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Facebook gaming shows first signs of weakness

June 14, 2012
It’s funny how some companies manage to rise to unbelievable heights in one quarter, only to hit all-time lows the next one. Zynga, the social game developer that has gained most of its profits (and popularity) by developing games for the Facebook platform, turns out to be one of these companies. Shares of the company have dropped to their lowest level since the December IPO (initial public offering). Today, Zynga shares are evaluated at just $4.98, a whole 50% off Zynga’s IPO price of $10. Even more disappointing is the fact that each share has depreciated threefold since their record high of $15.91 back in March 2012.

Citing AppData (a service that tracks Facebook app usage), analyst Doug Creutz from Cowen and Co stated that Zynga’s Facebook games have lost 8% of their daily active users during May, with “nearly all of the company’s major titles declining significantly’’, marking the second consecutive month-to-month drop in active users. At this point, it should be mentioned that Zynga has a unique deal with Facebook that allows the social game developer to extend its audience via viral marketing. All other Facebook game developers are “banned” from using viral marketing and forced to turn to (expensive) ads to extend their reach. The fact that Zynga is losing audience despite this exclusive deal with the world’s most used social network, is an obvious sign of the precarious health of the Facebook gaming industry.

According to P. J. McNealy, founder of consulting firm Digital World Researc, Google, Apple, Microsoft and Amazon are all courting game developers so that they move away from Facebook and on to mobile gaming. Since most Facebook game developers are already frustrated with Facebook for their exclusive viral marketing deal with Zynga, he argues that this initiative has already shown signs of amounting to the results desired by the four giants mentioned above. However, the most significant push in this direction has will happen in the next 12 months or so.

Apparently, even Zynga has realized that Facebook gaming isn’t the Holy Grail that everyone thought it to be just six months ago. As a result, Zynga is already pursuing means to gain profit outside Facebook’s platform by developing “light” but successful mobile games such as Draw Something or Words With Friends. In addition, Zynga’s “non Facebook related” efforts were also aimed at developing games for their proprietary portal,, despite the fact that their deal with Facebook will last until 2015. Zynga has obviously realized that their dependence on Facebook poses great risks, ones that might end up bankrupting the company.

Ok, so by now we have a clear picture of the fact that Facebook gaming is suffering, but how much damage could this one faulty sector do to the Facebook platform as a whole? Apparently, quite a bit, as Facebook earns a whopping 12 percent of its revenue (analysts believe that, profit-wise, the percentage is even higher) via social gaming. On a personal note, while I believe that Facebook has all it takes to overcome this crisis, it should be a wake-up sign for app developers relying entirely on Facebook for their profits.

Games, fun as they may be to the end users, are still a business like any other in the tech industry, and should follow the golden rule of business: don’t place all your eggs in one basket!