Much has been made of Zynga’s heavy dependence on Facebook, from which it draws the vast majority of its users. For would-be investors in the games company’s hotly anticipated IPO, here’s one more thing to worry about: thanks to recent changes in Facebook’s practices, it is hard to hard to assess what sort of underlying growth trajectory Zynga is on.
Facebook has repeatedly changed the terms of its relationships with Zynga and other developers, to detrimental effect. Its requirement for them to use its own payments system is one example. Last year it also brought in more stringent policies that limited the promotion that Zynga can do through its users to their friends.
That led to a drop in the number of daily users at Zynga. The figure peaked at 67m in the first three months of 2010, dropped throughout the year to 48m in the last three months of that year, and recovered only partially, to 62m, at the start of this year.
The impact on the company’s financials has been notable. Year-on-year, its revenues in the first quarter of this year were still growing at a heady rate of 133 per cent. But some of that came from deferred revenues from previous periods: its actual bookings during the period (a more accurate measure of its sales to end users) were up only 61 per cent. And its adjusted EBITDA – a measure the company said it wants to be judged on – rose just 20 per cent.
Has a deeper slowdown set in, or is Zynga going bouncing back strongly from Facebook’s rule-change? It will take at least a couple more quarters to judge.
Meanwhile, Zynga might get help mitigating some of its Facebook risk if the Federal Trade Commission investigates a complaint filed this week by Consumer Watchdog, an anti-trust advocacy group.
The group said Facebook’s new requirement for game developers to use its private virtual currency, Facebook Credits, creates a monopoly that would be harmful to companies like Zynga.
It is unclear whether or not the FTC will pursue an investigation, but attorney David Balto said: “I think Facebook’s conduct raises some serious competitive issues.”
Mark Lemley, a law professor at Stanford, said the fact that the group even filed a complaint was “certainly a sign that virtual currency is now very real business,” and that the Facebook policy could be called into question by the authorities. “Exclusive dealing arrangements are sometimes held illegal when imposed by firms with market power,” he said.
Reporting by Joseph Menn, April Dembosky and Richard Waters
