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Facebook and Zynga Divorce a Success

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In 2011 platform developers received $1.4 billion from transactions enabled by Payments. In 2012 the comparable figure was $1.96 billion. If one assumes that Zynga represented $1.1 billion of this figure in 2011 and $900mm in 2012 (i.e. 93% of Zynga’s 2011 bookings and around 80% of 2012 bookings, on most recent Zynga guidance), this implies that platform developers other than Zynga Inc (NASDAQ:ZNGA) received $1.06 billion in 2012, up from $300mm in 2011. This means that non-Zynga developers tripled the payments they received from Facebook. Perhaps equally important, the 10K states that 27 million of Facebook’s users purchased virtual goods during 2012, vs. 15 million in 2011.

A greater number of users and a wider base of economically sustainable developers is important for Facebook because it means there are more developers placing more resources towards improving the overall consumer experience on the Facebook platform. It also means there are more likely more advertisers in the future, as Facebook advertising will undoubtedly be an effective (or at least a very testable!) way for developers to market their wares.

As management pointed out during the company’s earnings call, essentially all payments revenues are derived by desktop-centric activities presently, and growing mobile use will curtail spending growth on payments in the near-term.

A success for Facebook, not for Zynga.

In mobile advertising, Facebook dominates, so Zynga needs Facebook:

In Zynga's fourth-quarter earnings call, CEO Mark Pincus got a question about how his company is going to recreate the awesome viral effects it used to have on Facebook as players shift to mobile.

That is the question for Zynga.

Pincus first gave measured praise to Facebook. On the Web, Facebook's News Feed offers a great way for a player to tell their friends about a game and recruit them to play. That's because Facebook essentially is the operating system for social games on the Web.

The problem for Zynga is that Facebook can twist the dials on what shows up in the News Feed. Last year, as Facebook turned down the volume on games that users found too spammy, Zynga got hurt bad.

On mobile, there's nothing like Facebook. Pincus called the mobile landscape "fragmented," and it is—between Apple and Android, between tablets and smartphones, and between social networks.

Pincus lamented that it was hard for someone playing Words With Friends to send a request to a friend to play on mobile, and said that Zynga had to develop that system.

A large reason why Zynga renegotiated its exclusive deal with Facebook, giving up some valuable advantages it had over other games makers, was to get more freedom to build such a friend-finding platform outside of Facebook's social universe.

Of course, Zynga has an alternative.

It's called App Center, which is Facebook's system for promoting apps. It already crosses Web and mobile. Facebook users can encounter an app on the website and send a link to their smartphone to install it.

Everything that Pincus talked about Zynga needing is already in place.

The problem with that is that it puts Zynga back at square one—a place of supine dependence on Facebook.

So this is not an easy game for Pincus to play.

Zynga will have to give a lot of money to Facebook to spread its mobile games.

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