Why facebook zynga google

By Peter Delevett
Empires and allies, indeed.

When online gaming giant Zynga on Tuesday added a voluminous amendment to its IPO filing, much of the chatter focused on new details showing just how tied the company's fortunes are to Facebook -- and perhaps to Facebook's rival, Google (GOOG).

San Francisco-based Zynga is the largest maker of games played on Facebook. In this month's initial filing with the Securities and Exchange Commission outlining plans to go public, Zynga disclosed among its risk factors that it derives "substantially all of our revenue" from the social network.

But Tuesday's 600-plus page amended filing makes clear just what kind of challenge Zynga might face in trying to move to other platforms. In an intriguing and heavily redacted "developer addendum," Zynga acknowledged that Facebook holds exclusive rights to distribute some of its most popular gaming titles, including "FarmVille" and "Mafia Wars."

It's also unclear to what extent Zynga is free to develop new games on other social networks.

In reaction, one oft-forwarded piece on the Business Insider website opined: "Facebook essentially owns Zynga."

Some investment analysts were more sanguine.

"What
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I see getting underplayed a little bit is the potential positive here," said Sumeet Jain, a principal at San Francisco investment firm CMEA Capital.

He noted that just as Zynga depends on Facebook for the lion's share of its revenues, so too does Facebook rely on the advertising dollars Zynga spends to woo new users to its games. "The fortunes are intertwined," said Jain, whose firm does not have an ownership stake in either Zynga or Facebook.

Facebook also receives 30 percent of the revenues Zynga users spend on "virtual goods" to flesh out their online worlds. "If Facebook walked away from Zynga, they'd be shooting themselves in the foot," Jain said.

Indeed, the new documents show that Facebook has agreed to help Zynga meet unspecified growth targets for new games launched on its platform.

"There is definitely a commitment on both sides," agreed Michael Pachter, an analyst with Wedbush Securities in Los Angeles who focuses on the video gaming industry. "Zynga's size and scale suggest that will give them leverage when the deal is up for renewal."

Jain said he would not be surprised if Facebook had negotiated similar exclusivity deals with the makers of other popular games and apps, given the Palo Alto company's massive distribution power and lack of a clear-cut rival.

But the CEO of another Facebook games company told this newspaper that the exclusivity requirements in Zynga's deal are unique. He did not wish to be identified, citing the need to protect his relationship with the social networking powerhouse.

The amendment also discloses for the first time that Zynga gets a cut of the display ads Facebook shows next to its games. While Zynga's prior filings said advertising is a much smaller portion of its revenues than virtual goods, the dollars the company reaps from ads are growing.

Some online pundits noted that the filing also confirms for the first time what has been long rumored: Mountain View search giant Google is among a lengthy list of Zynga's investors. Also appearing on that list for the first time are former PayPal CEO Peter Thiel and Paul Martino, who in 2003 co-founded Tribe.net with Zynga chief Marc Pincus.

That both Google and Facebook have financial stakes in Zynga delighted some wags, as there's no love lost between the two. The ranks of Facebook's top executive ranks are peppered with ex-Googlers, and the social network recently faced embarrassing revelations that it had hired a PR agency to plant unflattering stories about Google in the press.

This month Google launched a direct competitor to Facebook, a social network called Google+.

While some online news outlets speculate Google might have put in more than $100 million of the roughly $1 billion in private investments Zynga has received, Jain said his casual conversations with people close to both companies lead him to think Google's stake is not nearly that large.

"I believe that if there were a controlling interest by Google, the underwriters would have forced that issue as a risk factor in the disclosures," he added.

Google did not respond to requests for comment and Zynga declined to comment.

Even before Tuesday's disclosure, Zynga's IPO was shaping up as perhaps the Internet's most anticipated since Google's. The gaming company has said it hopes to raise $1 billion or more, and Jain thinks the new information about Facebook's ties to the company will only heighten investor enthusiasm.

"I think people in some way will look at this IPO as a proxy for investing in Facebook," he said.