chris Christie could sign a similar bill as soon as this week. The legality of online gambling in the U.S. has a confusing history - one typical of U.S. law trying to grapple with emerging online phenomena.

The Unlawful Internet Gambling Enforcement Act, which "prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet," solidified online wagering's illicit status back in 2006. So states like Nevada and New Jersey will still have to reconcile their state laws with federal regulatory agencies - a process that could delay big profits for Zynga and other companies hoping to get into online gambling. 

Is Zynga playing dead? An Uphill Battle Remains

According to The Wall Street Journal, Zynga may have to play the waiting game for another 18 months - and even then there's no guarantee of a big pay-out: 

"The opportunities within Nevada are somewhat limited since its population is small, but bigger opportunities might emerge. State officials have discussed the possibility of forming compacts with other states considering legalizing poker to merge markets and create bigger groups of players, much as lotteries have done with large lottery draws such as Powerball. California is among the other states that have considered bills in their legislatures to legalize online poker." 

Zynga Poker allows anyone over the age of 13 to play, but the company hasn't released hard numbers on who exactly plays the game. With age and location narrowing the pool, there are some big questions about how many of Zynga's existing players are ready to convert to real cash gamers.

A Sea Of Mishaps

In the meantime, Zynga has been hemorrhaging talent. Chief Game Designer Brian Reynolds, who worked at the Baltimore office, jumped ship last month.  Last October, Paul and David Bettner, co-founders of Words With Friends, left the company's Austin studio. That's a big deal because while the company has been quick to axe underperforming products, ad-ridden Scrabble-clone Words With Friends remains one of Zynga's top properties. The company reported that in December 2012 alone, players spent 7.5 billion minutes shuffling around virtual tiles in the game, which launched four years ago. 

(See also ReadWrite DeathWatch: Zynga.)

Still, the failure of games like CityVille 2 point to a flaw in Zynga's casual-gaming formula. Zynga CEO Mark Pincus has admitted that the company's sluggishness and lack of innovation has failed to keep users engaged with its cadre of social games. But rather than improve its recipe to make better games - or better clones of other, better games - Zynga seems to have its sights on the real deal. The company did not immediately respond to a request for comment. 

Zynga Is Ready To Gamble

Open any free Zynga game in the App Store and you'll be assaulted with a shamelessly busy user interface. There are so many pop-over and click-through ads that getting rid of them is basically a hyperactive mini-game all its own. Zynga's mobile and social games won't win any design or innovation awards - rather, they have addiction woven into their fabric. Incessant notifications draw users back, pop-up prompts prod players to invite their entire social circles. Those techniques should translate well to actual gambling.

So in spite of all the bad news and likely delays in legalized online gambling, Zynga's shares have perked up lately. With 38 million players, Zynga already has the world's largest free-to-play online poker site - it only needs legislators to open the gates and let the cash start pouring in. 

Images courtesy of Shutterstock and Zynga.

If this were a certain social network, Zynga and Facebook could probably agree that their relationship status is: It's complicated. Two new SEC filings on Thursday revealed that the social game-maker and the social network are putting a little distance between themselves, amending some rules of their multi-year agreement to give both companies a bit more autonomy.

What’s Changing In The SEC Amendments?

According to the filings, Zynga’s exclusive relationship with Facebook is dissolving. Loosening Zynga’s collar means that the social gaming company can ramp up efforts on Zynga.com, and redouble its push into mobile, as CEO Mark Pincus suggested in a gloomy earnings call earlier this month. The company’s own browser-based gaming HQ, code-named Project Z, launched this March. Project Z lays the groundwork for a more independent Zynga that could expand beyond the confines of Facebook’s walled garden, and maybe even stop its slide. Zynga will also look to invigorate its flagging performance by trying its hand at real-money gambling titles.

Zynga games will continue to clog facebook News Feeds of course (isn't it time you fed those pigs?), but the game-maker will no longer be required to employ Facebook credits for micro-transactions or display Facebook ads on its games. These amendments also open the door for Facebook to nurture other gaming partnerships, or even develop its own games, though the company claims to have no immediate intentions to do so.

Zynga's Stock Takes A Hit... Again

Zynga’s symbiotic relationship with Facebook is a troubled one. Now that the honeymoon is over, the social media giant seems happy to throw Zynga to the wolves. In its third quarter earnings call, Facebook noted that casual gaming was booming, but drew a distinction between the underperforming Zyngaverse, with its revenue down 20% in the third quarter of 2012, and the rest of Facebook’s gaming ecosystem, which is seeing healthy growth. On the heels of Thursday's SEC filings, Zynga's stock took a roughly 5% dip down to $2.50 a share. The latest fall is just a drop in the bucket compared to Zynga's ongoing woes - the company has lost more 70% of its value over the course of 2012. 

