Facebook and Zynga Loosen Relationship, Zynga Stumbles

Matt Hodges -

Things just keep getting worse and worse for the social gaming company, Zynga. It seems that the company that brought us the great treasures of FarmVille and Words With Friends just can’t catch a break. On Friday it was announced that Zynga and Facebook have altered their business arrangements.

In filings with the SEC yesterday, Facebook announced the alterations to its relationship with the struggling game company. In short, the announcement consisted of four main pieces:

1. Zynga is no longer required to display Facebook ads on its website nor is it required to use Facebook’s payment processing service.

2. All Zynga games distributed through Facebook will follow Facebook’s standard terms and conditions.

3. Zynga is no longer required to use Facebook as its primary platform for game distribution.

4. Zynga no longer has to use Facebook’s login service.

From the surface, the terms of the deal appear to rather benign, and actually in the favor of Zynga. If anything, it looks like Facebook is reducing restrictions on its partner. Unfortunately, share holders didn’t see it that way. Shortly after the announcement, Zynga shares dropped over six percent.

There is much speculation that this is the first step in Facebook completely severing ties with Zynga. If that’s the case, this would be bad news for the social gaming company. Facebook reports that roughly 12 percent of its revenue comes from Zynga, but Zynga brings in close to 90 percent of its revenue through Facebook. If Zynga were to lose Facebook as a distribution medium, it may be the nail in the coffin for them.

But seriously, Zynga’s continued struggles shouldn’t come as a surprise to anyone. Their business model consists of distributing free virtual farm animals with pay-for-premium options. I’m not sure why anyone would see that as a good investment.

It’s clear that Zynga continues to struggle. Facebook, which is faced with its own challenges, is wise to distances itself from a company that may be on its way out.