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Zynga and Facebook: Are the naysayers wrong?

So Zynga and Facebook have agreed to see other people -- and Wall Street is freaking out about that. Chris Morris tries to figure out why investors are so down on what could be a good thing for Zynga.

Chris Morris, Blogger

November 30, 2012

4 Min Read

In this op-ed, Gamasutra editor-at-large Chris Morris tries to figure out why investors are so down on what could be a good thing for Zynga. So Zynga and Facebook have agreed to see other people -- and Wall Street is freaking out about that. Zynga shares were down 8 percent in early trading Friday after the companies restructured their working agreement. And while those investors certainly have a right to be mad at Zynga in general, I think they might be getting it wrong this time. The source of the panic seems to be two-fold: Zynga loses some undisclosed privileges and Facebook is now free to make its own games if it wants to do so. But selling off shares of the company (or piling on with criticism) is failing to see the forest for the trees. Games on Facebook are on the decline -- especially at Zynga. And by restructuring the deal, Zynga is able to shed some of the more burdensome aspects of the symbiotic relationship it has historically had with Facebook. First up: Ads. Rather than being forced to use Facebook ads on its own sites, including Zynga.com, it can now sell its own. That will allow the company to not only be in charge of its own rates, but to better cater to its audience. And by not having to use Facebook payments on those sites (something it was never crazy about anyway), Zynga could see a slight income bump. The deal previously also required Zynga to share revenues from its own site with Facebook -- a curious arrangement that put the company at a slight disadvantage in competing with companies like King.com and Kabam. What Pincus and Co. have done here is essentially level the playing field. The advantages it once had through its Facebook deal have long since evaporated due to the changing market and that audience's increasing shift to mobile. Zynga games won't disappear, either. Worst case: The company will have to spend a bit more on marketing to boost awareness. (But the best source of marketing in social games has always been the existing customer base – something that's not about to change.)

Facebook: The Game Studio?

Facebook, in the meantime, is free to start making games of its own – but does it really want to? The company already has its hands full with course-correcting its own stock and quelling user privacy concerns. To date, Facebook has shown no interest in expanding its footprint. That might change in the years to come, but unless Mark Zuckerberg hires a gaggle of talented game developers, the titles won't stand much of a chance with an increasingly fickle social games audience. (And call me overly optimistic, but I certainly hope the development world has learned the lessons of gleefully dashing into the arms of a social media company at this point.) The best part of the deal, though, is it gives Zynga more freedom to continue its move away from social games and focus instead on mobile. The company has been slow to realize the customer shift in that area and its attempts to expand via acquisition have been poorly thought out. Investors, however, are ignoring all of this and dumping the stock -- again.

Trying to make sense of it all

What's particularly baffling is this is a move many people should have seen coming. Last month, Facebook founder Mark Zuckerberg buried Zynga during an earnings call, saying: "Now, I want to talk specifically about games for a bit, because I think the story here is a little misunderstood as well. Overall, gaming on Facebook isn't doing as well as I'd like, but the reality is that there are actually two different stories playing out here. On the one hand, our payments revenue from Zynga decreased by 20 percent this quarter compared to last year. But the interesting thing is that the rest of the games ecosystem has actually been growing. Our monthly payments revenue from the rest of the ecosystem increased 40 percent over the past year since payments has been adopted. This evolution is pretty encouraging." It was a fairly clear signal that the partnership needed to be adjusted, and the companies have now done just that. If this were any other company, stockholders would likely be cheering -- or, worst case, shrugging a bit and moving on. But because Zynga has upset investors so often over the past year, it appears that any excuse to sell is a good one. But it still doesn't make sense.

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