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Facebook has sat by and watched as prominent application developers have made millions upon millions of dollars on its platform, primarily through virtual currency. Not surprisingly, Facebook wants a piece of the action and is moving to take a piece of the action.

But that may not be so easy if the results of early deal making efforts are any indication. Application developer Zynga, which operates some of the most popular social gaming apps on Facebook, including Farmville and Mafia Wars, may leave Facebook and set up its own gaming social network after negotiations with Facebook over the use of Facebook's upcoming universal payments and credits system reportedly fell apart.

According to sources who spoke with Silicon Valley tech blog TechCrunch, Facebook has been using hardball tactics in an effort to get Zynga to agree to its terms. Those terms include exclusive use of Facebook's system, a 30% commission and restrictions on Zynga's investments in other social networks. Those terms are a tough pill for Zynga to swallow.

While there are a number of arguments to be made on both sides of this dispute, in my opinion there are a number of problems which have led to this widely-talked about deal making drama:

  • Facebook pulled a bait and switch. When Facebook launched its developer platform, Facebook stated unequivocally: "You are free to monetize your canvas pages through advertising or other transactions that you control." Developers who invested in the platform have good reason to be a bit upset now that it is trying to change the rules, even if it technically has the right to do so.
  • Big developers already pay Facebook. Zynga reportedly spends a significant amount on Facebook ads that promote its apps. Some reports even indicate that Zynga is one of Facebook's largest advertisers. At the very least, it might have been wise for the company to look at this as a point around which meaningful negotiation could have occurred.

    For instance, Facebook could have given Zynga the ability to reduce the amount in commission it pays on payments as it spends more on ads. In this way, Facebook may have been able to get what it wants revenue-wise without driving Zynga away from the negotiating table.

  • 30%. While it's not entirely clear how Facebook arrived at its 30% figure (Apple?), it appears that Zynga and other developers feel Facebook might as well have pulled the number out of its you-know-what. The reaction reveals a fundamental mistake: Facebook decided on a price that it was ill-prepared to convince developers makes sense. Long-term, it is in its financial interests to make sure that developers believe they're getting back something of equal or greater value when they hand over a substantial cut of their revenue to Facebook.

Despite all these problems, it would appear that Facebook has more leverage than Zynga. Just how much is debatable, and that might not matter if Zynga decides to take drastic action based on principle.

At the very least, it appears that Zynga is preparing for the worst, and moving ahead with plans to diversify even if it doesn't leave Facebook entirely. Which makes sense anyway given that no business should be so heavily dependent on a third party platform, especially when it does not have a formal agreement with the platform operator.

But make no mistake about it: regardless of the leverage Facebook may have, it has a lot to lose too. When Facebook launched its platform, Mark Zuckerberg stated, "We believe that there is more value for everyone in letting other people develop applications on top of the base we’ve built than we could ever possibly provide on our own." The popularity of applications created by companies like Zynga has demonstrated that he was right, but the tactics seen today indicate that Facebook is not really as appreciative of the value created now that it is a much larger and powerful company.

In my opinion, the most disappointing thing about this situation is that Facebook is on the brink of building a sustainably successful business without having to alienate some of its most important 'partners'. But it is instead choosing to treat them poorly anyway. Facebook is at a crossroads, and in a broader sense, I think that's the real story here because the current situation reveals a lot about its current mindset and likely future path.

Photo credit: RJ Bailey via Flickr.

Patricio Robles

Published 10 May, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2429 more posts from this author

Comments (5)

Peter Bordes

Peter Bordes, CEO & Founder at oneQube

Not a surprising move. it was just a matter of time. facebook was leaving to much money off the table. virtual currency is a growing core component and they need to be the central bank on their own platform.

over 6 years ago

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debs

Doesn't matter ultimately which platform Zynga stages its games on - it will still overcharge players whenever it gets a chance.

As a regular player of Yoville, another popular Zynga game on Facebook, I've been disgusted over the past year to see the increase not only in the number of "real money-only" items released in the game, but the increase in the prices of these items.

For example, a few days ago there was a "Super Saturday" event in Yoville where exclusive one-day-only items were released, the vast majority of which cost real money. One item alone cost 100 "yocash" - in real money terms, about £12. That's not a typo - twelve pounds sterling, for one decorative item in a computer game!

If players were to purchase enough "yocash" each month to cover the cost of every new yocash-only item released into the game, they would have to spend a couple of hundred pounds a month. Compare this to something like Sims, where you'd buy the main game on disk for about £30 and perhaps half a dozen add-ons at a tenner each, all of which would last for years.

Zynga's greed is ruining its games for its players - particularly Yoville, where players are leaving in droves in protest at Zynga's money-grabbing ways.

It'll be interesting to see what happens next.

over 6 years ago

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Drak

No, the problem is Zynga, not facebook. Not once in your article did you mention how much Zynga is hated in not just the gaming world, but also the end-user world. They (Zynga) have made changes to some of their most popular games that are universally hated. Their so-called "customer service" is the worst since the infamous "Dell Hell" blog, yet you people writing this article never once mention that Zynga most likely lost all these players because of their own screw-ups, NOT facebook's business tactics (which are prudent, by the way).

Remember, these are players they lost, not players they failed to gain. They LOST nearly 6 million MAU's from Café World alone just in the past week, which had nothing whatsoever to do with facebook and had everything to do with horrible changes Zynga made to that game.

You make Zynga sound like they're the poor little helpless victim of the big, bad Facebook, nothing could be further from the truth. They (Zynga) make their games as tedious and time consuming as possible, they do not listen to customer feedback, and they generally have the worst and most nonexistent customer service of any major company I've ever seen. Yet you guys don't acknowledge this? Please... Zynga is their own worst enemy.

over 6 years ago

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Andrea G., Promotions/Graphic Design at Duracard, LLC

Zynga's one of the worst companies. They don't come up with new ideas, they take ideas other companies have developed. They don't take the time to optimize any of the programming so games eat up computer resources. And, of course, they over charge for everything. Each game is made specifically to play on addictive behaviors rather than actual enjoyment. They even broke Facebook policy and collected private information of their players. Neither Facebook nor Zynga are innocent in these matters but Facebook's just trying to get some compensation from companies that take advantage of the rules and even brake them.

over 5 years ago

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Jill Miles

Zygan is the worst...Their support system is really bad..they cannot take the time to help!! I think it because they know nothing. They have also gotten so greedy...it is all about the money and if you don't have the money to spend they ignore you when you have a problem. I loved FV..but i am over it!!!!Iwish I could find a game that was not zygna..I am disable and all I really had during the day was my farm.

over 5 years ago

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