Is Facebook a graveyard for games?

By Alex Pham

May 18, 2012 2:08 PM PT

It may be a financial bonanza for investors riding on the coattails of Facebook’s grand initial public offering today, but in social gaming land, few are celebrating.

Facebook, whose popularity among its nearly 1 billion users has been partly fueled by social games published by Zynga, Electronic Arts Inc. and others, may be facing a collapse of its gaming ecosystem, according to a book released this week by P.J. McNealy, a media analyst with Digital World Research.

Titled “Early Days: The Social Gaming Market and Facebook’s Achilles’ Heel,” the book argues that developers are no longer making as many Facebook games because it has become impossible for them to make money. Instead, they’re taking their games to tablets such as Apple’s iPad, Amazon’s Kindle Fire and tablets that run Google’s Android or Microsoft’s Windows Mobile software.

“Game developers are already following the new path away from Facebook,” McNealy argues, “and some of the emerging platforms could shift market share positions in a surprisingly short time frame.”

In other words, Facebook could quickly become a graveyard for games published by anyone other than the top five publishers.

Want proof? Here’s the simple math, according to Peter Relan, a serial Silicon Valley game entrepreneur and investor who has backed companies such as OpenFeint, a mobile games platform that was sold a year ago for $104 million.

Now the chief executive of social games publisher Crowdstar, Relan said his company went from getting 90% of its revenue from Facebook users in 2010 to only 50% in 2011. This year, Relan expects to see only 10% of Crowdstar’s revenue from Facebook players -- the rest of its revenue will come from people who play his games on smartphones and tablets.

“Facebook is no longer the viral platform it used to be for games,” Relan said in an interview earlier this year.

Why? Relan and McNealy cite two hurdles. The first is Zynga, whose dominance on Facebook makes it difficult for smaller developers to compete. The second is related to the first -- to get significant attention, developers must spend money to advertise.

“It becomes prohibitively expensive, and Zynga will always outspend you,” Relan said.

Looked at another way, developers must agree to give Facebook a 30% cut of any money they generate from their games. They also must spend an additional 20% or so of their revenue on advertising to get the attention of players.

“That’s half or more of your revenue,” Relan said. “It’s not an ideal network for game developers anymore.”

This creates a potential headache for Facebook as well, McNealy writes. “This will mean Facebook will miss opportunities, and will become increasingly reliant on Zynga,” McNealy writes. Zynga provided Facebook with 12% of its revenue in 2011.

At the same time, Zynga has attempted to become less dependent on Facebook by launching its own platform under Zynga.com. The San Francisco social gaming company’s stock plunged $1.11, more than 13%, to close at $7.16 on Friday as investors diverted money away from Zynga and other stocks related to social networks to snap up Facebook shares.

But as the title of McNealy’s book says, it’s early days with social gaming, and Facebook still could change the outcome. In an excerpt from his book, the author offers a remedy: Facebook “could welcome game developers once again by turning on more viral marketing opportunities such as enabling friends’ lists status updates to include gaming activities.”

McNealy concluded, “The discussions we have had with publishers have had a common and resounding message: They want more help and less hostility from Facebook.”

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