Everyone is happy on the farm. That’s the message from Zynga and Facebook, which just announced a “five-year strategic relationship.”
For two companies attached at the hip, that may sound like stating the obvious. Zynga makes social games like Farmville that are played by hundreds of millions of users on Facebook’s platform, and in turn spends lots and lots of money advertising on Facebook.
But the announcement comes after weeks of speculation that Zynga was growing fed up with Facebook, and might even be considering leaving the platform.
There’s not much new information about Zynga and Facebook’s relationship in today’s news. Rather, the intent was to put speculation about a major rift to rest for now. But it’s hard to believe that Zynga is at peace with all of Facebook’s recent changes to its business model.
First Facebook turned off notifications for applications, taking away the primary mechanism for social games to go viral. Now if a company wants a massive audience for a new game, they almost certainly have to buy it through Facebook advertising.
Now Facebook is rolling out Credits as the preferred method of payment for games on their Platform, and taking a 30 per cent cut of the transactions. That’s a much larger percentage than the social games companies were handing over to the small payment companies that had sprung up to fill this niche, and higher than the fees charged by PayPal and credit card companies.
Taken together, these changes are putting Zynga’s profit machine at risk.
When Zynga chief executive Mark Pincus visited us last month he alluded to these tensions. “Any time you have two separate for-profit companies that are coming together to provide a service there will be some tension,” he said at the time. “There’s little things on the back and forth that anyone can get frustrated about.”
And Zynga is not the only company affected. In a recent note about Electronic Arts, which bought social games company Playfish, Todd Greenwald of Signal Hill Capital Group said there were “numerous hurdles on Facebook” for Playfish (and, by extension, all other social gaming companies). These include “limited notifications driving monthly active users down significantly, while Facebook credits driving costs up significantly.”
But not everyone is frustrated. PopCap Games told us they were fine with Facebook taking a 30 per cent cut. With a half billion users involved, Facebook credits will simplify the purchasing process and bring in new users.
Zynga, too, seems to have come around for now. That’s probably a good thing for Farmville players, the company, and its investors. Then again, with the vast majority of its users coming from Facebook, Zynga didn’t have much of a choice.
