Saturday, December 1, 2012
Zynga shares are down 7 percent after the social-games maker and Facebook announced they are all but ending their special relationship. Facebook can develop its own games if it chooses to do so, and Zynga can now host its games on a different social platform, according to a new agreement the two companies disclosed in SEC filings. The revised Facebook-Zynga deal is only the latest sign Facebook is souring on Zynga. In Facebook’s third-quarter earnings call, CEO Mark Zuckerberg singled out Zynga as under-performing compared to other games companies on Facebook. “The story here is a little misunderstood,” Zuckerberg told Wall Street analysts in late October. “There are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing. Our monthly payments revenue from the rest of the ecosystem increased 40 percent over the last year.” In other words, while Zynga is a big driver of Facebook revenue – 12 percent in the last quarter – the future of Facebook games is with other companies, at least judging by growth trends. That probably has something to do with the fact that desktop usage of Facebook is actually declining in the U.S. while mobile usage is spiking. Zynga is historically stronger on the desktop and only recently began racing to transition to mobile. Facebook was also caught flat-footed by the shift to mobile but made transitioning to mobile its top priority this year. The new Facebook-Zynga agreement, then, merely crystallizes the new reality between the two companies: Zynga needs Facebook, deriving 90 percent of its revenue from the social network, but Facebook does not need Zynga. If anything, Facebook needs to move beyond Zynga, diversifying its revenue streams and embracing mobile-native gaming companies. Zynga saw this coming. CEO Mark Pincus made clear in a Wired Business interview this past summer that mobile was a top priority for the company. Zynga’s mobile in-game sales recently hit 20 percent versus 6 percent the year prior. Zynga is also hedging its bets with another new focus: Real money gaming. Zynga will launch poker and other casino games in the U.K. in the first half of 2013, a prelude to what its CFO has called a “first step … toward what we think is a large opportunity.” Indeed, real-money games are so important to Zynga that they are the focus of the one special concession Zynga was able to chisel from Facebook in the new agreement. If Facebook allows real money games, it has to let Zynga participate. From Zynga’s SEC filing: If Facebook allows real money gambling games on the Facebook web site in countries where Zynga has real money gambling games, Zynga will subsequently launch such games on the Facebook web site, if certain conditions are met by Facebook. So Zynga’s new deal with Facebook is a roll of the dice in more ways than one. Kind of like its business.