Dependency Issues: Behind the relationship of Zygna and Facebook

After a year of non stop hype stoked by events like the recent 50 billion valuation after a 500 million dollar investment from Goldman Sachs, there will be very few people on the planet who have not heard about Facebook.

Then there’s Zynga, the company that creates social games built on top of the Facebook platform, which has comparatively been flying under the radar apart from in tech circles. Even though Zynga produces popular games like Farmville, Cityville and Mafia Wars, the parent company Zynga has been more focused on generating huge amounts of revenue rather than generating the sort of mainstream press Facebook have been getting.

The two companies are intrinsically linked but who needs who more and could they live without each other?

Facebook Revenues

The big question I have is just how much of Facebook’s revenues are coming from social gaming? Zynga may be the biggest Facebook advertiser and that is not something that they can take lightly. The fact that Facebook doesn’t have to reveal its revenue sources is a good thing for them because if it was a case of Facebook getting 50 or 60% of their total revenues from social gaming that is something that could influence their valuation negatively. I believe social gaming makes up a huge part of Facebook’s revenues although they have made massive strides in other areas to open up parts of their advertising platform to brands and decrease their over dependency on social gaming.

Zynga Helps Skew Facebook’s Numbers

The amount of time that people spend on Facebook every day is a great number to roll out to advertisers, but n.b.- that number is massively skewed by the 100s of millions playing social games for hours on end pushing up those average times.

Similar Investors

The companies have a lot of ties that link them together behind the scenes. Zynga CEO Mark Pincus was a very early investor in Facebook which has probably given him insight into where the company is headed from a strategic level. More importantly, both companies have very significant backing from Digital Sky Partners, the Russian investment firm, which means that they should have a common vision or at the very least a mediator to keep calm heads if things get ugly.

Could Zynga Go It Alone?

There have been a few behind the scenes rows like when Facebook put pressure on Zynga last year to start using its Facebook credit system. Zynga essentially sells virtual currency which costs little or nothing to produce and is nearly all profit. Introducing Facebook credits for its users means Zynga would be paying Facebook a 30% tax for using its platform, which Zynga thinks is unfair. It is however a fair price that is applied evenly across its entire platform and it’s a small price to pay in the long run for tapping into a community of over 600 million users.

Google Gaming Platform?

Things get slightly more complicated when you take into account that Google invested a couple hundred million into Zynga last summer and has plans to set up its own social gaming platform. It makes sense for Google to get into social gaming as a step to combat Facebook but the launch was meant to happen in 2010 and nothing has happened yet. You can expect that it has been pushed out to the middle of 2011 like the rest of Google’s +1 social networking strategies. If Google does enter the market in a serious way it will give Zynga an interesting alternative to Facebook’s platform but it all depends on the social networking capabilities that are built in and that is something that Google has not been good at in the past.

Better The Devil You Know

Facebook could live without Zynga. It would suffer a major blip in revenues if Zynga pulled out tomorrow but somebody else would move in, replicate the games and be willing to pay the percentage on credits. It hurts Zynga to pay such a large portion of its revenues over to Facebook but it’ll never find a better platform for fast growth. There are huge amounts of money involved and greed could see these bedfellows fall out at some stage but I’d imagine because they have similar investors, are both huge unstoppable juggernauts and are both headed for IPO that they’ll continue to live together and enjoy huge success.