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Why Facebook and Zynga Declared a 5-Year Truce

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Facebook and Zynga, the social network and its most popular game developer, have settled some of their differences and agreed to work together for the next five years, they announced in a joint press release today. The two companies realized they need each other, even if their objectives are not always aligned.

As part of the deal, Zynga promised to expand its use of Facebook credits to more of its titles “in the coming months.” Facebook will maintain its standard 30 percent revenue cut for Facebook credits on all Zynga games, which was a core negotiating point, a Facebook spokesperson confirmed to GigaOM. But of course there are other, non-disclosed terms of the deal that will keep Zynga on board and happy with the Facebook platform.

By way of background, though Facebook and Zynga have had a mutually beneficial co-dependent relationship for the last couple years, it’s gotten ugly lately. Facebook wants to push forward with its own standardized currency — Facebook credits — within applications on its platform. It sprung this on app developers at a particularly bad time, just after reducing functionality for them to notify their users, resulting in significant active usage drops. And worse, Facebook is taking a 30 percent cut of all credits, just like Apple (s AAPL) does on its iPhone platform, but without justifying such a large share by adding new functionality or marketing beyond what it’s long given away for free. App developers were particularly concerned that Facebook would, as it fully rolls out the credits program, require them to use it exclusively and disallow cheaper options like PayPal (s EBAY).

So Zynga, which built its business on the social networking site, freaked out and made a stink about building its own game network and said it may even leave Facebook altogether.

Zynga would lose virtually its whole business and its relationships with its users if it left Facebook, so that was hardly an option. What was at stake for Facebook was different. Perhaps the company could have stood to lose the Zynga advertising revenue and user engagement, and it might have been nice to live without Zynga’s particularly aggressive efforts to recruit users and their friends to its games. However, other developers were siding with Zynga because they agreed the credits deal was unfair. If Facebook had cut off its biggest game maker, it would have alienated everyone else, too — even the competitors who stood to gain the most, in the short term, from Zynga’s absence.

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Will Zynga’s Growth Make it a Facebook Frienemy?

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15 Responses to “Why Facebook and Zynga Declared a 5-Year Truce”

  1. tom p.

    looking forward to someone writing an in depth piece on this topic. realize this site isn’t necessarily the place, but it’s a potentially juicy fast moving story that wouldn’t be that hard to piece together. zynga flailing early days with no business model and low quality users garnered through fb spamming, pincus investor in facebook, facebook belatedly realizing they may have given away the crown jewels…

  2. Where is the influence of the patents supposedly held by Pincus and Hoffman? Weren’t these supposed to be the leverage Zynga held over Facebook?

  3. Good deal for both parties. For two pre-IPO companies, being seen as locking up a steady stream of revenues for 5 years has to be attractive for potential investors. This takes some risk perception out of the data that shows Zynga’s growth is flattening. Facebook comes out looking like a grown up company willing to work with partners that help them make money. Everybody wins.

  4. These two need each other. Facebook seemed to get a little big headed as of late and became a little Appleish, but with all attacks lately maybe they are realize they aren’t yet as big as they think and still need these types or partners.

  5. “Detente” is good for now but what will happen in 5YRS? I think its a risky move for Zynga not to try and move ahead and be less reliant on Facebook. At this point of the game Zynga does seem to have the upper-hand.

    For sure Facebook gave a financial incentive for Zynga to stay. How this incentive looks we will probably not know. But the other social game guys will get screwed and will pay the 30% tax and more.

    Distrust has already been injected between theses two for the next 5 yrs. and now we will see how well they can hide it and live with it.

  6. Five years is a long time, who know what will happen in a years time.
    They don’t have a choice but to work together as both Facebook and Zynga have been very successfull. Insterad of bickering it’s great to see them come together and agree to work together

  7. I knew this would eventually happen, as in the end both need eachother. Zynga has something along the lines of $450m in revenue (according to TC, iirc) and they would have every right to take drastic measures to protect that. Facebook made a mistake in not having a solid value proposition to the credits – can’t force people to use something without real value behind it, or else you make enemies.

    Regardless, they both need eachother because working together they both stand a much better chance of redefining the social web and gaming as a whole.