What Do Revised Terms With Zynga Mean For Facebook?
Facebook (NASDAQ:FB) and Zynga (NASDAQ:ZNGA) have made certain amendments to their business agreement aimed at making the two companies less dependent on each other. Zynga, a social gaming company, rose to success by leveraging Facebook’s large and growing user base. However, it seems to be thinking differently now. While the news has not been received well by Zynga’s investors, it is not a major concern for Facebook from a long-term perspective. Facebook is too big to be affected by the agreement change and is increasingly diversifying its revenue channels. Furthermore, social gaming is still a relatively small part of Facebook’s value.
See our complete analysis for Facebook
The Agreement Changes
Zynga stated that it will be subject to Facebook’s standard policies and procedures as far as the use of Facebook’s platform and data is concerned, implying that any favoritism that might have existed will be gone. [1] Furthermore, Zynga is no longer obligated to use Facebook’s credit system for payments and to show Facebook ads on Zynga’s game pages. [1] The company can also launch its games on Facebook as well as other platforms, including its own site, concurrently. [1]
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The Significance
In 2011, approximately 12% of Facebook’s revenues came from Zynga. However, this proportion has been decreasing as Facebook is growing its other revenue channels and promoting numerous game developers. Additionally, some of Zynga’s games haven’t performed as well as its initial games that went viral on Facebook. In Q3 2012, Facebook’s revenues from Zynga decreased by 20% compared to the same period in 2011. [2] However, revenues from Facebook’s remaining gaming ecosystem grew by 40%. [3] The recent amendments are in-line with what we believe is Facebook’s strategy to reduce its reliance on Zynga.
Zynga makes money by selling virtual goods (in-game items) to its users. We estimate that the virtual goods business constitutes less than 20% to Facebook’s value. The impact of the reduced revenue contribution from Zynga will fade against growth of multiple game developers over the course of next few quarters.
Our price estimate for Facebook stands at $25, implying a discount of about 5% to the market price.
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