Breathing Room - And Room To Innovate?

Facebook might be the big dog here, but Zynga is still the biggest social game maker around. As we learned with Facebook’s IPO, Zynga accounted for a whopping 12% of the social network’s revenue in 2011. But if casual gaming rose sharply between 2010 and 2011, its fate is looking a little less certain at the end of 2012. Social gamers, many new to gaming, appear to be burning out on Zynga’s cadre of candy-colored, cookie-cutter titles - which even Zynga itself admits don’t innovate enough to keep gamers engaged.

But as social gaming slows, arguably into maturity, mobile gaming continues to explode. Projections from eMarketer estimate that mobile gaming will boom 19% in 2013, while social gaming will level off with around 6% growth in the coming two years. With a little more slack on its leash, Zynga needs to think fast - and think different - to break out of its social gaming rut.

But is mobile the answer? There's certainly growth there, but revenues are less certain.

Want to dig into the SEC filing yourself? Read the full text of the respective filings from Zynga and Facebook.

Lead image from Zynga.

Zynga's logo walked into the boardroom with its tail between its legs today as the company presented its third quarter earnings. On the call, CEO Mark Pincus announced the company's plan to wrap a tight tourniquet around its ongoing losses.

How to turn things around? Pincus said development teams would cut costs even further, ramp up mobile app development, and pursue gaming models with higher engagement and monetization opportunities, namely by expanding into virtual casino games that pit players against eachother with real cash at stake.

In the third quarter, the company surpassed its own standards -- but that isn't saying a lot. Zynga reported $316 million in revenue, and lost $52.7 million, or 7 cents a share, beating out its own intentionally rock-bottom forecast of losing 12 to 14 cents per share on an estimated $305 million. In the same period last year, Zynga raked in $12.5 million in profits on $306 million in revenue.

What's more addictive than virtual farming? Gambling.

Beyond emphasizing mobile app launches, the company will get its hands dirty with "real money gaming." Through its partnership with online gambling company Bwin.Party, Zynga will launch U.K.- exclusive real money gambling games.

Real money gaming is a departure from the company's existing model, but not that much of one, all things considered. The kind of micro-transactions -- think buying virtual garden gnomes to decorate your digital farm with real cash -- that power Zynga's arsenal of casual games are already capitalizing on psychologically addictive models to have users turning their wallets inside out.

Moving into straight-up virtual gambling just subtracts the layer of artifice populated by digital denizens tilling the virtual fields. 

Out With The Old, In With The Profits

On the heels of yesterday's 5% workforce reduction, Zynga also announced that in order to remain afloat it would be "sunsetting 13 underperforming older games" and slowing development of The Ville, Zynga's copycat of publisher EA's endlessly remixed franchise The Sims. Pincus also noted that Zynga's Boston homebase would be shuttered, with tentative plans to follow suit with Zynga's Japan and UK studios.

According to an internal letter sent to the Zynga team yesterday by CEO Mark Pincus, "These reductions, along with our ongoing efforts to implement more stringent budget and resource allocation around new games and partner projects, will improve our profitability and allow us to reinvest in great games and our Zynga network on web and mobile."

Risky Reliance On Facebook

Unsurprisingly, Zynga's symbiotic relationship with Facebook is a noted earnings liability. The company noted its "relationship with Facebook" and potential unforseen "changes in the Facebook platform" as major risk revenue factors. Facebook-related earnings represent a whopping 80% of the company's total bookings, with mobile filling out the remaining 20%, so it's no surprise that Zynga is looking to tip the scales toward the latter. 

It probably doesn't help that Facebook made a distinction between the troubled Zyngaverse and the rest of its online gaming ecosystem in its own earnings call yesterday. As Zuckerberg snarked, "Overall, gaming on Facebook isn't doing as well as I'd like, but the reality is that there are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing."

Ouch.

But Zynga doesn't only have Facebook to blame. Pincus admitted to lapses in game execution, mostly failing to innovate to keep players interested in major titles like CityVille and then being too slow to the market with new games to offset those drooping numbers. 

Oddly enough, Zynga's stock popped up a tiny bit after the earnings announcement. Then again, Wall Street now values the company at only $1.6 billion, which is about what it has in cash. Not exactly a vote of confidence.

Update: Zynga just provided us with a copy of an internal letter sent out today by Zynga CEO and co-founder Marc Pincus. It appears reprinted in full below.

