Facebook and Zynga Battle Over Credits — and Bigger Platform Issues

  • SHARES

By Eric Eldon Comment

The relationship between Facebook and the largest social gaming company on its platform, Zynga, has fallen to an all-time low, or so industry sources are telling us.

Zynga had an all-hands meeting last Thursday, where chief executive Mark Pincus told his hundreds of employees that the company might leave Facebook’s developer platform. Instead, it might launch its own social gaming service, called Zynga Live or (ZLive), as TechCrunch then VentureBeat reported.

One big reason may be money. Zynga has built a business worth hundreds of millions of dollars, largely monetizing through virtual goods that it sells in its games. Facebook now wants to take a 30% cut of this money directly out of Zynga’s pocket by forcing use of its Credits virtual currency — although Zynga could eventually reap benefits from this arrangement.

However, everyone we’ve spoken has described the issues between the two companies as being about more than just Credits. Some also say that the conflict is representative of larger issues on the platform. We’ve gathered more details, but here’s context first.

Industry Turmoil

Facebook is starting to make all of its developers use its Credits virtual currency. All other things being equal, this means Facebook will get revenue that developers have been getting up until this point. However, Facebook says that everyone can benefit through Credits.

We covered the issues in more detail in our Inside Facebook Gold membership service, last week. To recap, if Facebook’s various efforts to improve Credits work — like more payment purchase options, better user access within its core interface, liquidity due to broader usage, etc — then developers could see drastic increases in the number of paying users and the amount they pay, and thereby make more money.

The problem is that nobody knows how Credits will actually work.

Meanwhile,  Zynga has already built its own payments system, and it typically pays a much lower portion of its revenue to service provider partners, including Paypal, Offerpal, and others. No matter how well Credits eventually work, Zynga is likely to bear a big part of the cost in the meantime.

It has 243 million non deduplicated monthly active users and 60 million daily active users, by far the most out of any developer on the platform, according to our independent AppData measurement service. It is likely going to make hundreds of millions of dollars in revenue this year.

Zynga may also feel misled about Credits, and other platform changes. Like many developers, the company built its business on Facebook over the past several years with the understanding that it would be able to retain all of the revenue, based on statements made by Facebook when the social network launched its developer platform in 2007. Zynga also planned its games around specific parts of the user interface, like notifications and requests.

Beyond making Credits mandatory, Facebook removed third party access to notifications at the beginning of March and it is planning to mostly remove requests, as soon as this month. Organic growth is next to nothing now, according to many developers. Most of the biggest games are losing users, according to what our data shows.

Zynga has had one big hit this year, Treasure Isle. The title has grown through advertising and cross-promotion within its other games, as far as we’ve been able to tell. Facebook wants developers to reach its users through its news feeds, the email addresses that apps can request directly from users, or through the counters that appear in the game and app dashboards on the home page.

None of these channels are currently helping social games reach and engage with users.

Most users read their feeds in the algorithmic “Top News” view, which shows users only 50 items per day; given all of the status updates, photos, shared links from the web and whatever else they see — and the preference the algorithm gives these other types of stories — games don’t have much room to get noticed. Email has all the problems that it does in real life, such as messages ending up unread or in the spam folder. The dashboards and counters, meanwhile, just aren’t getting significant engagement, even though Facebook wants them to.

Of course, the reason that Facebook took away communication channels like notifications and requests is that many  developers (Zynga included) relentlessly messaged users through them, to the point that the channels became choked with communication that seemed more like spam. So, between Credits and the communication changes, Facebook has reduced the value that Zynga and other developers can get out of the platform — at least for the present. These are all things that any serious developer on the platform already knows painfully well.

While the current changes are severe, it is important to understand that Facebook has made changes throughout the history of the platform that have seemed just as severe at the time they happened, like when it removed app profile boxes from users’ personal profile pages, or made the news feed a raw stream of real-time updates… or changed it back to be algorithmic. For more on this sometimes-painful evolution, see our article from 2008: Facebook’s platform: rebuilding the plane in midflight.

Basically, some companies have suffered as each change has rolled out, yet the social app industry itself has grown along with Facebook.

The Issues Today

With every change over the years, some developers have said Facebook is doing a bait and switch, encouraging them to build for one set of rules then changing the rules on them in ways that hurts their businesses. Yet at every turn, it has also been clear that some developers have acted in bad faith, forcing Facebook to take action against them in ways that affect the whole ecosystem. How one views Facebook’s changes now or before depends on where one’s interests lie. Usually, developers get upset but deal with the changes.

But no developer has ever moved off Facebook’s platform, especially not one as big as Zynga. What’s the reason it might, now?

Zynga has also already established something of a presence off of Facebook; millions of people are playing FarmVille on the web site since it launched months ago, and it has been slowly expanding web versions for other games, like Mafia Wars.

But those games all have relied exclusively on Facebook’s platform, from user’s identities to communication channels. A break with Facebook would mean these aspects of its sites would be completely cut off.

Instead of Facebook’s social graph and communication channels, Zynga would apparently try to create its own. It has gathered users’ email addresses, as Facebook has encouraged developers to do. And it has been busy testing out text messaging in at least one of its big apps, Mafia Wars, so it has some phone numbers. These are two communication channels it can use beyond Facebook. And considering that there are relatively fewer other communications channels left on the service, these alternatives look more appealing than before.

ZLive would also have the immediate short-term benefit of not requiring Zynga to pay the Credits tax; although if Credits ends up working as Facebook intends, Zynga would miss out on any of the benefits.

