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Facebook Basically Owns Zynga

Zynga has updated its IPO filing and it's a doozy. In particular, the amendment goes into the details of its relationship with Facebook, which is much deeper than we originally thought. It almost makes Zynga into a Facebook subsidiary.

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AllThingsD's Liz Gannes goes into what's new:

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  • Any game that Zynga builds that includes Facebook integration or Facebook data will be exclusive to Facebook for the duration of the two companies' agreement.

  • Zynga must tell Facebook about new games at least a week before they launch.

  • In exchange, Facebook will help Zynga meet monthly unique user targets for its games, and share some of the revenue from ads it sells next to Zynga games with Zynga. UPDATE: Facebook tells us that's not true. Apologies.

  • Apparently, Zynga can't launch games on certain rival social platforms, although that list is redacted, so it's not clear how extensive it is or how the deal really works. 
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Screenshot

There are a couple things to take away from this:

  • Facebook basically owns Zynga. We knew that Zynga had to share virtual goods revenue and spend advertising on Facebook, but this goes beyond a tax. This is control. Facebook decides what games Zynga can launch, and when, and how successful these games will be.

  • The Facebook Platform is not a level playing field at all. Whenever Facebook talks up the success of Zynga on its platform, they always make sure to mention that other competitors could theoretically catch up to Zynga. In reality, that doesn't seem to be the case. Facebook tweaks how much sharing of actions on Zynga games is allowed so that those games can get all the users Facebook promised. Maybe a couple of other big players like Playdom and Playfish have similar deals. It's hard to believe the dozens of smaller games makers do. What's more, most of the ads that appear next to Zynga games are ads for other, rival social games. So when a small maker of Facebook games buys Facebook ads, some portion of that goes to big-dog Zynga. Heartening.  
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Here's what it means for prospective Zynga investors:

  • Zynga's Facebook risk is enormous. Zynga is basically Facebook's outsourced games arm. Paradoxically, it might be good for the stock short-term, because Facebook is still private and owning Zynga is even more a proxy for owning Facebook, so investors could pile in.

  • Over the longer term, however, this clearly doesn't make Zynga look great. Even though revenue from Facebook games is increasing as Zynga gets better at monetizing, unique users are basically flat. Zynga's interest is clearly to build games on other platforms besides Facebook, both for growth and for platform risk mitigation. But it seems Facebook gets to say on what platforms Zynga can and can't launch games. Zynga is betting on mobile as its next big platform. Is GameCenter, Apple's iOS gaming social service, one of the "social platforms" on which Zynga can't launch games without Facebook's say-so? 

Über-VC and Zynga investor Fred Wilson has a saying: "be your own bitch," meaning don't be overly dependent on one platform; e.g. don't be a Google bitch by relying on SEO for all your traffic. But this filing seems to indicate conclusively, however, that Zynga is Facebook's bitch.

Don't Miss: How Zynga Makes Millions Off A Silly Game Like CityVille →

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