With recent changes to the Facebook platform having a large and mostly negative impact on social gaming developers, there’s been a lot of concern about the future of the industry and what part Facebook will play in it going forward. This was reflected today in a post by Michael Arrington entitled Zynga Gunning Up (And Lawyering Up) For War Against Facebook With Zynga Live.
At Blue Frog Gaming we’re obviously quite a bit smaller than Zynga, but we’re big enough that we’ve been able to talk to some of the people working on the platform. We’ve developed something like 8 games for it (many of which have appeared on other platforms such as the web, Twitter, and MySpace). We’ve gotten millions of users, and we’ve used the various ad networks, so we have a bit of insight.
When Michael says:
The relationship between Facebook
and its biggest gaming partner, Zynga
it’s not hard to believe. Recent platform changes have had a serious negative effect on the industry for most involved. Most of the app developers I’ve talked to have seen the same things we have, mainly virality decreases and connecting with existing users becoming harder.
And, to some extent, nobody wants to have all of their eggs in one basket. Especially when somebody else with a clear profit motive owns that basket. While the Facebook platform is certainly worth developing on, often to the exclusion of all the rest, nobody is ever happy about being tied to it.
But I’m suspicious that Zynga will ever really get away from Facebook, or even want to. Both companies are hurtling toward an IPO, and if there’ve ever been two tech companies whose valuations are so dependant on each other, I can’t think of them. Zynga is totally reliant on Facebook for users, and Facebook’s revenue stream would look a lot shakier without Zynga’s ad budget.
Facebook’s ad platform has been largely a dud. CPM rates are comically low, and anyone doing performance advertising on there will tell you why. People on Facebook go there to hang out, often from work, and don’t want to be sold something. As such most ads get very low click through rates (relative to search advertising) and even among the people who do click ads, relatively few end up purchasing. I liken running ads on Facebook to trying to self life insurance to drunks at a nightclub.
The one glaring exception, it seems, is social gaming. You can verify this just by using Facebook. You’ll see an occasional ad trying to sell a t-shirt with some quote from a movie you listed in your interests, and if you’re single you might see a few dating sites, but by and large what you’re going to find is almost entirely ads for games.
Facebook, on the other hand, has conflicting interests. They’ve long been accused of playing favorites with Zynga, allowing them to get away with things the rest of us cannot, giving them higher limits than they really deserved, etc. How much of it is true I cannot say for sure, but I will say we’ve had Facebook force us to change things in our games due to policy violations that are commonplace in Zynga’s apps. While we’ve certainly never been happy about that, it is their platform and if they want to give the guys who pay them millions of dollars preferential treatment, there’s not much we can do about it other than play by the rules and try to grow to the scale where we’ll be receiving the same.
When Mike says:
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.
I suspect that at least some of what he’s referencing is a shift in platform enforcement policies. I’ve seen some quotes from Facebook lately saying they’re planning on being more uniform and active in enforcing the rules and I suspect much of what’s going on is them trying to bring the policies that the biggest couple app developers adhere to closer to parity with the ones the rest of us do.
I’m not really sure how much of the schism, if there is one, has to do with Facebook’s payment platform. I have to imagine that right now, Facebook is realizing that they just might make most of their money through this in the future. Their recent above-expectations financial performance has been almost entirely a result of the rise of social games, and there has been a lot of grumbling lately about the possibility of them banning other forms of payment as a result.
For now, though, developers (presumably including Zynga) are free to monetize with many different forms of payments. Facebook has done a good job of helping eradicate many of the offer scams, which is a good thing for all involved, but other than that they’ve been pretty permissive.
If Mike’s on-target here, and he may be, then I suspect this means Facebook has already decided on this and has conveyed their decision to Zynga. It wouldn’t surprise me if they’re getting notice well ahead of the rest of us, as they often seem to do. And if there really is tension here, I would assume it’s because Zynga’s information points to this being largely a bad thing for app developers. If there’s one thing you can be sure of, it’s that Zynga’s doing multivariate tests and has a pretty accurate picture of just how much this is going to cost them.
The Facebook payments platform is, from a developer’s standpoint, not very enticing yet, and if there’s truth to Arrington’s words, I suspect Zynga thinks that’s not going to change. The long-term vision is appealing. The ability for people to pay with 1 click would certainly reduce friction, and having Facebook’s branding on the payment page might make people more willing to trust the process.
