The Social Gaming Movement off of Facebook Has Already Begun

When it comes to competition for traffic and engagement for social gaming, is Facebook actually losing?

The problems related to the Facebook initial public offering have diverted attention from the state of the business. While the general impression is that Facebook is building and growing, there are more than a few red flags, notably the company’s social gaming platform and relationships.

Facebook currently earns about 12 percent of its revenues from social gaming — and likely a higher percentage of its profits — led by its deal with key developer partner, Zynga.

But other game developers, unhappy with the way they are treated by Facebook, are taking their games elsewhere. While it’s the biggest platform today, the economics and opportunities to make games on Apple’s iOS devices, or Google’s Android-based devices, are luring developers to change their focus away from Facebook.

The biggest issue for developers is the way the company ratchets viral marketing efforts up and down depending on the partner. For example, a Facebook user who has 30 friends on his/her friends list will receive updates on the activities of those 30 friends. If one of them starts playing a Zynga game such as Castleville, the user will likely receive a notification saying so.

However, if the friend plays a non-Zynga game, the non-Zynga status update typically won’t show up. This status notification is a form of viral marketing, and can have a significant impact on the marketing dollars spent by a developer to drive gamers to download and play their game. The only option for developers is to spend more advertising dollars on Facebook to drive downloads, because Facebook has shut off viral marketing for every company except Zynga.

What is a game developer going to do? No matter what a developer spends on advertising on Facebook, viral marketing has been shut down, so acquiring users is prohibitively expense. As a result, developers are moving to other platforms, lowering Facebook revenue and advertising dollars.

The movement off of Facebook has already begun

The first company to acknowledge it publicly was CrowdStar — but it isn’t alone. In my discussions over the past six months with private gaming companies, more are moving game development off of Facebook to other platforms but haven’t publicly disclosed it yet.

Further, Facebook admitted while on its IPO roadshow that advertising dollars were weaker than expected. The news about GM stopping advertising on Facebook doesn’t help, either. While I don’t believe the weaker advertising dollars is completely attributed to gaming, it raises a red flag for Facebook.

Facebook’s competition: Apple, Google … and both Amazon and Microsoft

New platforms for social gaming are regularly springing up, and the social gaming market is in its early days.

For example, while the tablet market today is currently dominated by Apple’s iPad products, there is no clear platform in second place. The emergence of either Amazon or Microsoft as the No. 2 tablet maker in market share behind Apple over the next 12-to-18 months means they will have enough size and reach to lure developers to make exclusive tablet games, and not for Facebook.

In the next 12 to 18 months, the competition for tablets will heat up considerably as a) the Kindle Fire continues to gain share as a low-cost alternative to the iPad and b) Microsoft throws its considerable weight and cash balance behind support for Windows 8 mobile devices and Windows Phone devices.

Google, Microsoft and Amazon are being aggressive in courting game developers to change their development efforts away from Facebook. These behemoths are writing checks, offering advertising support and other development support deals to get developers to make the change, and it has been working.

While market share shifts in the video console eras have typically been on a five-year basis, today’s market share shifts in technology and social gaming platforms are noticeable on a 12-month, or even a six-month basis. This means the landscape for tablets and social gaming could be markedly different just a year from today.

Lost publisher revenue and advertising means Zynga’s deal is magnified

With more publishers moving development off of Facebook and focusing on other platforms, such as the Kindle Fire or Windows 8 tablets, this means lost revenues and associated advertising revenue for social games for Facebook. Further, it magnifies the risk that Zynga must launch more games on Facebook instead of on zynga.com.

Zynga is inherently conflicted. While it generates the majority of its revenues and profits from Facebook, it is launching new efforts in mobile and on its own portal, zynga.com. According to public filings, Zynga’s deal with Facebook runs through 2015, but hasn’t stopped Zynga’s efforts to build up new, non-Facebook revenue streams, and this puts them at odds with Facebook.

How does Facebook change? Should Facebook change?

Some think Facebook should do nothing and simply enable any Facebook user to continue to access its service on any platform, current or future. However, game developers are already following the new path away from Facebook, and some of the emerging platforms could shift market share positions in a surprisingly short time frame.

What could Facebook do to help retain developers?

Short of changing the economics on Facebook credits, the one significant move to re-welcome game developers would be to turn on more viral marketing opportunities — such as enabling status updates to include gaming activities. Viral marketing being enabled again would be a direct and clear response by Facebook. The only developer not likely to welcome that move, however, is Zynga, since more open viral marketing on Facebook would mean more competition for Zynga games.

P. J. McNealy is founder of consulting firm Digital World Research and has conducted research in the technology and gaming sectors for 15 years. His new book, “Early Days: The Market for Social Gaming and Facebook’s Potential Achilles’ Heel,” is available on Amazon.com.


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