Just when you thought Zynga was preparing to take the leap and leave Facebook permanently, the two companies have announced a formal “long-term relationship”. While terms of the agreement were not disclosed, we can make some pretty good guesses as to what took place behind closed doors. For those that haven’t been following the drama, a week and a half ago Zynga threatened to leave Facebook due to the massive cut the company was trying to take from Zynga’s business through Facebook Credits.
So what does this partnership mean? Here’s our speculation about what each company has conceded:
- Zynga agrees to keep Facebook as their primary platform for games
- Zynga agrees to further integrate Facebook Credits into their games, eventually moving toward an exclusive, or almost exclusive level of integration
- Facebook agrees to take a significantly smaller cut through Facebook Credits (this has since been dismissed)
The dynamic between Zynga and Facebook is an extremely complex one. Most significantly, Zynga is reportedly the largest advertiser on Facebook, spending millions a year to drive new installs to their Facebook applications. When Facebook wanted to force many game developers to use Facebook Credits as a payment platform, it substantially altered the business model for social game developers, reducing the margins significantly.
As such, Zynga threatened to leave the Platform all together, potentially launching their own site and possibly threatening to use Google AdWords or alternative ad platforms as their source of installs, cutting off a large percentage of Facebook’s revenue. If Zynga were to leave Facebook all together, it would be a massive blow for Facebook, and potentially a life-threatening one.
While Fox News tried to quote a source at Facebook, suggesting that it would be best for Zynga to leave the Platform, it was an inaccurate portrayal of how the cards are distributed in the relationship between the two companies. As today’s announcement illustrates, the companies now have a symbiotic relationship and it’s more important that they work together rather than function as enemies.
Not only does it solidify Zynga as the most dominant platform (and social games) developer, but it also illustrates how important social games have become to Facebook. We’ll be sure to follow this story as we learn more.
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Argh, yet MORE stupid apps to block…
Comment by IJ — May 18, 2010 @ 12:41 pm
"If Zynga were to leave Facebook all together, it would be a massive blow for Facebook, and potentially a life-threatening one."
Who to? Zynga I hope. Thank the Facebook gods they added functionality to allow you to block those rubbish apps from taking over your wall. I haven't seen them for months and very happy not to.
Comment by Angus McKinnon — May 18, 2010 @ 1:23 pm
Nick,
The key point here is that Zynga doesn't have to leave the Facebook platform to avoid almost 100% of the impact of the 30% Facebook Credits tax.
Based on stats from other top games, only 2% of the users are payers. Of this group 80% of the revenue comes from the top 30% of payers. That means that only 0.6% of a given game's user population (i.e., the whales) account for 80% of the revenue.
So, for Farmville's 80 million users, only 480,000 whales generate 80% of the revenue in the game. This means that if Zynga fully embraces Facebook Credits for the 98% of users who pay nothing and the 1.4% of users who pay a little, its bottom line revenue will not be hurt that much (i.e., about 6% = 30% tax * 20% revenue).
The key is to ensure that as Zynga's small payers (i.e., minnows) begin to become whales (based on their repeat purchases over time) that they are lifted out of the Facebook ocean and placed in the Zynga lake (i.e., FarmVille.com or zyngalive.com).
The great thing is that by making Farmville.com or ZyngaLive.com an exclusive place that is ONLY for whales, Zynga can actually get folks to pay more in the game to gain access to all of the extra perks available to whales. This is just like in Vegas where the whales get comp'ed rooms, meals, show tickets, cars, etc. as long as they stay loyal to a given casino and gamble $500K a day at the tables.
So, in reality Facebook doesn't have a stranglehold on Zynga's business model because they don't need to coax 80 million people off of Facebook (which would be hard). The key is that only 480,000 Farmville players really matter from a revenue point of view. Once these folks are extracted, Facebook Credits could charge the full 30% or higher tax and it wouldn't materially hurt Zynga's business model.
So, it makes sense that Zynga and Facebook have reached in accommodation where both parties walk away winners. The most interesting play will come when Facebook allows Facebook Credits to be used on 3rd party web sites and creates the first micro-payment solution with enough user adoption to convince a critical mass of web sites to support it.
The ability for advertisers to reward targeted Facebook users with Facebook Credits for watching video ads and providing their e-mail address to the advertiser (either inside of Facebook.com or on a web publisher's site using Facebook's upcoming AdSense killer) will give Facebook yet another way of increasing the CPC and CPM rates for their ads. It will also dovetail nicely with the existing TV advertising format of 30 and 60 second video spots and the ad agency infrastructure that goes along with it.
Thanks,
Lee
Comment by Lee Lorenzen — May 18, 2010 @ 4:31 pm
I totally disagree – in fact I think zynga are nothing without facebook and that facebook would suffer very little as there are so many alternatives now. People are fickle with games and can adapt – but there is only 1 facebook, and whats more, we all lve it… but zynga, i can live without.
I think zynga would die without facebook actually and so for that reason facebook i would stand tall and say sod you!!
Facebook – tell them to get lost – seriously, renogotiate and see how long they last without you – they are so cocky now!
Facebook – forever!!! zynga… herummm… remember, you was nobody before Facebook – lol
Comment by faye — May 18, 2010 @ 7:41 pm
Now it's clear why Zynga threatens ban people from not only thier applications (FarmVille, YoVille etc) but from FaceBook aswell…. and thats because they can…
Comment by Mark — May 20, 2010 @ 10:53 am
Iwould like to get anyones attention out there in Zynga land, I recently answered an email , today in my facebook mailbox,it said that i must immediately answer and contratulations myself along with several other zynga players are the lucky winners of the day it posted the names of the other players and instructed me to follow the info needed to collect my 80mill chip bonus along with 100gold. I was excited about this and did as instucted I still have the link . BuT I had earned 6mill on my own to have zynga hackers and or zynga who I hold responsible for the theft against my account as you have all my private info you took from me to become a member 6mill someone please tell me how a person who trust their site could want to continue to be a member of a fraudulant gaming company please give me my chips back asap.
Re gards
Lorrice Williams
ZYNGA MEMBER SINCE FEB 2009.
Comment by lorrice williams — June 26, 2010 @ 5:46 pm
[...] Facebook games in terms of monthly active users are from one developer, Zynga, which also boasts a multiyear agreement with the social network, giving the game company an advantage over smaller [...]
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