I’m heading to the LOGIN 2010 conference next week, and I’ve been thinking about social games a bit lately. Then, something exciting happened yesterday: According to TechCrunch, Zynga is preparing to break away entirely from Facebook. This is very possibly just a negotiating tactic by Zynga, but it clearly shows that the Facebook/Game Developer relationship is changing rapidly. Facebook games aren’t going away any time soon, but their growth has basically peaked.
If you want some evidence, the best place is some real metrics. According to Inside Social Games, 18 out of the 25 top Facebook games lost monthly active users during April, following the month of March where 14/25 lost users. King of the casuals FarmVille itself lost 4 million users (out of 82 million), the first ever significant loss in the titles history. Turns out that acceptance speech at GDC for FarmVille’s social gaming award will in retrospect be the exact peak of FarmVille’s success.
Much of the lost in active users can be blamed on changes Facebook made back in to reduce status updates from 3rd party applications. Without that available channel for spamming their users, apparently many drifted away. That’s an irritating loss of free advertising, but what has Zynga really pissed is the introduction of Facebook Credits. Facebook has decided that it, too, would like to profit from the use of it’s network for free viral marketing and presentation of microtransaction-based games, and is going to require Facebook apps that do charge to use their proprietary system, which means Facebook will take a cut.
The reason Facebook games have peaked is because that’s exactly what Facebook wants. Back when they originally set up the 3rd party app APIs and started encouraging gaming, Facebook’s primary business goal was to grow their active users as quickly as possible, so revenue from gaming was irrelevant. Now, Facebook is in a different place: they actually need to start making some money. That’s where Facebook Credits (they take a 30% cut) and the restriction on free viral marketing (it helps alleviate customer complaints of spam, and drives the app developers to buy more paid advertising) is coming from. They no longer care about user count, they care about revenue per user. So the game companies will no longer get to exploit Facebook’s extremely valuable social network for free.
This is why your business plan should never be at the mercy of a single vendor. Facebook was undercharging for the access to their social network, and various companies were able to experience massive growth as a result. Now that they want to start charging for the value they provide, the dependent companies will have to deal with reduced margins. These changes will hit a rapidly growing and crazily overstaffed company like Zynga (went from 100 employees to 760 in about a year) very hard, which is why their CEO is talking about jumping ship entirely from Facebook. Their entire company is set up to depend on massive growth, and when that slows I expect things to start going very poorly.
Facebook games aren’t going anywhere, as they clearly provide value to an audience that is happy to pay for virtual cows. But, the organic growth is slowing down throughout the sector, and the massive cash that companies like Zynga have accumulated won’t be able to sustain the growth forever. But, it’s a good time to be Facebook, as the combination of a 30% tax on microtransactions and what I expect to be a nice big uptick on advertising for games (easiest way to convert cash -> users is facebook ads) should allow the company to actually cash in on the work they’ve done to create the world’s biggest social network. As for Zynga, I expect them to try to make their own social network and fail miserably, based on the quality of their engineering so far.