/// Should Facebook Buy Zynga?
Zynga ZNGA +3.40% is cheap these days, with an enterprise value of around $700 million. In some corners of the Internet, the idea that Facebook should buy the ailing social networking company is cropping up.
This is a good time to assess what Facebook is, and what it may become. Currently, the value of Facebook is as a platform for other developers. It collects 30% of each transaction. The more transactions it processes, the more it makes, so there’s an incentive to have as many businesses operating on the platform as possible.
It’s no coincidence, for instance, that the word “platform” was uttered 27 times on Facebook’s first earnings call on July 26.
Here’s what Mark Zuckerberg said about the platform idea then:
“We believe one of the biggest opportunities we have is to create the identity and social layer that all new apps and websites can be built on top of. We think almost every product is better when you can experience it with the people you care about. So over time, we expect almost all of these products should naturally become social. Since there’s no way we could ever build all of these ourselves, we’re focused on building a successful platform, which enables developers to build great social experiences into their own apps by integrating with and exchanging information with Facebook.”
The art for Facebook is to extract as much value from these partners and not play favorites. At this point, it seems too difficult for Facebook to buy Zynga, and not pollute this very valuable and and relatively neutral platform for developers.
Facebook’s financials show how valuable this platform is becoming. In Q2 this year, Facebook brought in $192 million in so-called revenue from payments, up from $116 million in Q2 2011.
On paper, it looks like adding Zynga would increase this number by a massive amount – some $1.1 billion, according to Zynga’s projections for the year. But Facebook’s platform has already brought in about $400 million in payments revenue in the first two quarters this year, and it hasn’t even begun a mobile effort in force.
There are also benefits from Facebook’s platform that aren’t immediately visible in Facebook’s financials. Payments primarily focuses on games, but all the extra content that Facebook serves through its platform provides additional incentive for users to come to Facebook. In turn, Facebook can serve more advertisements and make more money that way.
Why buy Zynga? When Facebook went public, a huge chunk of its revenue came from Zynga in the form of transactions and advertising. An acquisition would certainly be a way to cut costs, too.
A much more mobile-focused Zynga could be of greater interest to Facebook, which is trying to figure out its own mobile approach. About 600 million of Facebook’s one billion-plus users now access the site each month from a mobile device. Mastering mobile is considered, perhaps, the essential question for Facebook and its stock price.
But here’s what Facebook said when it first went public, from its S-1 filing with the Securities and Exchange Commission:
If Zynga does not maintain its level of engagement with our users or if we are unable to successfully maintain our relationship with Zynga, our financial results could be harmed.
Alas, Zynga has not maintained that level of engagement, and its player base has started to trail off, precisely because mobile has been so hard to execute. The era of Facebook juggernauts such as FarmVille and CityVille has passed. Zynga’s stock is showing the strain, down to $2.31 today, well off its $10 IPO price.
Don’t forget how Zynga has performed even in the best of times: It lost $404 million in 2011, $85 million in the first quarter this year and $22 million in the second quarter this year.
To buy Zynga in its current form would be to essentially buy an aspiring mobile gaming company — whose games don’t monetize as well as the old Facebook ‘Ville games — and a company in transition that’s still trying to figure out the rest of its business, like its own platform for connecting players.
Zynga’s advertising revenue is tiny compared to Facebook’s: Revenue from advertising grew from $15 million to about $41 million in the second quarter this year, year over year. In just the second quarter, Facebook brought in $992 million in advertising revenue, according to its most recent quarterly earnings filing with the Securities and Exchange commission.
So, open platform or walled garden?
Remember what Zuckerberg said: “It’s worth calling out that our vision for platform is bigger than what most people perceive.”
Zynga in its weakened state offers an opportunity for other developers to build games that can directly compete with and surpass those built by Zynga — and possibly end up being the “next” Zynga. If Facebook bought Zynga, and threw weight behind Zynga, it could scare all of them off, and Facebook wouldn’t make money by serving as a platform for them.
As of now, the risks of buying Zynga and setting a new precedent seem greater than those of not buying.
So, if Zynga were to sell, who else should buy it? Here are a few possibilities:
Amazon. Zynga, while losing talent, still has a massive stable of game designers. Those designers make games for the Kindle Fire, which Amazon could use as a promotional tool. Amazon CEO Jeff Bezos said he wanted ”to make money when people use our devices, not when they buy our devices.” That an incentive to get Kindle Fires into as many hands as possible. Amazon has a games studio, but purchasing Zynga could help them get immediate access to a greater number of developers.
Yahoo. Yahoo already has games on its home page, and including games by Zynga — which are still among the most popular, though less so these days than they used to be — would open the portal up to a wider audience and attract more eyeballs. Both a deal with Yahoo and Amazon would be content-centric.
AOL. Like Yahoo, AOL has a games portal that could benefit from the presence of Zynga games. That portal also includes some editorial content — ironically, some are posts like “FarmVille 2 cheats.”
Both Facebook and Zynga declined to comment.
All that being said, it seems unlikely Zynga CEO Mark Pincus would seek to sell his company either. In a recent interview in July with PandoDaily’s Sarah Lacy, Pincus said, “We hope to build a long term company that matters, that will always follow this same mission, and I said we’re never gonna sell the company. There is no exit, and I’ve said my only exit is by natural causes.” Pincus followed by saying he hopes to be CEO of Zynga for his entire career.