Let the video game wars begin

Zynga founder Mark Pincus is stepping aside as CEO and bringing in Don Mattrick, head of the Xbox division at Microsoft. Interestingly, the two will have a both directly report to the board of directors since Pincus will stay as chairman and chief product officer, according to the Wall Street Journal.

Here is some of the context behind the move from the WSJ story:

The unusual arrangement underscores how difficult it has been for Mr. Pincus to revive his company, which went public in December 2011 amid lofty expectations for businesses built on social networks, but has been caught flat-footed by the rapid adoption of mobile devices and the exodus of high-profile employees. Zynga’s shares have dropped about 70% since its IPO.

Mr. Mattrick’s departure comes at a crucial juncture for Microsoft’s videogame business. The Xbox One, Microsoft’s first refreshed videogame machine in eight years, is set to launch in coming months. The company didn’t immediately name a replacement for Mr. Mattrick.

Zynga, best known for its “Farmville” and “Words With Friends” games, reported in April that sales fell 18% in the first quarter. The company soon began restructuring, announcing last month plans to lay off 18% of its workforce, noting that its scale was now hindering its ability to turn around its business.

It isn’t clear how Mr. Mattrick, 49, who will also join the board, and Mr. Pincus, 47, will steer the company together through the new executive committee, or how they will hash out disagreements, since Mr. Pincus won’t directly report to Mr. Mattrick. Mr. Pincus still maintains a strong grip on the company he founded as chairman, and also through his ownership of 61% of the company’s voting rights.

The New York Times story points out the Pincus joins a growing list of start-up founders who turn to more established outsiders to help move their businesses to the next level:

In hiring Mr. Mattrick, Zynga is following a familiar rite of passage at young technology companies, which often look to seasoned managers to aid their transition from start-ups run by creative, headstrong founders into bigger enterprises. Google, for instance, brought in Eric Schmidt as chief executive to help manage the company with its co-founders Larry Page and Sergey Brin.

Some founders of troubled Internet companies have not been able to hang on, including Andrew Mason, the former chief executive of Groupon, who was fired from the coupon service in February after his missteps put him on the wrong side of its board of directors.

Mr. Pincus, who will remain at Zynga as chairman and chief product officer, worked hard on Monday to portray himself as a strong supporter of hiring Mr. Mattrick. In a message to Zynga employees, Mr. Pincus said he had long told Zynga’s board, including Bing Gordon, a stalwart of the games business and friend of Mr. Mattrick’s, that “if I could find someone who could do a better job as our C.E.O. I’d do all I could to recruit and bring that person in.”

The Financial Times story details how Pincus will still retain a large amount of control over the company even after stepping aside:

Mr Pincus’s leadership of Zynga has proved controversial since the company’s fortunes turned down a year ago. He has gained a reputation for harsh treatment of employees whom he thinks are underperforming and has attracted criticism for stripping some executives of equity awards previously promised by the company.

His management style came under scrutiny after early hits like Farmville lost momentum and follow-on games failed to build a solid following. Mr Pincus has also struggled to prove that Zynga can thrive beyond the shadow of Facebook, as he has tried to build an online platform which would reduce the company’s dependence on the social network.

Zynga recently cut Mr Pincus’s salary to $1 for 2013 and said he would not receive a bonus or any awards of extra equity. However, he has faced far bigger financial loss from the collapse in the company’s shares. Zynga’s IPO at close to the peak of its fortunes in late 2012 turned him into a paper billionaire, valuing his stake at $1.4bn by early last year. His shares are currently worth under $300m.

Mr Pincus has held the voting power to determine his own fate at the company he founded. Despite holding only 12 per cent of Zynga’s shares, he controls 61 per cent of the votes through a special class of voting stock, leaving him with full personal control of its boardroom.

Zynga’s unusual equity structure will leave Mr Pincus with the final say over Mr Mattrick’s plans to turn the company round.

According to USA Today, many analysts are speculating on how the two will work together:

Zynga’s interest in Mattrick stretches back nine months, but only got serious in the spring when he and Pincus started working out parameters over an executive partnership, according to two sources with knowledge of the discussions.

That partnership hinges on Mattrick running day-to-day operations while Pincus focuses on product development, which he has done at Zynga for years.

The sources, who asked not to be identified, said Mattrick was the only person Zynga considered as CEO. Mattrick has been a hot CEO candidate for the past year and linked to several jobs, including his former employer, Electronic Arts.

How the strong-willed Pincus and Mattrick divide duties is also the subject of conjecture among analysts.

“What’s (Mattrick’s) assurance that Pincus won’t be meddling?” Wedbush Securities analyst Michael Pachter says, ticking off a number of Zynga execs who recently left, including the former chief financial officer and chief operating officer.

As more and more of our economic value and growth comes from Internet companies, how these firms move from newly public to more mature corporations will be a driver of wealth. With many founders and early executives being pushed aside for those with more traditional corporate experience, the transitions for these firms is sure to be rocky.

Zynga is just another example of a technology firm struggling to move past its initial good idea into a more sustainable business model. For the sake of investors in many sectors, let’s hope it figures out the formula for making it work going forward.

As for the media coverage, they did a good job of analyzing the issues and laying out the various political aspects to the story. Fights for the top job are generally juicy stories, but this one with Pincus’ ability to retain control of the firm makes for an even more interesting read.