The bigger issue is that the two companies seem to have a personal problem with each other. Zynga has had far more platform violations than any other developer on the platform, according to sources in the industry. The company is well known within the developer community to be very aggressive with everything: messaging users, monetizing, etc. We have long heard complaints about its business practices from other developers, and those issues appear to have come to a head with Facebook itself.

But how much worse is Zynga? It has so many big, full-featured games that the numeric volume of issues will naturally be higher. We also hear that it has been getting in less trouble than most other companies in recent months.

We have, meanwhile, also heard that Facebook is using strong-arm tactics to control developers, although sources have not been able to provide meaningful details about the tactics themselves.

The TechCrunch article suggests one way strong-arming might be happening:

To make matters worse, say sources, Facebook is trying to get Zynga to agree to a long term deal where Zynga remains primarily on the Facebook platform. During negotiations Facebook has taken some steps to punish Zynga, such as shutting off notifications for Farmville and other games, and Facebook has threatened, say multiple sources, to simply shut some of Zynga’s games down permanently.

This example is unlikely, as notifications were shut off for all developers at the beginning of March. But, as the platform owner, Facebook potentially has other tools at its disposal.

Facebook does regularly tweak some ways that apps reach users, such as friend invites — it has been doing this since the platform launched. We’ve heard reports from developers over the years that Facebook play favorites with features like invites. On the other hand, from our understanding, it does try to be fair, and generally we haven’t heard complaints from developers on this front in quite a while.

Whether fair or not, the problem here is that Facebook offers no transparency into how it handles negotiations with individual developers; perhaps the company turned down the number of friends that Zynga players could invite to their games, for example, but it’s not clear that it was due to negotiations versus other completely legitimate policy enforcement measures.

Because there’s no more specific information about what Zynga has done wrong, or how Facebook has handled negotiations with it and other developers, it would be a mistake to pass judgment on either company’s behavior just yet.

Conclusion: Is Zynga Bluffing?

If Zynga tries to leave Facebook, it will be embarking on a risky experiment — no social game developer has even tried to do anything similar on the scale that Zynga might. After all, the whole point of “social” in social games is that you build games that use the social graph and communication channels of a host social network. It could try to use other social graphs as identity providers and as communication channels, like those from MySpace, Twitter or even Google — but no competitors offer meaningful competition to Facebook at this point. Zynga just withdrew from Tagged, another social network it’s been on, as TechCrunch also spotted, in an early draft of a company note to users about moving to ZLive.

So it seems Zynga is trying to centralize all of its resources on ZLive, and trying to own the entire relationship with its users rather than relying on Facebook or any other identity service to help it reach users. This basically makes Zynga a casual game company. While it may have a lot of money, a big team, and users, it is essentially going up against big casual gaming companies that have already established themselves on the web. It will be playing on their turf. This seems like a big challenge, but  Zynga has actually gotten good at building games, as many of its competitors have come to grudgingly admit in the last year or so.

There are also serious questions for Facebook about how users will be impacted if all of Zynga’s games were to suddenly disappear from the platform. What about the users who have each spent hundreds of hours, if not hundreds of dollars, building up their farms, their mafias, their virtual aquariums, and the other core components of Zynga games?

Certainly, Zynga has had issues over the years, but it has also made products that millions of people love. Facebook itself could likely see traffic and engagement fall, at least in the short term, if Zynga’s games disappear. Lots of other developers are hungry to grow, and we expect they’d happily try to take Zynga’s Facebook user base. But are they able to create and operate as many high-quality games at the scale Zynga has already achieved?

A related point here is that because Facebook has curtailed developer-to-user communication — it’s not clear how competitors will reach the users they need to in order to fill the void. We don’t know how many Zynga game players overlap with rivals; millions have likely only played Zynga games, and don’t know about the others. Techniques like cross-promotion within other games may not work that well here.

Zynga is also paying Facebook millions of dollars for performance advertising every month. Rivals buy ad space to reach developers, but most lack Zynga’s budget. It’s possible that Zynga’s departure would reduce the cost of ads, helping rivals find users, and hurting Facebook’s revenue. But many non-game advertisers have moved on to the system, other developers may not be able to gain much of an edge here.

ZLive ultimately sounds like it could end up worse for Zynga than for Facebook, but a split is a gamble for both companies.

The more damaging part for Facebook here is if it is publicly seen as acting unfairly towards Zynga, in a way that undermines other developers’ interest in the platform. If most developers thinks they can’t create a business on Facebook without having the rules changed or unfairly enforced on them, then they might also leave.

That doesn’t just apply to social app developers, it applies to web publishers busy integrating its new social plugins around the web. Platform developers are generally hooked on being able to access Facebook’s traffic — many describe it as an “addiction” — and the plugins are now helping other sites get that same addiction. Mainstream media companies have already been reporting significant traffic from Facebook. In other words, the plugin users are making Facebook a more important part of their businesses.

But if companies on the rest of the web think that Facebook will treat them poorly, they might not add its features in order to avoid the same headaches Zynga is going through. Facebook is also dealing with fallout over how it has handled a user privacy around the plugins and a variety of other launches; critics say it has tricked users into revealing sensitive personal information, as we’ve just covered in detail over on Inside Facebook.

Zynga and Facebook are in a good position to hurt each other. As with mutually assured destruction in other realms of human conflict, we think they’ll look at the costs and benefits, and work out their differences — although probably in a way that serves Facebook more, given the company’s better leverage.