But the devil is in the details and there are three major problems with the platform that I see. The first is that it’s to a large degree cannibalistic. Some percentage of the people using Facebook payments would have simply given you their credit card, and the cost is about 28% lower when they do. That’s not chump change. Right now in a typical month, Blue Frog Gaming’s payments will break down to about:
48% Credit Card (Direct Payment)
43% PayPal
9% Offers, mobile, etc.
What this means is that we’d be losing 27% of our revenue if Facebook forced us to use them as an intermediary when accepting credit cards and PayPal. It would have to boost sales by 30% just to make up for that. It’s questionable whether any amount of added convenience could make this happen, especially for PayPal which is already just as convenient as Facebook for someone who is a customer of both.
The second is that most users don’t have a credit card stored with Facebook yet and setting that up is more work than just paying us directly due to the extra steps involved the first time. (This would be equally true of a new PayPal customer, but PayPal already has zillions of users.) To put it another way, it’s actually harder for most people to pay us the first time through Facebook than directly. Clearly most of our users already have a PayPal account (many of the direct CC payments come from people who also make a PayPal payment at some point, and the same is true of offers) so most customers already have a very convenient way of paying.
This will become less of a factor over time as more and more Facebook users begin using the system. Every time someone makes one payment at any app they get over the first hurdle. After that making further payments is roughly equivalent to paying through PayPal.
The third is that Facebook credits are portable. Right now if someone buys $20 worth of credits in our game Starfleet Commander, we make $20. However if someone buys $20 worth of Facebook credits after getting hooked on our game, they might spend only $10 immediately and then find another game they also like and spend the other half there. Of course it goes the other way too, but we Facebook developers are all vain and think our apps the most engaging and monetizing of the bunch and assume we’re the ones on the losing end of that deal in the long run.
So my guess it that what we’re hearing is the end result of Zynga’s a/b testing which has shown that the payments platform is cannibalizing significantly more than it’s adding. Or it’s mostly hearsay. Mike’s certainly not omniscient, and the article was clearly linkbait (note the “Lawyering Up” in the title and conspicuous lack of mention about any legal action in the article) but he just might have much of this story correct. He often surprises you with what he knows.
As for Zynga’s rolling their own gaming-focused social network, I think it’s a great idea. If anyone has the users to pull it off, they do. I only hope they have the wisdom to do it in a truly open way that allows other developers to participate and help control the platform in such a way that, like the web, you’re not constantly worried that an intern in Palo Alto is going to decide you’re violating some vaguely-constructed rule and shut your game off.
But really, Facebook’s not that bad. I cannot say I like all of their changes, but overall if they let the site get too spammy (and it certainly was borderline) users will leave and in the end we’ll all be worse off. I like that they’re looking to the future and thinking long-term, which is one thing they’ve done much better than their many competitors.
Also if game payments become a substantial portion of their revenue, especially if they become much larger than the amount they make off of the advertisements we developers place, they’ll have more incentive to help us boost virality and engagement in the future.
So overall, while we at BFG are a little nervous about the payment platform and some of the policy changes, we’re excited to see a more even-handed enforcement and are bullish about developing games on Facebook going forward. The birthplace of social gaming won’t lose it’s crown any time soon, and I have faith that they’ll be smart enough to keep from doing so in the long-term as well.
Tags: fb platform
You do realize that if zynga is on a run rate of, pick a number, $650m/yr that 28% difference if they were forced to use to use facebook as an intermediary is the ballpark of 200 million dollars?
When you’re talking about that kind of money anything is possible…. No one throws away hundred(s) of millions of dollars.
Furthermore, that’s straight off the top, so that’s in zynga’s current profits. Assign a 20x multiple on earnings, which is only for exercise value because it’s largely meaningless, but you get to $4 billion in capitalization/valuation ballpark. That’s off the investors value, and a whole lot of Pincus’ value. Really screws their valuation when they’re going out to raise more money or value an ipo.
Same equation for facebook.
Players only have so much money to spend and it’s in competition with things like other entertainment and living expenses.
Sucking it up and assuming you’ll make it up in sales is fool’s logic. Imagine if visa raised their rates to 30%. What should the shopkeeper do then? That’s comes out of profit.
Facebook is squeezing the lemon pretty hard when zynga is their biggest advertiser with massive leverage too. You’re nuts if you don’t think facebook is going to squeeze the little guys even harder than zynga in the future if they can, because they can. It’s billions at stake for them as well and if this is any indication, they have little long term interest in any one developer.
If they’re okay shooting someone as strong as zynga, they’re running with the idea that they are the main source of value and there will always be another developer to take their place. If this line of thinking holds, i think you’ll find at developers will end up with less and less of the money.