Zynga’s future depends on Facebook…for now

By: ispeculatornew
Date posted: 05.10.2010 (4:22 am) | Write a Comment  (1 Comment)

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Last week, we wrote an article about Paypal being under attack, one of the main ways that is being done is through Facebook. The arrival of a new Facebook “virtual currency” will change the way things are done in the Facebook galaxy. In last week’s edition of Business Week magazine, there was a very good article describing the Apple universe and everything that surrounds it. The concept is basically that Apple is at the center of a universe with hundreds and maybe even thousands of freelancers, small and bigger companies depending on it to launch and commercialize their products. You could say that any of Apple’s application developers are among the “smaller planets” of this universe.

Gaming on Facebook… it is about Zynga

A smaller but fast growing galaxy similar to Apple’s is the Facebook universe. As it continues to grow, it has added many commercial opportunities mostly linked to applications but also to games. Perhaps the most important of the companies that depends on this universe is Zynga. The gaming company counts over 70 millions users logging in daily to play its games. Its estimated revenues for 2010 are between $450-$600 million. The games are addictive and give major incentives to play with your friends. Then, users can buy various items that will help them do better in the games. The company has been growing at the speed of light, perhaps even faster than Facebook itself. The company is already thinking about an IPO.

All is perfect then right?

Not quite. Being in the Facebook universe means playing by Facebook’s rules. The first major change will come soon when Facebook finally introduces the virtual currency and forces all players in its universe to either:

1-Use the Facebook currency as sole means of payments
2-Or get out of the universe

Of course, everyone expects Zynga to oblige. But that will bring many consequences. Obviously, Facebook will now have all the details of Zynga’s revenues and could hike fees depending on how much they consider Zynga can “afford” to pay. This will obviously have major impacts on the companies profitability. It might not be lethal but it certainly takes Zynga down a path that the gaming company would prefer avoiding. What would stop Facebook from creating games itself once it knows exactly what is working, what isn’t, who is playing and paying, etc. It’s just a lot more information than Zynga would prefer giving up…

What can Zynga do?

That is the big question of course. Is Facebook more dependant on Zynga or the contrary? While Zynga is a major player, it is still difficult to imagine that it would have that much power. The first part for Zynga is to do its best to diversify. It has tried that through application launches on the Iphone, Yahoo, MSN,  and also launching its games on its own websites such as Farmville.com. But to this date, almost all of Zynga’s revenues remains tied to its business on Facebook, which is a major problem. One of the cards that Zynga has is that it is rumored to be the most important advertiser on Facebook and thus bringing much needed revenues for the social network.

One solution to be considered would be to get Facebook to invest in the company. That would certainly give Facebook a major incentive to remain civil with Zynga. But as with all other solutions, the major issue is that Zynga seems to have so little negotiating power with Facebook. That certainly makes investing in a possible Zynga IPO very risky in my opinion.

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  1. […] Zynga’s future depends on Facebook…for now « Intelligent Speculator […]

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