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Facebook's Triumph

Fri 21 May 2010 7:00am GMT / 3:00am EDT / 12:00am PDT
Business

Farmville creator Zynga has reaffirmed its commitment to Facebook - clearing the path to the next stage in the platform's evolution

This week's announcement that Facebook has signed what amounts to a concord agreement with Zynga - operators of the social network's most popular and successful games, including the gigantic Farmville - came as something of a surprise to industry watchers. Whispers had been circulating for months suggesting that Zynga was falling out with the firm on whose platform it operates; rumours reached a crescendo last week with both firms reported to be on the verge of an acrimonious split.

Yet this week, suddenly, it's all peace and light between the two, with an agreement signed which keeps Zynga's games on Facebook and ensures that they will transition towards using the social networking platform's Facebook Credits currency more widely. Farmville players can breathe a sigh of relief, while Facebook's growing band of vocal detractors will snap their fingers and mutter darkly about pesky kids, recognising that a golden opportunity to take some of the wind out of Facebook's sails has passed by.

Looking at the substance of this agreement, it's hard to characterise it as much other than a capitulation on Zynga's part. Realistically, it's Zynga that came to the table with grievances - Facebook has, in recent months, taken a number of moves that have not been positive for Zynga's business, including implementing systems which remove game updates wholesale from the frontpages of non-players, and moving towards enforcing Facebook Credits (from which it takes a 30% cut) as the de facto currency for applications on its network.

Yet when it came down to it, Zynga blinked first. It really only had one thing with which to threaten Facebook - the removal of its games from the Facebook network, with the potential consequent loss of traffic and growth for Facebook. That's not an inconsiderable threat, of course - Farmville alone boasts tens of millions of sign-ins each day, and many of those users probably sign into Facebook specifically to play Farmville. Add in Zynga's other games, and this company alone could be accounting for a genuinely significant percentage of Facebook's daily sign-ins.

The question, of course, was whether this action would be tantamount to Zynga cutting off its own nose to spite its face - a question which has been answered fairly clearly by the firm's decision to look past the tensions of recent months and pin its colours all the more firmly to Facebook's mast.

While Facebook may no longer be quite so friendly a place for Zynga and its rivals to do business, it remains pretty much the only game in town. The torrid time which the social network has been having in the media in recent months disguises the fact that its growth continues to be stunning; indeed, one could reasonably ask whether the public would care quite so deeply about Facebook's faltering commitment to user privacy if it wasn't seen, quite credibly in some regards, as the "new Google". Its user-base is almost absurdly huge compared to even its closest rivals, and its dominance has reached a point where new start-ups will find reaching critical mass extremely difficult.

For just about anyone in the Internet business, especially on the entertainment side, there's simply no question of trying to compete with Facebook at the moment. For now, at least, it has become an immovable object in the landscape; the question for entrepreneurs is no longer, "how do we beat Facebook?", but rather, "how do we integrate Facebook into our business plan?".

Given that, and given the extraordinary speed with which Facebook has become an important and immensely profitable platform for game development and distribution, it's worth taking a look at the differences which arose between Zynga and Facebook, and what they tell us about the future of this platform.

The core problem was that Facebook was forced to find a balance between the interests of game developers on its platform, and the interests of two other core groups of people - its users, and its accountants. The ability to attract new players into games using the social tools which Facebook provides is one of the most attractive features of the network platform, essentially giving developers the ability to use their existing player-base as powerful, inexpensive marketing drones. However, it's not quite so good for the users themselves, who found themselves inundated with updates and requests from games which they didn't play and had no interest in.

Facebook was forced to make a choice, and it chose to shut down this marketing channel to a large extent - providing a simple interface which allowed users to block messages from games easily and intuitively. Now Facebook game developers need either to get cleverer with their marketing - some inexpensive avenues do still exist - or to take Zynga's approach, which is to spend millions of dollars each month on Facebook display advertising. To many developers, this is tantamount to the end of the gold rush; the heady early days are over, and some smaller firms feel locked out of the market by Zynga's dominance and Facebook's policy changes.

The second group which Facebook needed to appease was its own accountants, because despite its enormous size, Facebook still fundamentally lacks a business plan which can monetise on all of those clicks and eyeballs. One promising move towards a solid business plan lies in using Facebook's ubiquity to deliver a key piece of Internet infrastructure which the world has been waiting for since the mid-nineties - micropayments. At present, even tiny transactions must be carried out on a credit card, leading to a proliferation of sites which offer "wallets" full of pre-purchased credits, most of which only work for one company's products. Facebook's opportunity is to become the central wallet for all microtransactions, allowing you to top up a wallet of Facebook Credits and spend them on in-game items, game time cards, watching videos, downloading music, reading articles on pay-sites and even buying small physical items.

