What Does Facebook's IPO Mean For Games?

In the end, Facebook's IPO played out just as you might have predicted. Launched last week to immense fanfare and an immediate jump in valuation, the company's shares have now dropped off significantly in what looks most like a thunderous, week-long hangover on the financial markets - as investors all over the world awaken with throbbing heads, wonder what on earth they did last night, and then notice the huge pile of Facebook stocks they've woken up next to.

The implication from press coverage - particularly in the mainstream press, many corners of which are delighted to find any new implement with which to bash Facebook over the head - is that in the euphoria of the long-awaited IPO, investors donned their beer goggles and woke up next to a real horror of a stock. In fact, the IPO is essentially being presented in some quarters as the beginning of the end for Facebook, with speculative articles springing up to imagine (gleefully, with much rubbing of hands) how the giant will now tumble into an abyss of its own making.

"Zynga would absolutely love to see itself as being a cross-platform company, with fingers in every pie going - but right now, that's simply not the case"

This is utter nonsense, revealing more about the biases and worldviews of the authors involved than about Facebook's future prospects. The company faces lots of challenges - it's still very weak in the mobile space, it's proved to be slow and inflexible when it comes to altering its proposition to fit into new markets, and there's always the risk that it's going to find a "tipping point" where its obsession with revealing users' profile information as publicly as possible goes past the comfort zone of the silent majority of users, rather than the vocal minority of malcontents. "Some investors are grumpy", however, isn't on that list of challenges, especially not in a week when the actual message from investors was "shut up and take my money" - to the tune of a cool hundred billion dollars (perhaps more like $70bn now that the dust has settled).

Watching this from the perspective of the games business, of course, is especially interesting. The growth of Facebook has not occurred in isolation - rather, it has happened hand in hand with the explosion of social gaming. It's hard to say which has been more important for the other. Facebook enabled social gaming's boom by creating the notion of a social graph which games could exploit to encourage users to participate and engage their friends, but social gaming in turn drove the growth of Facebook by creating countless reasons for users to return daily and extend their engagement time.

With that in mind, the question of whether Facebook begat social gaming, or whether social gaming propped up Facebook, seems moot. It's been a symbiotic relationship almost from the outset - without Facebook there would be no social gaming, but without social gaming, Facebook would never have grown to this extent. Now one side of that symbiotic partnership has had an IPO that values it at a hundred billion dollars, the impact on the social gaming side bears consideration.

One immediate impact has been on Zynga - the leading provider of social gaming on Facebook. Zynga went public last year, well ahead of the Facebook mothership's own IPO. Unexpectedly - but totally understandably in hindsight - the launch of Facebook's own stocks sent Zynga's share price plummeting. Prior to the IPO, the general expectation was that a successful float for Facebook would also boost Zynga's valuation - and long-term, that's probably true. In the short term, however, investors who had put money into Zynga as a proxy for the privately held Facebook (essentially, buying Zynga stock as a way to get some financial exposure to Facebook, whose stock wasn't publicly available) pulled out their holdings in order to buy "real" Facebook stock, deflating Zynga's valuation.

The fact that Zynga was being treated as a proxy for Facebook is compelling evidence for just how closely the fates of these two companies are linked. Zynga would absolutely love to see itself as being a cross-platform company, with fingers in every pie going - but right now, that's simply not the case. In social networking terms, there's only one pie with any meat in it, and that's Facebook - Google's Plus offering simply hasn't gained any traction as a social network (although it's got an interesting set of content-sharing communities growing up around it), while Twitter isn't a games platform. In mobile terms, Zynga's still far behind the pack and struggling to make mobile work for it. It's wedded to Facebook, whether it likes it or not.

Facebook, for its own part, is equally wedded to Zynga. Of course, the Farmville creator isn't the only game publisher in town - but it's by far the most successful of the Facebook social game firms, having built up a huge user base back in the halcyon days before Facebook cracked down on the use of spam-like strategies for viral spread (they were halcyon days for Zynga, at least - the rest of the world couldn't wait to see the back of dozens of messages a day encouraging us to milk cows or poke chickens). Hard figures don't exist to show us how much of Facebook's traffic is driven by people returning to social games, but experience suggests that many of the network's most regular users are playing social games - and those users are also the ones who generate events on their friends' pages, encouraging them to return to the site regularly as well.

"Here's a gigantic business sector entirely founded on the idea of in-app purchasing and microtransactions, which has grown up right on top of the Facebook platform"

Moreover, social gaming is Facebook's best hope for creating a direct revenue stream from users in the medium term. Facebook is presently focused on using the social graph to sell targeted advertising, which is a big business but an unproven one - and one that brings it into direct conflict with Google, a much larger company which will undoubtedly do everything in its power to protect the money tree that is the online display advertising business. That leaves Facebook's other potential business - microtransactions using Facebook Credits, a currency which can be used to buy loads of low-cost digital items using Facebook as a payment processor and digital wallet.

Facebook Credits are the company's primary hope for creating an ongoing revenue stream from its users - and if they're going to work (which isn't guaranteed, as half the time Facebook doesn't seem to have a clue what to do with them), social gaming will be at the heart of that. Here's a gigantic business sector entirely founded on the idea of in-app purchasing and microtransactions, which has grown up right on top of the Facebook platform. There could be no more logical place for Facebook to engage users in microtransactions - which could then be extended to other areas of media, eventually getting users to consume video, audio and even text media within the Facebook ecosystem, all paid for in fraction-of-a-penny transactions using Facebook Credits. That's a long way off, and it has to work in social gaming first - but if Facebook is going to justify its enormous stock market valuation, this must be made to work.

In other words, what the Facebook IPO really means for games is this - it's a validation of the sheer scale and importance of the Facebook ecosystem, and a powerful reminder of the important part which social games have played in putting the company into this position. It means that Facebook is going to have to double down in an attempt to get its growth figures and its revenues to keep looking healthy - and it almost certainly means that the company will have to turn to social games in the process. Facebook is big and important to our industry right now, but there are big problems to be solved - questions of discoverability, of playability, of user trust in the ecosystem itself, and many others besides. The IPO means those questions will need to be answered sooner rather than later.