Why game developers hate the Facebook-Zynga marriage, and how Google+ can benefit

Facebook game developers were furious when they found out about the tight relationship between Facebook and Zynga.

If Google properly channels that anger, it could find considerable support for the idea of making games that run on its new social framework, Google+. The question is whether that anger is justified – and the answer isn’t crystal clear.

Because Facebook appears to favor Zynga more than other game developer, including through an unusual growth-target agreement, those two companies seem to be just about joined at the hip. Developers of Facebook games might logically conclude that there’s no hope for them to compete with Zynga. They might instead focus on Google+, which is expected to support games in the future and is currently virgin territory.

“It’s an outrage,” said an executive at one Facebook game developer, who spoke on condition of anonymity, at last week’s Casual Connect game conference in Seattle, where the Facebook-Zynga deal (and a filing Zynga made with the Securities and Exchange Commission describing the deal) was the subject of much conversation. “It means we can’t move to Google+ soon enough.”

Dan Rose, vice president of partnerships and platform marketing at Facebook, acknowledges that some developers are upset and that his company is restricted about saying everything because of the IPO quiet period. But he insists that Facebook isn’t playing favorites, contrary to rumors of kickbacks or some special favoritism in exchange for Zynga’s adoption of Facebook Credits.

“It’s actually a level playing field,” Rose said in an interview. “Everybody on the platform is playing by the same rules, whether that is from an economic perspective or a distribution perspective.”

Trip Hawkins, chief executive of Digital Chocolate, which makes both mobile and Facebook games, was the only CEO willing to go on the record for this story. Hawkins described platform holders as “feudal lords” in a recent talk at our GamesBeat 2011 conference.

“We all knew Zynga had contractual advantages, but the extent of it makes Facebook a tough platform for everyone else,” Hawkins said. “Policy changes have made revenue and margins more challenging this year, so it is a bitter pill for all of us to find out that the market is neither competitive nor fair.  Their relationship could not be more complicated.  It’s like a bad marriage that is staying together for the money.  You don’t get the feeling that either side really feels happy or free.  Ironically, they could both use more real friends.”

Other Facebook partners are not satisfied with what they have heard so far. A different chief executive at a Facebook game company, speaking on condition of anonymity, said, “The bottom line is those two need each other and Zynga got a preferred deal. It sucks for other developers. We have long lived in a world where the playing field wasn’t fair. We knew that for a long time, and this doesn’t change anything. It’s annoying. We would very much like to participate in Google+.”

And still another chief executive at a Facebook game company said, “I fully expected they had a sweetheart deal from the beginning in order to get Facebook Credits to take off. They needed the biggest player to support it. Where it gets shady is where Facebook gives them growth targets. That makes me sick.”

The executives spoke with VentureBeat but didn’t want their names published in order to protect their business relationships with Facebook. That’s an indication of how little leverage these developers have, and how important Facebook remains to them. They might also one day be acquisition targets for Zynga.

“I think the tight relationship is positive for Facebook and Zynga, but places other game developers at a disadvantage,” said Lou Kerner, an analyst at Wedbush Securities, who has also spoken with developers about the deal. “All else being equal, other developers will seek out opportunities that offer a more level playing field. The agreement is counter to what Facebook has been saying about how it’s an equal platform for all.”

In conversations with game developers, Facebook is trying to calm developers down and explain that it really doesn’t favor Zynga in a way that is unfair to the rest of the development community. There were, in fact, times when Zynga hated the Facebook-Zynga relationship. A year ago, Zynga’s chief executive Mark Pincus told employees that Zynga planned to expand beyond Facebook and start its own Zynga Live web site as a portal for its own social games. That never happened because Facebook cut the deal on Facebook Credits with Zynga.

Zynga already has enormous advantages over other developers on Facebook, with more than 264 million monthly active users on the social network, more than the top 15 other game companies combined.

But what’s really making developers angry is a new disclosure by Zynga filed with the SEC, which shows that Zynga gets benefits that apparently no other game company gets. In the filing, Zynga said that it received a special deal when it agreed to support Facebook Credits, a new virtual currency from Facebook, a year ago. In that deal, Zynga agreed to give 30 percent of its virtual goods game revenues to Facebook, the standard fee for using Facebook Credits.

In exchange, Facebook agreed to help Zynga hit growth targets for its games. Facebook did not, as initially reported, agree to kick back revenue to Zynga from ads placed by Facebook alongside Zynga games on Facebook. Facebook said there was a deal to share ad revenue with Zynga if it chose to move its Facebook games off of Facebook, but that ad deal never kicked in, according to a statement by Facebook. The 30 percent fee is what every developer pays, and Facebook told developers that everyone was treated the same.

But other developers were upset about Facebook’s support of Zynga’s growth targets. Facebook reportedly (in a redacted section) promises growth by the end of the five-year agreement, according to a source familiar with the agreement. Those developers said they specifically asked Facebook last year if Zynga was getting a special deal when it signed up for Facebook Credits, and they were told there was no such deal. But the developers said there were no growth targets in their own agreements about Facebook Credits.

“Were developers misled?” said another source from a social-game maker. “The unequivocal answer is yes. In meetings with us, they told us there was nothing to the agreement that was not available to other leading social game developers. That’s patently not true. We look at the agreement and it does not allow a level playing field.”

