Facebook IPO 'Will Impact Social Games'Facebook has filed for its long-anticipated IPO, and it's going to be the largest Internet IPO ever, looking to raise $5 billion. The impact will be huge on Silicon Valley and the entire tech world, with the gaming industry feeling it more than most. Facebook's filing with the SEC revealed that it made a cool $1 billion in profit on $3.71 billion in revenues in 2011. The gaming industry accounted for 12% of Facebook's revenue in 2011, through a combination of Facebook credits and advertising. The number was less than 10% in 2009 and 2010.
Facebook clearly considers games important to its future. “If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected,” Facebook says in their S-1 filing.
Conversely, Zynga certainly considers Facebook as important, since 93% of Zynga's revenues come from Facebook. Obviously, other social game companies are also heavily dependent on Facebook. Attempts to run social games from independent web sites have largely been a flop, as the enormous network effect of Facebook represents a supercharged marketing advantage. What effect might a public Facebook, with a huge store of cash on hand, have on the gaming industry? We reached out to game companies and analysts to find out. Game companies were reluctant to speak out on the subject, no doubt not wanting to anger Facebook inadvertently. Analysts were more forthcoming with their opinions.
"Facebook could 'tax' video games more than it already does." -- Jesse Divnich
“Facebook going IPO has both its advantages and disadvantages for the gaming community,” said Jesse Divnich, analyst for EEDAR. “On the positive side, Facebook's IPO will put additional pressure on the company to continually innovate its back-end technologies, which will add additional resources and tools for game developers to experiment with.”
But it's not all upside, as Divnich warned, “On the negative side, Facebook will command a high multiple in the open market, signifying that investors expect aggressive revenue and profit growth, which could force Facebook to 'tax' video games more than it already does. This could include various license fees, tool fees, or Facebook connect fees.”
In other words, Facebook could wake up one fine morning and decide that taking 30% of the revenue for Facebook Credits is nice, but wouldn't 35% be ever so much nicer? What recourse would a company have if, for example, 93% of its revenue came from Facebook? Such a company could hardly say to Facebook no, we won't pay 35%, and then watch Facebook shut off the traffic flow to their games. It's scenarios like these that keep social game company executives turning fitfully in their sleep.
Michael Pachter, analyst for Wedbush Securities, agrees that “Yes, their IPO will impact social games.” How? “They will be under pressure from investors to deliver revenue and profit growth, so they will have an incentive to find creative ways to get Facebook users to register credit cards and engage in commercial transactions. That could be renting a video stream, downloading a song, buying a discount coupon, or buying virtual items in a game. The point is that once they have a reason to get users to register credit cards, buying virtual items will be far easier for those who play social games and who haven't yet bought anything (much like one-click ordering on Amazon). I think that is good for the social games makers.”
Divnich sees the potential for investor pressure to make things more expensive for game companies developing on Facebook. “I am hopeful that Facebook's IPO will add value to the social gaming space, but I would anticipate that the cost to develop on Facebook will increase as the company explores additional measures to increase profits,” said Divnich.
Will a Facebook IPO impact games outside of the social games that use Facebook as a platform? Pachter doesn't think so, noting that “Facebook is already a great source of potential audience for non-Facebook games, so I'm not sure that being public makes them any more important to games that don't run on Facebook.”
If Facebook becomes a more expensive or difficult environment for game companies, will this drive them to look more at its only serious competitor, Google+? Pachter, for one, doesn't see much value there. “Google+ has to find a way to get users to actually visit the site. It doesn't appear that they have become particularly sticky yet, and again, the Facebook IPO doesn't change that much.” He doesn't think much of the growth potential for Google+, saying “I don't see Google+ succeeding, but if they throw a lot of resources at it, I suppose it has a chance. It really only takes one killer app on Google+ to draw people there, so perhaps some start up social game company will make the next FarmVille.”
Overall, it seems that the Facebook IPO may well have some significant impact on the social game segment. Divnich sees the potential for conflicts ahead. “At the end of the day, Facebook owns the consumer and it is in Facebook's best interest to look after their bottom-line, not the bottom-line of game developers, which could spell trouble for Zynga as they too wish to 'own' the consumer.”
