The business model is perfectly fine, it's the execution that's absolutely terrible. I'm a flash game developer by profession, and small teams are extremely profitable. It doesn't take a company the size of Zynga to run Farmville, they simply do so anyways, because they don't know better. Buying out words with Friends for that ridiculous amount was also a horrible business strategy, it simply didn't regain the cost before the fad of the game died out (yes it's still played, but not nearly as much as it was, which was obviously going to happen).
Bottom line, flash games can be made by 1-4 people, and maintained by even less once released, Zynga is too big for what it does, and loses money by paying salaries to too many people.