Facebook's high costs are driving game developers away

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LOS ANGELES -- Tom Byron used to spend a couple of hours each day playing games on Facebook, attending to his virtual diners in "Restaurant City" and waging war against the Raven in "Empires & Allies."

"I'd check into these games every chance I got," said the 50-year-old marketing executive in San Rafael, Calif., who played four or more Facebook games at a time. "Now I spend most of my game time on my iPhone. It's just more convenient to be able to grab my phone."

It's not just players such as Mr. Byron who have wandered away from Facebook. Game developers have also migrated to other platforms such as Apple Inc.'s iOS and Google Inc.'s Android largely because it has become so expensive to do business on Facebook. Zynga Inc., for example, the largest developer of Facebook social games, in July blamed a downturn in its finances on a "challenging" environment in the world's largest social network.

Although Facebook is the world's largest social network, it still needs fresh content to keep its 900 million users engaged on its site and to reel in new users. As a result, an exodus of developers and their games would be disastrous to Facebook Inc.

"Facebook is still a viable platform for independent developers looking to make money on a game," said Mitch Lasky, a venture investor at Benchmark Capital who specializes in game companies. "However, companies with aspirations to be larger publishers -- Kabam, Kixeye, even Zynga -- are moving aggressively off the Facebook platform to mobile and the open Web. Publishers aren't convinced that the costs of being on Facebook are worth it."

One such publisher is CrowdStar Inc., a Silicon Valley social games developer whose titles once dominated the top charts for Facebook applications. Last year, CrowdStar introduced its games to iPhones and iPads. Since then, the company went from getting 90 percent of its revenue from Facebook users in 2010 to only 50 percent in 2011. This year, it expects to see only 10 percent of its revenue from Facebook players; the rest will come from people who play on smartphones and tablets.

"Facebook is no longer the viral platform it used to be for games," CrowdStar Chief Executive Peter Relan said.

Mr. Lasky said developers such as CrowdStar are turned off by the high cost of acquiring new players through advertising on Facebook. Add to marketing expenses the 30 percent fee that Facebook charges for revenue generated on its site, and costs can add up to 50 percent of revenue or more.

Facebook, however, isn't ready to declare "game over."

In recent months, the Menlo Park, Calif., company has labored to address the complaints of developers and players, lest it lose the single-most-important driver of its early and meteoric rise in popularity.

"Games has historically been our biggest (applications) category," said Sean Ryan, Facebook's director of games partnerships.

Fueled by the surprise popularity of "Mob Wars" and "Scrabulous," Facebook began attracting independent game developers in early 2007. One of those was Zynga, whose massive growth over the next five years paralleled that of Facebook. Through an agreement signed in 2010, Zynga pays Facebook 30 percent of the revenue it generates on the social network from the sale of virtual items for its games.

The deal proved mutually beneficial. Last year, Zynga paid Facebook $444 million in fees, accounting for 12 percent of Facebook's total annual revenue. At the same time, Facebook players accounted for 90 percent of Zynga's sales.

Until recently, Facebook has maintained a hands-off policy toward its applications. That changed after Zynga in March 2011 announced it would launch its own platform, Zynga.com. Although Zynga would continue to pay Facebook 30 percent of its sales on Zynga.com as well, that agreement would have to be renegotiated in 2015.

That meant Facebook needed to cultivate other game developers, many of which, such as CrowdStar, had already started leaving the social network as the cost of luring players away from Zynga became prohibitive.

In May, Facebook launched its App Center, a page its users can browse to find new games and other social applications. The feature, which doesn't cost developers money, has helped drive millions of players to lesser-known titles.

Developers are also more optimistic about the platform, said P.J. McNealy, a media consultant with Digital World Research.

"Depending on how they manage things, Facebook still has a chance to maintain its position as the premier platform for social games," Mr. McNealy said. "At the end of the day, Facebook still has an audience and reach that no one else can touch."

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