Facebook Breakup Puts Zynga in DangerVille

The relationship between Facebook and Zynga got even more complicated this week as the pair agreed to new partnership terms that free both from constraints under the prior deal. Zynga’s stock took a hit because the new deal allows Facebook to develop its own games.

The success of each company has long been tied to the other, especially for Zynga, which uses Facebook as a platform for popular games such as FarmVille and Mafia Wars. Under the new agreement, though, it has more freedom to pursue its gaming strategy outside Facebook’s infrastructure.

Zynga can still use the Facebook platform to distribute its games, but it will now be under the same standard terms and conditions as any other game developer. It is no longer required exclusively to use the Facebook login or Facebook Payments features. In also will be free to premiere new social games in places other than Facebook.

Investors seemed to fear Zynga would have trouble making it as well on its own. Its stock plunged as much as 14 percent in after-hours trading and was down by about 8 percent Friday morning.

Facebook and Zynga did not respond to our request to comment for this story.

Cutting Ties?

The renegotiated agreement allows Facebook to develop its own games.

Creating games to rival Zynga was never Facebook’s endgame, said Michael Pachter, managing director of equity research at Wedbush Securities.

“There is no chance that Facebook will spend on infrastructure to build games when so many third parties already do so,” he told the E-Commerce Times.

Instead, this is a way of allowing Zynga to compete on a platform that more closely resembles that of its industry peers, he pointed out.

“They are letting Zynga do the same thing as King.com, Kabam, Kixeye and others who have games on their own websites and don’t pay Facebook a royalty,” Pachter said. “Zynga needs to be in the same competitive position as the others, and Facebook secured a release from their non-compete, but I’m pretty confident they have no intention of developing games.”

While that wider, more independent path might take some adjusting for Zynga, it still has a quality product to sell, said Ted Pollak, senior gaming analyst at Jon Peddie Research.

“Zynga makes very good mobile games and will have plenty of opportunities there and on PCs via Facebook and other distribution channels, and perhaps in the living room eventually,” he told the E-Commerce Times.

Beyond the Games

In addition to allowing Zynga to compete in other markets, Facebook is lessening its reliance on the gaming company, said Brian Wieser, analyst at Pivotal Research Group. As Facebook was preparing to go public, it used its relationship with Zynga as a way to convince stakeholders it could continue to engage users and monetize site activity. That tied the two companies together in many investors’ minds, with Facebook stock dropping when Zynga slashed its sales outlook.

By developing new advertising and non-advertising initiatives, Facebook is ensuring that gaming doesn’t have to be a core component of its success.

“Gaming had been important historically for Facebook, but we would expect gaming to account for an increasingly diminishing share of total revenue,” he told the E-Commerce Times. “There are so many other non-advertising businesses for Facebook to expand into, that Zynga is really going to be a diminishing share for Facebook.”

In the future, Facebook will look to expand into commerce options that could bring a much higher return on investment, or try to become a more premier media platform to compete with a service such as Netflix, Wieser predicted.

“Gaming is the one of the first things they tried to monetize, but they are heading toward developing e-commerce or media products,” he pointed out. “They haven’t gotten there yet, but those things are all possible in time. There is no shortage of non-advertising avenues into which Facebook can expand its platform.”