Another reason for investors to run from the game industry's most desperate company.

The truth about Zynga (NASDAQ: ZNGA) has been known for quite some time. But over the past few months, it has become painfully clear that the overhyped social gaming entity was destined to die.

This week Benzinga learned of another reason why Zynga is in trouble: the company currently loses $150 on every new paying customer.

“That's our math; that's not what the company says,” Arvind Bhatia, an interactive entertainment analyst with Sterne Agee, told Benzinga this week. “They've given us the sales in marketing dollars for the first nine months – $120 million. Almost all of that is for acquiring customers. We also know that they had 3.4 million unique payers in the September quarter, which is up from 3 million at the end of December 2010. In other words, they added 400,000 additional payers and they spent $120 million to acquire them.”

That's the math, Bhatia said – $120 million divided by 400,000 new paying customers, which equals $300 per person.

“Now, what does that mean?” Bhatia continued. “Is it high? Is it low? It's high to begin with, but we know that generally they say that a person is staying with Zynga for about 12 to 15 months. We know that, on average, these people are spending about $150 or so. Our concern is [whether or not it's worth] spending $300 to get these customers when people are spending $150. That math won't work for very long.”

The Not-So-Pretty Picture

I asked Bhatia if he believed that Zynga's troubles were a sign of things to come for the social gaming industry.

“I think it's telling us [about] a slowdown in social gaming in general,” Bhatia replied. “I don't think it's just Zynga. But Zynga clearly has tried many games, and they're finding that the interest level isn't necessarily going up. We've seen many games launch and then fade within a few weeks.”

Historically, Bhatia said that Zynga's games used to thrive for several months before peaking. “FarmVille peaked after eight or nine months,” he said. “CityVille peaked after three months and then stayed at high levels for a long time.”

The same cannot be said for Mafia Wars, Pioneer Trail, or Adventure World.

“Those [games] are peaking within a couple of weeks and then coming down very rapidly,” Bhatia explained. “They have to replace what is inevitably slower growth from the existing titles with newer titles, and clearly the newer titles aren't as strong.

“Not immediately, but down the road this is going to catch up with them – whether it takes three quarter or four quarters is hard to say. But our projection for the next 12 to 15 months is that growth is slowing significantly. That's with us giving them a lot of credit for the possibility that they will add more payers and that [each payer] will pay more.”

Ultimately, Bhatia said that Zynga needs “stronger growth than what I think they're headed for.”

“When Facebook was in rapid growth mode, millions and millions of new people were trying these Zynga games just by default, and now it's getting harder,” Bhatia explained. “They talk about mobile, but I don't know [how much] mobile growth [can be monetized], and what kind of revenue they're getting.”

Bhatia said that his suspicion is that mobile revenue is not very large (yet).

“I think on Facebook we've seen other companies' games come under pressure,” he said. “Part of it might be Zynga, given that they're the leader. Part of it might be a slowdown overall in social games. Part of it might just be Facebook itself. Facebook's growth rate would have slowed down given the law of large numbers.”

Originality or Lack Thereof?

It's no secret that Zynga's games are all very similar. The company has been rehashing the same design concepts since the day it started. That, obviously, could be one of the social entity's biggest problems.

“When we say that traffic hasn't gone up despite new introductions, that's telling us that maybe people are moving from one game to another, but you're not really getting a lot of incremental people trying them,” Bhatia explained. “The really hardcore are, perhaps, finding themselves trying FarmVille, Castle World and CityVille. The newer audiences are trying and finding that this is all the same and leaving.

“Again, the fact that there is such a small base of people who actually pay says that your risk is tremendous. This is spread out over 20 million people. You could say, ‘Oh yeah, 5% could get bored.' Although, you only have 2% of your people paying, and God forbid if those guys get bored.”

New Talent

Last year, a handful of prominent developers and execs left their respective companies to come to Zynga. One of them was Mark Turmell, the creator of NFL Blitz and NBA Jam. Turmell left Electronic Arts (NASDAQ: EA) – the company that now owns the rights to Turmell's leading games – to become the senior creative director at Zynga.

Why did he make the move? And why did Zynga want him to come aboard?

“Honestly I think it's to be determined,” said Bhatia. “I don't think it'd be fair to comment without knowing what these guys are working on. I want to give them the benefit of the doubt. But I think ultimately the proof is gonna be in the pudding. We're looking at the games that are coming out right now. Maybe the pipeline gets better. We are monitoring Hidden Chronicles to see what that does. We'll keep monitoring.”

Rolling the Dice

With regard to Zynga's stock, Bhatia said that he thinks it went up recently “because of the speculation on online gambling.”

“There's an opportunity there,” he said. “But as we said in our note this [week], we think that's a long shot. Zynga has gamers, not gamblers. That's a different list. People are kind of confusing and saying, ‘Oh, it's the same people.' No, it's not. These [Zynga players] are people who just want to play for 15 minutes; they don't want to spend $100 playing poker.

“My point is, Zynga doesn't necessarily have an inherent advantage in online gaming versus the established players. So to me that was just noise, and I think when people look at the fundamentals, they will realize that online gambling may or may not be legalized. If it is legalized, the opportunity may or may not materialize. It's down the road. Near-term, traffic is slower. That matters more.”

Zynga's 15 Minutes of Fame

Despite the less-than-stellar outlook for Zynga, Bhatia believes that there is a market for what the company offers.

“I think there is a place for that 15-minute play,” he said. “I think it's getting harder and harder. Some people will pay. There are whales. We all know there are people who will spend $50,000 on stuff like this. Same thing with casinos. But I do not think that's going to be common. I think companies are going to have to give more and more stuff away for free, not the other way around.”

And it's not just social games that are suffering. Other PC games are also taking a hit.

“We're even seeing games like World of Warcraft [incur] subscriber losses after seven years,” said Bhatia. “They've had to give levels for free. After a while I think it becomes tougher, so Zynga will have to find their next FarmVille. That's the bottom line. Until they can find that, if it's all incremental stuff that people are not really crazy about, it's gonna be tough to put up the kinds of growth numbers that the stock's multiple is implying. I think that's going to be tough to do.”

UPDATE 1-23-12: Following a retort by NaturalMotion CEO Torsten Reil, Bhatia explained why Zynga is ultimately in the toilet. Full story: Zynga NOT Losing $150 on New Customers, Making $30, $50 or $100+ Instead?

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