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End of a Love Affair: Zynga’s Share Price Plummets 12% On News of New Facebook Developer Status

Sites include , . Published on December 2nd, 2012. Written by Anthony West.

Separations are never a good thing in human relationships and the same seems to be true for companies. What started out as a wonderful love affair; one that produced millions of dollars between the partners Facebook and Zynga is now all over. Facebook no longer needs Zynga to keep its 1 billion strong users engaged and so the social networking has officially ended the exclusivity partnership which gave Zynga unprecedented access to its user base. 

Talks failed

Zynga has suffered terribly in the last few months and its share price lost around 90% of its value due to increasing competition in the social games space. This didn’t help its relationship with Facebook of course, who in the past had relied on Zynga to contribute to its revenues (around 19% in the first quarter of 2011). This fall-off in contribution meant that Facebook could no longer afford to give Zynga the sort of access it enjoyed and after failure to re-establish the partnership on beneficial terms, the social networking giant has now said goodbye—at least in the preferential sense.

The news that Zynga now has ‘developer status’ only was greeted with dismay on Wall Street and the company’s stock dropped 12% to close out at $2.62. When you consider that Zynga launched its IPO and debut north of $10, the decline is spectacular.

What next for Zynga?

It is very difficult to see where Zynga will be in the next year or so. The company hasn’t proven that it can cope without associating itself with Facebook and its standalone website hasn’t taken up the level of subscription from users it had hoped. The company is also failing miserably at coming up with catchy titles to replace the fading interest in games like Farmville, once the staple of all its revenues.

Perhaps Zynga’s biggest problem is that it has defined itself as a social gaming platform exclusively through Facebook and hasn’t sought to build an audience outside of the social network. This approach was heavily criticized in the beginning and now Zynga seems to be paying the price.

The rate of taxation that the company pays on its revenues earned from ads and sales of virtual currencies is also one of its Achilles heels. The hope had been that the agreement signed in 2010 allowing Zynga to use Facebook credits for 5 years on an exclusive basis was supposed to smooth the company’s transition into a more robust earnings platform. That hasn’t quite worked out either.

There has also been little sympathy among some analysts who say that Zynga’s business model was flawed from the beginning. Social gaming is big and people pay lots of money to other companies to play their games; the mistake Zynga made was placing its games behind Facebook’s login. He who owns the gold makes the rules as they say, and in this case, Facebook is exercising its ownership. As one commentator put it, “Hopefully a notice to businesses with terrible business plans everywhere.”

Zynga is still worth some money and so I believe it can still find a home, at least in a stripped down version of itself. Perhaps EA Inc. will buy Zynga; it’s a long-shot but possible.

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