By Alexei Oreskovic and Gerry Shih
SAN FRANCISCO Nov 29 Facebook Inc and
Zynga Inc severed the cozy ties that once bound the
Internet industry's closest couple, revising a years-old
partnership between the two companies.
The two companies reported in regulatory filings on Thursday
that they had reached an agreement to amend a deal struck in
2010 that was widely seen as giving Zynga privileged status on
the world's No.1 social network.
Zynga stock fell 12 percent to $2.30 in after-hours trading.
Facebook shares were off 5 cents at $27.27.
"Zynga's favored nation's status is gone but it seems like
it's been slipping away for a while now," said PJ McNealy, CEO
of Digital World Research.
The new agreement gives Zynga a freer hand to operate a
standalone gaming website, but eliminates the San Francisco game
publisher's ability to promote its site on Facebook and to draw
users from Facebook's thriving social network of roughly 1
Visitors to Zynga's gaming website will no longer be able to
tap into their network of Facebook friends or post messages
about their gaming progress to Facebook.
Zynga games, like "FarmVille" and "Mafia Wars," will still
be available on Facebook's social network, but those games will
no longer feature cross-promotions directing users to Zynga's
The move underscores the widening gap between the two social
networking pioneers, which went public within seven months of
each other and have been intimately tied.
In recent quarters, fees from Zynga contributed 15 percent
of Facebook's total revenues, while Zynga relies on Facebook for
roughly 80 percent of its revenue.
The 2010 agreement provided a variety of ways for Zynga to
meet its monthly user growth targets, including guaranteed
promotions of certain Zynga games on Facebook.
"Effective on March 31, 2013, certain provisions related to
Web and mobile growth targets and schedules will no longer be
applicable," said a regulatory filing submitted by Zynga on
The changes could benefit Zynga's rivals who have long
groused about Zynga receiving preferential treatment.
"There was plenty of speculation Zynga was getting referrals
within the Facebook community that other gaming companies
weren't getting which helped drive web traffic to Zynga games,"
said Digital World Research's McNealy.
But he noted that recent changes to Facebook's algorithm
appeared to be helping drive more traffic to Zynga competitors
such as Electronic Arts and KixEye.
In July, Zynga executives told analysts that the company's
revenue had plummeted in the second quarter as Facebook tweaked
its algorithms, sending fewer gamers to Zynga titles. Zynga CEO
Mark Pincus, at the time, assured Wall Street that Zynga was
"working closely with Facebook to optimize the game ecosystem."
Both Internet companies have been trying to reduce their
inter-dependence, with Zynga starting up its own Zynga.com
platform, and Facebook wooing other games developers.
"We have streamlined our terms with Zynga so
that Zynga.com's use of Facebook Platform is governed by the
same policies as the rest of the ecosystem," a Facebook
spokesman said in a statement. "We will continue to work with
Zynga, just as we do with developers of all sizes."
Among the myriad terms of their new agreement, Zynga could
elect not to collect revenue for games on its own website by
solely using Facebook payment system, in which Facebook takes a
30 percent cut.
The game developer could also choose not to display
Facebook's ads on its own site, Zynga.com.
"Wall Street thinks Facebook is booting them off or
something bad, but there's no way this is bad," said Michael
Pachter, an analyst at Wedbush Securities. "This is at worst
neutral and at best good."
The revised agreement also allows Facebook to develop its
own games, according to the filing. A person close to Facebook
said the company "was not in the business of building games and
we have not plans to do so."