From Facebook’s point of view, it is easy to see why the company entered into a special deal with Zynga. A year ago, there was a lot of resistance to Facebook Credits. Facebook charges a 30-percent transaction fee, whereas other virtual currency providers take as little as 10 percent. It amounts to a huge tax increase for developers doing business on Facebook. Facebook planned to make the virtual currency mandatory, but it needed to work out the kinks in the system with real-world trades. Zynga was prepared to expand its games off Facebook to its own portal, Zynga Live, and move to other platforms as quickly as possible. At the time, that was pretty alarming to Facebook.

So Facebook cut a deal to get Zynga on board. That deal was similar to other deals that console makers have made to get crucial support for their platforms, for instance when Sony was able to convince RockStar Games/Take-Two Interactive to publish Grand Theft Auto games exclusively on the PlayStation 2 console. Facebook’s position was that it would increase its overall support for the game ecosystem, but it would not arbitrarily help Zynga’s own games grow faster.

But for the smaller developers on Facebook, the Zynga-Facebook deal is a sign that Facebook isn’t being fair to all comers.

From Facebook’s point of view, the favoritism isn’t as bad as what some platform owners have done in the past. Console makers, for instance, typically have their own first-party (in-house) game studios that get access to information about a new console far earlier than third-party developers. That allows the first-party game makers to get a head start. Facebook has no such first-party studios.

Also, Zynga and other early adopters of Facebook Credits — CrowdStar, RockYou and Electronic Arts — had to start paying the 30-percent royalty to Facebook earlier than other developers, simply because they started using Facebook Credits earlier.

Zynga also had a major restriction. If Zynga hit its growth targets with Facebook, then Zynga’s games had to stay exclusive on Facebook. From that perspective, that part of the agreement may return to haunt Zynga. Now that Google+ is a viable platform, Zynga may want to extend its games there. But Zynga can’t just take the exact same game and move it over now, due to its contract with Facebook. Paradoxically, the lack of a special Facebook deal will give other game developers more flexibility to pursue Google+ games.

Rose at Facebook said, “Our focus is to grow traffic for games on Facebook. And the developers who build good games will benefit from the products we launch that are designed to grow distribution. That’s the way we run the platform. That is how we grow the platform generally. The best games will benefit the most because those are the games our users will want to play. We don’t apply the distribution mechanisms of the platform from one developer to the next in any way. The largest developers on our platform down to the smalllest developers on our platform operate on the same distribution rules. There are two ways to achieve a growth target. One way is to single out a developer and grow their traffic. Another way is to grow the entire platform and assume the developer that makes good games will grow with the platform. Our approach with any single developer is the latter, period.”

Developers aren’t necessarily buying that. It didn’t help that some sections of the Facebook-Zynga agreement were heavily redacted in the SEC filing, fueling more rumors that there were other special deals in place. In fact, in section 8.3 of the document, the agreement states the fee that Zynga has to pay to Facebook for the use of Facebook Credits. That section doesn’t say 30 percent. Rather, the actual fee is redacted. The SEC document also has a chart of the schedule for growth targets, but the numbers in the schedule are redacted. (Facebook says it said publicly in January that every developer pays the same 30 percent fee per transaction for using Facebook Credits, and that is still true now).

Developers have also heard rumors of other examples of favoritism. Zynga, for instance was reportedly allowed to issue more invitations to gamers to join a social game than other developers were allowed to send, according to one executive at a Facebook game developer. But Facebook’s policy on invites depends on whether the users embrace or reject the invitations. If users reject more invitations from a certain game, then the number of invites that game can send will be reduced, according to conversations that game companies had with Facebook.

Officially, Facebook says it supports the idea of more game companies and games on its social network. Sean Ryan, head of game developer relations at Facebook, said in a speech last week at Casual Connect that there are plenty of opportunities for game developers to make social network games in genres that aren’t crowded. While Zynga has a lock on city and farm simulation games, there are still plenty of opportunities in areas such as role-playing games, hidden object games and casino games, Ryan said. Facebook continues to invest heavily in its game ecosystem and will continue to offer new features for game companies in the future, Ryan said.

Ryan also said there were 376 games with more than 100,000 monthly active users and 80 games with more than 1 million monthly active users.

Google, as we noted in our other Google+ story today, has yet to come up with an applications programming interface, or API, which sets the rules on how to create a game that sits on top of Google+. Google would be smart to create a smaller royalty — perhaps 20 percent or lower (as is rumored) — to attract game developers who don’t want to share 30 percent of their revenues obtained via Facebook Credits.

“On Zynga-Facebook and how that impacts Google+, any substantial social platform without an established games ecosystem offers opportunities for new entrants,” said Tim Merel, managing director at game-focused investment bank Digi-Capital. “These must be offset against the risks of it being a new social platform. All the established games companies, particularly strong social players like Zynga, Wooga, Crowdstar, Playfish, Playdom and others should also be considering how to play the Google+ market.”

Hawkins said, “Google is a major force in the industry and could drive important innovations with Google+.  When there are alternatives and different approaches it makes things more competitive and keeps everyone on their toes.  These new industries are still in the first inning, so much remains to be decided.  Every major participant has great opportunity and will make many good moves, and also bad ones from which they will need to retreat or recover.  Whoever goes down their learning curve with a humble attitude will adapt fastest and be likely to win.”

Already evident from the trend at Casual Connect and our recent GamesBeat 2011 conference is the fact that many social game developers are moving into mobile, where the battle for market share is still wide open, since there is no dominant company. But they’re also looking around for any other platform that can give them large numbers of users.

“We’d love to move to Google+, but the only problem is that there isn’t anything to move to yet, and they will have a smaller audience for games than Facebook for a long time to come,” said one Facebook game developer CEO.