Facebook Inc (FB) & Zynga Inc (ZNGA): Splitsville As Zynga Moves On


Zynga Inc (NASDAQ:ZNGA), according to news released today, will no longer receive special treatment on Facebook. The market responded poorly to the news, the firm’s shares dropped by around 13% before recovering later on in the day. Zynga Inc (NASDAQ:ZNGA) stock now stands at around $2.50, down just 5%.

Facebook Inc (FB) & Zynga Inc (ZNGA): Splitsville As Zynga Moves On

So is the announcement really that bad for Zynga? Our own analysis published earlier, framed the announcement as a move by Facebook Inc (NASDAQ:FB) to distance itself from Zynga as the firm’s fortunes change. Zynga Inc (NASDAQ:ZNGA) was not always seen as Facebook’s little brother, however. A look at the history of the relationship between the firm’s is certainly worth the effort for investors.

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Zynga Inc (NASDAQ:ZNGA) released its first Facebook game, Zynga Poker, in July of 2007. It wasn’t until 2009 that the firm’s fortunes, and its relationship with Facebook Inc (NASDAQ:FB) really took off. In April of that year Zynga became the social networking site’s top developer. In June it released Farmville.

That game, and those related to it, have been the real jewels in Zynga’s crown. The company has relied on the freemium model perfected in those applications to supply it with revenue. In June of 2012, Facebook saw the advantages of social gaming and laid out a five year partnership with Zynga Inc (NASDAQ:ZNGA). That partnership was dissolved today.

It was just weeks before that deal was signed that Zynga threatened to leave Facebook altogether. The firm had set itself against the Facebook credits model of monetization, but after negotiations in which it was guaranteed a competitive advantage over other game developers, the company joined hand in hand with Facebook Inc (NASDAQ:FB).

During that conflict, Zynga CEO Mark Pincus announced that Zynga Inc (NASDAQ:ZNGA) would launch its own social network dedicated to gaming. The terms of today’s deal would allow them to do just that. It gives them the same freedom as any other application developer on Facebook’s platform.

The deal announced today is a preliminary decoupling of Zynga’s fortunes from Facebook’s and vice versa. The companies are still highly connected, however. Zynga Inc (NASDAQ:ZNGA) provided Facebook Inc (NASDAQ:FB) with around 14% of its revenue in 2011. There are no other social networks with the ability and user base to give Zynga a strategic impetus to leave Facebook.

There are several ways to interpret the deal. The first, mentioned earlier, is an attempt by Facebook Inc (NASDAQ:FB) to distance itself from a dying company. The second is an attempt by Zynga Inc (NASDAQ:ZNGA) to protect its future plans from Facebook’s control.

The company’s first game, Zynga Poker, is being touted as the company’s saving grace by some analysts. If Internet poker is legalized in the United States, the company could begin to multiply its revenue in a very short period of time. If Zynga Inc (NASDAQ:ZNGA) were to take full advantage, Facebook Inc (NASDAQ:FB) might be an impediment.

Denying Facebook Inc (NASDAQ:FB) control over the firm’s activities is a sensible move in the current atmosphere. Allowing exclusive hosting of the company’s games to the social network would leave online poker revenue taxed, and might result in other obstacles.

Today’s agreement will be viewed differently depending on the company’s future success. It could be the day the firm began to die, or it might be the day the firm finally threw off the shackles of Facebook. The interpretation will depend on the company’s management, and the decisions they make.

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