Zynga-Facebook Deal Seals Platform Match

Farmville Creator Threatened to Plant Roots Outside Social Net; Five-Year Pact Ensures It Stays Put

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NEW YORK (AdAge.com) -- If social-gaming company Zynga had a Facebook profile, here is what the game company's recent status updates might look like:

Zynga is in an open relationship.

Zynga is single.

Zynga is in a relationship. With Facebook. For the next five years.

The two officially tied the knot last week in a pact that keeps Zynga's popular games such as Farmville on Facebook and quells rumors that the gaming company will split from the social network to compete with Facebook for users and their time. The deal also means Zynga will have to share its revenue with Facebook, expanding the use of its payment system (Facebook Credits) in which the social network gets up to 30% of each transaction.

But why share? After all, Zynga is growing almost as fast as Facebook. According to AppData.com, Zynga has 240 million users, and analysts estimate its 2010 revenue from advertising and virtual payments could reach $1 billion, potentially matching Facebook's.

"They need each other ... but Zynga needs Facebook more," said Steve Carpenter, a financial researcher who mined the AppData site and published a report about Zynga. "Right now, 90% of Zynga play happens on the Facebook network. Zynga's $100 million per year ad spending is about 20% of Facebook's annual advertising revenue. If Zynga were not there anymore, Facebook still has a very sustainable business. The converse is not true."

Do the math
Nielsen data supports Mr. Carpenter's math. According to April 2010 numbers, 122.3 million unique U.S. visitors played Zynga inside of Facebook, and only 18.5 million visited Zynga's website. Indeed, Facebook owns the house -- or platform -- where Zynga has lived and grown astronomically for the past 19 months. While some reports had Facebook and Zynga on the verge of war, reality seemed closer to a pre-nuptial arrangement between a couple already living together and sharing housing expenses. Facebook just wanted some rent.

The rent will come from a cut of all virtual transactions made by Zynga gamers. Its gamers bring in an estimated $50 million a month, and the games add up to a hefty third of all active applications on Facebook in terms of audience. No other company comes close to having e-commerce numbers like Zynga's, so a percentage of that haul equals a lot of cash for Facebook.

The two companies didn't detail the revenue split in the deal -- the first of its kind between Facebook and a developer -- but analysts say a 30/70 cut is fair and similar to other models in the industry, such as Apple's iTunes.

"The real question is, will the credits increase the velocity of transactions and will Facebook's multi-tiered relationships -- including advertising, revenue sharing, etc. -- with developers increase the cut of the pie?" said social-gaming venture capitalist Jeremy Liew, managing director of Lightspeed Venture Partners.

Ad industry
Justin Smith of InsideFacebook, a site dedicated to analyzing all things Facebook, suggests the long-term scenario is more people buying things on Zynga as a result of being able to use Facebook Credits. He also said Zynga needs Facebook to keep bringing in new people who will play the games and buy their virtual goods.

For the ad industry, the deal brings clarity to working with Facebook and Zynga, which should encourage more advertisers to jump on board. "Before the partnership, it was two companies operating in the dark as to what their next moves were going to be," said Chris Cunningham, CEO of Appssavvy, a company that pairs marketers with app developers. "Every time Facebook would update the platform, it caused Zynga to scramble in terms of updating the code. Now Zynga will have a front-row seat as to how to adjust their games." This, Mr. Cunningham said, will only make Facebook and Zynga users happier, putting more money into both pockets.

"Zynga needs scale," said Ian Schafer, CEO of Deep Focus, a digital ad agency. "Until it can prove that it can achieve scale without Facebook, it needs Facebook."

Mr. Schafer worked on a Microsoft/Facebook deal to advertise Bing inside of Farmville. Both he and Appssavvy's Mr. Cunningham believe the deal will only increase big-brand confidence in Facebook. "We've already heard from three to four clients who were already excited to work with Zynga and Facebook, who are now even more comfortable. They see now it is a true partnership, and they have more confidence."

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