Anyone who knows the tech industry will tell you: the best time to announce bad news is smack dab in the middle of an Apple announcement. Actually, ask Zynga, the ailing maker of Facebook games, which today snuck out some very bad news indeed -- that CEO Mark Pincus (above) had sprung a surprise layoff on his game developers, laying off 5% of the company's total workforce.

As the collective tech blogosphere had its blinders on during today's iPad mini announcement in San Jose, reports bubbled up on Twitter that Zynga had quietly let go more than 100 employees in its Austin office. This afternoon, Zynga confirmed with us that it had not only culled its Austin team, but just announced the closure of its Boston office. Zynga intends to also close its bases in Japan and the UK.

Zynga just laid off 100+ employees (incl. my friends) in its Austin office during the Apple Event. Gave them 2 hours to vacate. RT please.

— Justin Maxwell (@303) October 23, 2012

One (now former) Austin Zynga employee confirmed with us that the company had just announced a round of layoffs in Austin, and that TheVille along with another new IP "are both done." According to the source, who requested not to be identified, employees who got the axe were given "less than two hours to vacate the premises, turn in [their] computers, phones and badges."

Many of the people let go in Austin had been with Zynga for more than two years. Naturally it sounds like once they collect the physical remnants of their time at Zynga, they'll be headed to the bar.

Why didn't anyone see this coming? Oh wait, we did

Here at ReadWrite, we're not wholly surprised by the end, though the means were certainly conspicuous, both given the timing of the Apple event and the extreme short notice that our source reports. As our own Richard MacManus wrote back in June, Zynga's fortunes are dangerously bound up in Facebook these days:

"Social gaming company Zynga had an outstanding 2011, leading to a well-hyped IPO in December. But Zynga's biggest risk was always an over-reliance on Facebook, with most of its revenue and users coming from the social network. It's now six months after Zynga's IPO and its stock price has halved, currently sitting at under $5. That's because many of its high profile gaming products are tanking.

"At the time of its IPO in mid-December, Zynga had the top five games on Facebook by daily active users. But, according to app tracking website AppData, three of those five apps have declined dramatically in Daily Active Users (DAI) since then."

We're a long way from November 2010, when John Doerr of Kleiner Perkins called Zynga was one of the best investments his company had ever made. In February of 2011 Kleiner Perkins and others invested $490 million in Zynga at a valuation approaching $10 billion. Today the comapny is worth $1.7 billion. Zynga stock has plunged 85% from its peak last summer, now trading at $2.21 per share.

INTERNAL NOTE FROM ZYNGA CEO AND FOUNDER, MARK PINCUS

Team,
Earlier today we initiated a number of changes to streamline our operations, focus our resources on our most strategic opportunities, and invest in our future. We waited to share this news with all of you until we had first spoken with the groups impacted. As part of these changes, we’ve had to make some tough decisions around products, teams and people. I want to fill you in on what's happened and address any concerns you may have.

Here are the most important details. We are sunsetting 13 older games and we’re also significantly reducing our investment in The Ville. We are closing the Zynga Boston studio and proposing closures of the Zynga Japan and UK studios. Additionally, we are reducing staffing levels in our Austin studio. All of these represent terrific entrepreneurial teams, which make this decision so difficult.

In addition to these studios, we are also making a small number of partner team reductions. In all, we will unfortunately be parting ways with approximately 5% of our full time workforce. We don’t take these decisions lightly as we recognize the impact to our colleagues and friends who have been on this journey with us. We appreciate their amazing contributions and will miss them.

This is the most painful part of an overall cost reduction plan that also includes significant cuts in spending on data hosting, advertising and outside services, primarily contractors. These reductions, along with our ongoing efforts to implement more stringent budget and resource allocation around new games and partner projects, will improve our profitability and allow us to reinvest in great games and our Zynga network on web and mobile. 

Zynga made social gaming and play a worldwide phenomenon, and we remain the industry leader. Our success has come from our dedication to a simple and powerful proposition – that play is not just something people do to pass time, it’s a core need for every person and culture.

We will all be discussing these difficult changes more with our teams and as a company. Tomorrow, Dave and I will be hosting a post-earnings webcast (details to follow) and next week we will be discussing our broader vision and strategy during our quarterly all-hands meeting. I’m confident this puts us on the right path to deliver on the promise of social gaming and make Zynga into an internet treasure.

If you have any immediate questions, I hope you will talk directly with your manager, Colleen, or me. I look forward to talking with you tomorrow.

Mark