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Breaking up is hard to do: Facebook and Zynga

Zynga Inc. and Facebook agreed to “see other people” in its recently revised Securities and Exchange Commission (SEC) agreement. The document emancipates the social gaming supplier from using Facebook as its sole social platform provider and levels the playing field for companies to partner with Facebook.

“The crux of the changes is that Zynga had been getting special treatment,” says Brian Blau, research director of consumer technology and markets of Gartner Inc. “They were an early adopter of the platform and negotiated a special developer contract with Facebook…but the new agreement either resembles or is exactly the same type of agreement that Facebook has with all the other third-party developers that are using the Facebook APIs and social graphs.”

“We have streamlined our terms with Zynga, so that Zynga.com’s use of Facebook Platform is governed by the same policies as the rest of the ecosystem,” Facebook said in an email statement. “We will continue to work with Zynga, just as we do with developers of all sizes, to build great experiences for people playing social games through Facebook.”

The agreement also frees Zynga from integrating Facebook display ads and Facebook credits. According to the Developer Addendum No. 2, the Facebook Credit terms previously charged Zynga 30% per redeemed credit.

“On Facebook, [Zynga] was locked into Facebook Credits. It’s generally true that a lot of game developers and publishers can now use local currencies,” says Lewis Ward, IDC’s research manager of connected consumers for gaming.  “There was already some flexibility out there, so Zynga is essentially going to be like any other game developer or publisher.”

Gartner’s Blau says that both companies have motivation for dropping the famous, “it’s not you, it’s me” bomb and that the two organizations have grown in different directions.

“The motivation on the Zynga side was to relieve themselves of restrictions around how they had to publish games and how they were able to collect revenues from advertising partners,” Blau says. “Facebook had some undue restrictions as well around guaranteeing traffic and access to Facebook’s network.”

However, Blau says that Facebook was more ready to sever ties than Zynga.

“I think when [Facebook] plays favorites, or when any big company plays favorites, it really has to have a good business reason to do that, and because of Zynga’s poor performance, it probably was urgent for Facebook to take care of this more than for Zynga.”

Yet, Ward claims that Zynga had more motivation to pull the plug.

“[Zynga’s] situation has changed dramatically since going public,” Ward says. “I think it recognizes the need to grow its customer base at a top-line level and be able to branch out to many more social networks [and] be more aggressive on mobile portable fronts.”

The analysts also appear to disagree on which organization benefits more from the split. Blau says Facebook is the true beneficiary of the separation.

“Despite everything you hear, Facebook’s business is around revenue generation, and the way it achieves that is by keeping people on Facebook.com, using the mobile apps, and somewhat using the social graph,” Blau says. “The only way that it can do that is by expanding its ecosystem, inviting more developers to come on there, and getting more businesses to build their platform and rely on that platform for their core business.”

“The revised agreement between Facebook and Zynga that allows Facebook to develop its own games will make Zynga even more vulnerable than before,” adds Karsten Weide, IDC Program VP of digital media and entertainment. “It’s so dependent on Facebook for distribution that it was always kind of a tracking stock of Facebook’s. It’s only way out is to diversity distribution.”

But, again, Ward says Zynga is the one reaping the perks.

“[Zynga will] have more freedom to grow its base of casual, browser-base gamers on more platforms—in other words: more social networking sites, its own portal, [and] international destinations that are popular,” Ward says.  “In that in sense, I think it’s positive for Zynga because, to grow its top-line revenue, it needs to keep growing its basic customers and expand the pie into not only PCs, but on mobile and portal and so forth. It gives them the opportunity to grow their audience more quickly on a global basis.”

Now that the two organizations are no longer Facebook official, Blau says Zynga has the flexibility—specifically in terms of platform, game-type, and geography—to launch a new top game.

“[Zynga] has to go after more paying players, and it’s natural that it’s thinking about all these platforms,” Blau says.

Given that the social network is no longer tied down in a committed relationship, Blau says he expects Facebook to evolve into more of a platform.

“I think it wants to be more like Google or Apple. It wants to be more of a platform than a content publisher,” Blau says. “They’re making sure that their access to their social graph is in as many places as possible and that is a pure sign that it wants to be a platform player.” 

Blau says he has asked the social network directly and the response was that it currently has no intentions of creating games.

However, Weide says if Facebook were to start creating games it could through a wrench into Zynga’s site traffic.

“If Facebook gets into games itself, this will reduce Zynga’s traffic share on Facebook,” Weide says. “If Zynga succeeds in getting non-Facebook distribution-–as it must to remain viable–this might increase its overall traffic.”

Facebook and Zynga are only “taking a break,” as the agreement states that Zynga “will be governed by Facebook’s standard terms of service, effective on March 31, 2013.” Blau predicts that Zynga and Facebook will stay on good terms and continue to see each other during their separation.

“To be honest, leveraging Facebook is a value. I don’t think [Zynga] is going to stop leveraging the Facebook social graph,” Blau says. “There are a lot of people that play games on Facebook, and I think that Zynga still wants to take advantage of that.”

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