Will Facebook's cold shoulder doom Zynga?

The relationship has hit the rocks. But this was never a marriage of equals.

By Jonathan Berr Nov 30, 2012 1:20PM
The corporate logo of Zynga Inc. is shown at its headquarters in San Francisco, Calif. on April 26, 2012 (ROBERT GALBRAITH/Newscom/RTR)Zynga (ZNGA) and Facebook (FB) are like a married couple whose once red-hot romance has cooled but have stayed together for their kids. The timing of their "break-up" couldn't have come at a worse time for the social game developer.

Shares of San Francisco's Zynga have plummeted from their $11 IPO price in December 2011 to about $2.40 Friday. Wall Street has not liked the game-playing at the company that was unrelated to "Words with Friends" and "Farmville." About a half-dozen senior executives have left Zynga in recent months as its relationship with Facebook, which is responsible for about 92% of its income, began to wither. 

That trend will no doubt continue under terms of the revised partnership announced by the two companies this week.

Zynga users will no longer need to sign on to its gaming platform with Facebook. Conversely, Facebook will no longer require Zynga to use Facebook Payments to conduct transactions.  Facebook also could develop its own games, though Bloomberg News is reporting that it has no plans to do so. Though both companies are giving this news a positive spin, it is abundantly clear that Zynga is on the losing end of the deal. While Facebook didn't say "goodbye" to Zynga, it is certainly saying "hello" to all of its competitors. 

According to Bloomberg, Zynga was not invited to a recent meeting that Facebook CEO Mark Zuckerberg and Sean Ryan, Facebook’s director of game partnerships, held with social game developers to show them ways they could increase usage and sales. Exactly why the relationship between Facebook and Zynga began to sour isn't clear, but it certainly is evident.

It's hard to see a silver lining in this for Zynga. Though it recently reported earnings that surpassed Wall Street's low expectations, there were some worrisome trends. For instance,
average daily bookings per average daily user fell to 4.7 cents in the most recent quarter.  Zynga has also pointed out that some of its popular mobile games, such as "Words with Friends," don't monetize as well as its higher engagement games. Its $180 million acquisition of OMGPOP, creator of "DrawSomething", that was announced in March appears to be bust.

Zynga is expected to lose money in the next two quarters and post double-digit declines in revenue. The average 52-week price target on Zynga is $4.02, about 65% higher than where it currently trades. Given the huge challenges that lie ahead for the company, that seems like a pipe dream.

--Jonathan Berr does not own shares of the listed stocks.  Follow him on Twitter@jdberr

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