The big news in the social gaming space this week is that Facebook and Zynga have significantly changed their relationship. Two years ago, Zynga entered into a “special” agreement with Facebook that gave both companies exclusive privileges in exchange for special treatment. While Zynga’s stock has taken a much bigger hit than Facebook’s after this announcement, this new relationship will impact the changing social game ecosystem and the risks Facebook faces.
The Impact on Zynga
The key change that will negatively impact Zynga is that Zynga now must abide by Facebook’s Terms of Service (ToS). In the original agreement, Facebook gave Zynga the ability to bypass certain Facebook requirements, primarily related to cross-promotion and viral calls. Zynga will now have to follow the same policies other Facebook game developers face, primarily stopping its ability to promote games on Zynga.com or mobile from within its Facebook games.
This issue is probably other game developers’ top current complaint with Facebook and will only exacerbate the issues Facebook is having with developers. With players no longer spending most of their time on Facebook, game developers are pursuing ways to make their content available wherever the player is (e.g., smartphone, tablet, web). Facebook, in turn, has been tightening its ToS to limit greatly cross promotion so that players are not driven away from the Facebook version of games (where Facebook makes its revenue). Now Zynga will have the same limitations, which will impact to some degree their ability to migrate their users from Facebook to Zynga.com and mobile.
The Impact on Facebook
Although the announcement does not seem to have had a major effect on Facebook’s stock value, several elements of the amended agreement will have long-term impact:
- Zynga does not have to use Facebook payments off Facebook. To me, this is the biggest change. The original agreement was driven by the rollout of Facebook credits and the platforms move to requiring use of credits (and thus giving Facebook 30 percent of all gaming revenue). While Zynga will still have to use Facebook payments for its games played on Facebook (I assume), they now can use any payment processor(s) on Zynga.com or any other platform (where the platform allows it). Thus, Zynga can negotiate deals where it keeps significantly more than 70 percent of the revenue it generates and also find creative monetization solutions (some of which helped make Zynga the company it is today) that are not available through Facebook payments. It is a big blow to Facebook, which when it rolled out Credits was seen as creating the next PayPal.
- Zynga can now display ads from any network. The original agreement forced Zynga to use Facebook to serve ads on Zynga.com; now Zynga can use whatever ad platforms provide the highest CPM. This change will have a similar impact on Facebook as the elimination of the Facebook payments requirement in that it shows their dream of becoming a ubiquitous ad platform across the web, not just on its own properties, is probably not going to happen.
- Zynga will no longer have to launch a version of every game on Facebook. Under the original agreement, Zynga was required to launch a Facebook version of every game concurrently or before launching on any other platform. This forced them to create web versions of its mobile games, sometimes when it did not make sense. Not only does that create a cost, it s a focus issue as the development team ends up spending time optimizing for Facebook rather than creating a great mobile experience. The new freedom should allow Zynga to compete more effectively on mobile platforms and will deal a significant blow to Facebook’s gaming ecosystem over iOS and Android.
- Zynga will no longer be forced to use the Facebook platform as its exclusive log-in mechanic. Of all the changes to the relationship between Zynga and Facebook, this will have the least impact. Facebook Connect is incredibly popular (when given choices, 70-80 percent of players will still choose to login through Facebook) and elegant. Zynga can now create its own log-in system as well as leveraging other third parties (such as GameCenter or the recently announced Habbo API). Overall, though, I do not see anyone replacing Facebook as the most popular log-in system for games, regardless of platform.
The overall impact
Although investors feel the amended agreement will have a much more negative impact on Zynga than Facebook, I just do not see that. The “special relationship” has not helped Zynga much this year, just look at their numbers (not only share value, but DAU and MAU of its Facebook games). The changes will not cost Zynga its Facebook business but only force it to compete on the same playing field as other game developers, many of whom are still quite successful on the Facebook platform.
For Facebook, it looks like trying to close the barn door after the animals are out. The main benefit to Facebook is that Zynga can no longer drive traffic from its Facebook games to its non-Facebook games. The reality is that this traffic is leaving Facebook anyway, as players are now looking at mobile first for their gaming experience. The agreement may slow the exodus, but will not change the underlying dynamic.
I also feel the change is an implicit acknowledgement that Facebook as failed to extend either its ad platform or payments platform beyond Facebook.com. This is potentially huge, for Facebook to justify its valuation and grow into the next Google, it needs these products to be dominant across the Internet.
For social game developers, there is not a tremendous impact from this news. It should not significantly impact Zynga’s competitiveness. It was also already obvious that Facebook is no longer the sole platform opportunity and it reinforces the importance of mobile.
The Business of Social Games and Casino 
Great post Lloyd.
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Thanks.
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Interesting indeed!
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