Weekly Update

Zynga’s Project Z could be the next big game network

Social gaming star Zynga hosted its first-ever press event last week, where it showed a handful of new games and dropped big hints about a “Zynga Direct” strategy that could ease the company’s dependence on Facebook. Zynga didn’t give a timeline or details about “Project Z,” but it is building a gaming destination site, and potentially offering platform services for other developers. Does Zynga want to be a game distributor rather than just a studio? It sure sounds like it, so let’s examine how that might play out.

Building a gaming network would benefit Zynga in two ways: It would give Zynga more control of its own destiny, and it would smooth out revenue swings that depend on releasing a constant flow of new hits.

If Zynga and Facebook are in a co-dependent relationship, Facebook has the upper hand. Zynga derives nearly all of its revenue from Facebook traffic while Facebook users spend only 10 percent of their time on apps in general. Facebook takes a 30 percent cut of the virtual goods Zynga sells — Zynga’s main revenue source — via its Credits program. And Facebook can control viral game promotions, though it has traffic guarantees built into its agreement with Zynga.

But blame a slight slowdown in Zynga’s recent growth on a lack of new hit titles, rather than Facebook Credits. Like other entertainment studios, Zynga must successfully manage a portfolio of titles where the business is dominated by hits. During Zynga’s recent half-year, franchise titles FarmVille, FrontierVille and CityVille produced $77 million, $71 million and $47 million in incremental revenue, while all its other games totaled $78 million of the growth.

At the press event, Zynga assured people that it wasn’t divorcing Facebook. I suspect Zynga will leverage Facebook platform services and APIs, rather than creating much new technology. Zynga promised that Project Z would incorporate core Facebook Connect technologies, and its brand new HTML5 gaming engine is optimized to support Facebook’s mobile strategy.

What could Zynga add to create a social gaming network? Here are a few ideas:

  • Game destination hub. Zynga could act as the central hub for games played on social networks or mobile devices. Like Xbox Live, it could build out arenas, leaderboards and cross-game contests focused on social gaming.
  • Promotional opportunities. Zynga offers other games an alternative to depending solely on Facebook’s ever-changing news feed. It could create a Google search-like ad marketplace or paid listings, options Facebook and the apps stores have resisted.
  • Game identity with connectivity. Zynga will give gamers a game-centric persona or identity that still leverages Facebook Connect. It will support new Connect features like Wants and Owns in a less cluttered real-time stream. Ultimately, Zynga could wean games off Credits by offering better rates and encouraging a virtual goods exchange.
  • HTML5 engine. Zyngs could license its new engine to developers, a practice common in videogames, or to ad agencies looking to build advergaming “branded entertainment” sponsorships.
  • Advertising. Zynga could offer richer advertising vehicles to developers than Facebook, and actually share the revenues with developers. It should offer sponsored genre channels and cross-game sweepstakes and couponing.

App stores aren’t any fun, and social networks are crammed with communications and other features. Today, big gaming companies rely on Facebook for their social games distribution. Electronic Arts might try to weave titles from its proposed PopCap acquisition into its sluggish Pogo.com site, but it runs its other social gaming acquisition, Playfish, like a studio. Disney’s Playdom hub hasn’t really gone anywhere. So if Zynga can demonstrate better promotional vehicles and revenue opportunities on its own social gaming network, developers will have to take notice. Competitive games notwithstanding, Zynga could instantly offer a better story for game developers than Google+.

Question of the week

What are Zynga’s chances at building a social gaming network?