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.