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TheStreet Open House

Zynga CEO Needs to Whack Headcount

It would, of course, be tremendously hard going to a friend whom you respect and telling him that it's time to step aside. Then, you have to go through the process of finding the right replacement and convincing the founder to really recruit the guy in. And, after doing all that, you've got to ensure that your founder friend doesn't fall into the easy trap of starting to micromanage or undercut the guy.

We're still only a quarter in to Don's tenure. So, it's way too early to declare things a success. But the early signs are good. The real test will come if Don's initial games aren't successful, adding to the stress on everyone at the company.

If that happens, will Pincus still give Don free rein, or will he jump in and start to create the problems Horowitz discussed in his piece? We will have to see. But, for now, Pincus is doing a great job letting Don analyze the situation and take initial steps to correct it.

Now here's the bad news, particularly for short-term investors.

The existing slate of games for Zynga that Don inherited don't seem to be that good. The company launched Castleville on mobile a few weeks ago, hoping it would be a hit and help to launch other "ville" games on mobile. It hasn't been a hit, so it can't refer a lot of new traffic to future releases.

It appears that the existing games don't give Mattrick much to work with.

So, if you're hoping Don can magically create some new Candy Crush-type game himself to drop in the laps of Zynga customers, the other piece of bad news is that we likely won't see the "Don" games -- built from start to release -- until next summer.

And, once they're out there, there's no guarantee they'll be hits.

However, a longer-term oriented investor like me doesn't mind holding this stock and waiting around. I'm betting that Mattrick will deliver better quality games that will help grow daily active users. In the meantime, I'm comfortable with the cash hoard and real estate assets the company has to backstop my investment.

On any popular game news, this stock will move quickly to the upside. We just don't know when exactly that will be.

So what can the more short-term Zynga investor hang his or her hat on? I think it's headcount reductions. Big ones.

I expect they're coming soon.

Don's had a quarter now to size things up. He's got 2,300 people. King, with its Candy Crush game and impending IPO, is seeking a $5 billion valuation. It has only 600 people.

So I think we'll hear about a big staff reduction at Zynga -- maybe before the next earnings call in two weeks. Such an announcement should support the stock.

At the time of publication, Jackson held shares of ZNGA.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at Dr.eric.jackson@me.com.

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