Facebook and Zynga Battle Over Credits — and Bigger Platform Issues

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.