Will Facebook Inc's Latest Idea Crush Zynga Inc?

Facebook CEO Mark Zuckerberg recently stated that his company was keen on blocking social game invitations. At a recent Q&A session at the Indian Institute of Technology in Delhi, Zuckerberg pledged to "prioritize" shutting down unwanted invitations, although he didn't didn't explain which features will be removed.

Source: Pixabay.

Back in the early days of Facebook, social games -- particularly those from Zynga -- drew a lot of new users to the site. But three years ago, new contract terms weakened that symbiotic relationship. Facebook's subsequent reformatting of its Timeline, News Feed, and Notifications further marginalized social games. If Facebook places even more restrictions on game notifications or blocks them altogether, how badly would Zynga and its social gaming peers suffer?

Why Facebook wants to kill game notificationsToday, Facebook no longer needs social games to drive its active user growth. Instead, it's investing heavily in turning the social network into a first-party ecosystem with its own video, news publishing, and e-commerce platforms. It's turning Messenger, its stand-alone chat app, into a monolithic platform with its own app store. It's also tethering third-party apps and websites to this ecosystem through time-saving single-sign ons.

Within this new system, Flash-based games on Facebook seem outdated and out of place. More importantly, many social games reward users with powerups for spamming non-players with invitations. If these invitations are burying Facebook's own first-party ecosystem notifications, it's easy to see why Zuckerberg is interested in blocking them altogether.

What this means for ZyngaEver since it renegotiated its contract terms with Facebook, Zynga has reduced its dependence on Facebook with its own website and mobile apps. By hosting its own games, Zynga no longer has to pay Facebook a 30% cut of its transactions or use Facebook credits -- but its ability to virally expand through Facebook's social connections is diminished.

Facebook remains Zynga's "largest single payment platform" for its games, butthe percentage of bookings conducted on Facebook has declined dramatically. During the third quarter, only 28% of Zynga's total bookings came from Facebook, compared to 31% in the second quarter and 41% in the prior year quarter.

That might sound like Zynga can survive without Facebook, but its bookings and user growth have been weak over the past year. Last quarter, Zynga's total bookings remained flat year-over-year at $176 million, even though mobile bookings improved 26%. Monthly active users (MAUs) fell 27% to 75 million, with mobile MAUs sliding 6% to 61 million and web-based MAUs falling 63% to 14 million. If Zynga had remained more dependent on Facebook users, those numbers might have looked better.

How Zynga fell behindIf Facebook blocks game notifications or buries them, Zynga's numbers will still take a hit, albeit a softer one than before. But Zynga shouldn't blame Facebook for its woes. Zynga enjoyed so much success in the early days of Facebook that it didn't adequately prepare for Facebook's evolution or the shift toward mobile devices. Many of its top franchises -- Words With Friends, Zynga Poker, Slots, and Farmville -- now seem dated compared to newer mobile-first hit games like Supercell's Clash of Clans.

Zynga's top games. Source: Zynga.

Meanwhile, game publishing giant Electronic Arts has invaded the mobile gaming market with bite-sized versions of its top franchises like Need for Speed, SimCity, and Madden. EA had 150 million MAUs playing its mobile games at the beginning of this fiscal year, giving it twice the number of active players as Zynga. EA's rival Activision Blizzard recently agreed to buy Candy Crush Saga maker King Digital Entertainment for $5.9 billion. In addition to creating a diversified portfolio of popular mobile games like Hearthstone: Heroes of Warcraft, Candy Crush Saga, and Farm Heroes Saga, it will havea combined mobile MAU base of over 500 million.

Looking ahead, it could be tough for Zynga to stay afloat without Facebook, and it could even be hard to compete against better-funded mobile rivals like EA and Activision.

An existential crisisShares of Zynga have fallen more than 80% since peaking in early 2012. That's because it's tough to see how Zynga can compete in the saturated mobile gaming market as bookings from Facebook gradually decline. If Facebook decides that it's finally time to kill all game notifications, Zynga's bookings and user growth could suffer.

The article Will Facebook Inc's Latest Idea Crush Zynga Inc? originally appeared on Fool.com.

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