Yet if this is to succeed, Facebook must first put its own house in order - by convincing games and other applications on Facebook itself to adopt Credits instead of using their own currency systems. Many of those providers will have to be dragged kicking and screaming into Facebook's system, not least because of the hefty amount which will be skimmed off the top of each transaction - but with Zynga wrangled into submission, it's likely that others will see themselves as having little choice but to follow.

This short-term pain, however, is likely to lead to long-term gain for everyone involved. Love or loathe Facebook, there's no question but that it's in the interest of the games business to have it healthy, thriving and profitable, providing a powerful platform for social games, exporting a social graph for developers to utilise and creating an unrivalled channel for game discovery and peer recommendation.

Moreover, Facebook Credits themselves could turn out to be manna from heaven for the online game development industry. Credit cards provide an enormous barrier to transactions - customers still don't entirely trust sites which ask for their credit card details, fearing security breaches and recurring bill payments that they didn't ask for. Moreover, the simple action of entering your card details makes it quite clear just how much money you're spending, and what you're spending it on - a degree of transparency which is laudable, but perhaps not particularly good business sense (Microsoft Points are a good example of the "credits" system working incredibly well, for example).

A wallet full of Facebook Credits, perhaps topped up by a simple, cheap subscription each month, is a different proposition. It will encourage people to make microtransactions, to experiment with new games and products, and allow the emergence of revenue streams made up of a torrent of tiny transactions - a few pence at a time - rather than a trickle of larger ones.

Of course, this all relies on Facebook being a trustworthy business partner for those with whom it works, not to mention on Facebook Credits actually getting off the ground as a payment channel. However, it's likely that Zynga's decision to back down from its confrontation with the platform holder is largely based on precisely such an optimistic vision of the future, as well as a pragmatic view of the present. One thing is certain - even those companies who believe that Zynga has achieved unassailable dominance over the Facebook games platform will want to watch very closely to see what happens next, because if this relationship works out in the coming months and years, it will have immense implications not only for Facebook, but for online gaming and entertainment business models across the board.

2 Comments

Brian 'Psychochild' Green
MMO Developer

14 11 0.8
I suspect that Zynga got Facebook to give them a good deal on Facebook Credits, perhaps they will get more than 70% of face value. As the article points out, everything seemed to be in Zynga's favor here, so I have to imagine that Facebook did something to keep them happy. I'm sure Facebook didn't want their biggest success story walking away and providing a template for other developers to follow.

However, I don't think that Facebook Credits will really be the manna from heaven for game developers. Throughout the history of the game industry, whenever someone has controlled access to getting games into the hands of the consumers, they have always tried to squeeze more profits out of it to the detriment of the system. The biggest example is the developer/publisher relationship, which started out almost as a partnership and has turned into a very one-sided arrangement. More recently we saw how portals became the predominant way to distribute casual games, with the rates the portals paid to developers going down in a short period of time. (See Brian Hook's article on his own casual game company written several years ago: http://trac.bookofhook.com/bookofhook/tr... Things have only gotten worse since then.)

So, unless you become the next Zynga, I'd expect to see Facebook continuing to put the squeeze on their credits. I'd put money on the fact that Facebook's take will increase from 30% within the next few years. As the article pointed out, they're currently the only game in town without a good alternative available today. Not a good position to negotiate from. So, game developers have to ask themselves if the revenue increased by working within Facebook is going to be greater than the chunk Facebook takes out; and, what what point does it become not profitable enough to stay in the "social games" space?

Interesting times, for sure.

Posted:4 years ago

#1
I think that what will keep the Credits system honest is the fact that it's not merely aimed at the games space. Facebook will want to make this into a completely open system which is as widely used as possible across all kinds of online payments - and to achieve that, they'll need to run it much like the App Store, with clear, published costs and percentages, and the ability for vendors simply to sign up and start using it, rather than negotiating a specific settlement with Facebook.

You may well be right in that Zynga has probably earned itself some kind of special treatment, but I think the majority of developers and content providers will get the 70% cut - and I think most will be very, very happy to be getting 70% of a revenue stream they simply couldn't tap into previously. If Facebook can convince its users to be as happy spending 50p or so as App Store users presently are, they'll have created a massive market overnight.

Posted:4 years ago

#2

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