Facebook's high costs are driving game developers away

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 Byron who have wandered away from Facebook. Game developers have also migrated to other platforms such asApple Inc.'s iOS andGoogle Inc.'sAndroid 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% of its revenue from Facebook users in 2010 to only 50% in 2011. This year, it expects to see only 10% 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.

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% fee that Facebook charges for revenue generated on its site, and costs can add up to 50% 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.

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% 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% of Facebook's total annual revenue. At the same time, Facebook players accounted for 90% of Zynga's sales.

Zynga became the largest game publisher on Facebook, regularly accounting for four of the top five games on the platform. Its monthly player numbers, which for the last year have been consistently above 200 million, are routinely four to five times those of its nearest competitor.

Its overwhelming dominance, however, discouraged smaller developers, who thought it impossible to compete with Zynga's well-financed marketing machine.

"Zynga will always outspend you," Relan said.

Until recently, Facebook had 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% 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 its site as the cost of luring players away from Zynga became prohibitive.

"Every time marketing costs go up, another handful of aspiring developers bite the dust," said Brandon Barber, senior vice president of marketing at Kixeye, which has been working closely with Facebook to make the social networking platform more games-friendly. "For us, Facebook is still the most efficient way to reach people. It's where the people are. We're very bullish about Facebook as a gaming ecosystem."

Sean Ryan, Facebook's director of games partnerships, who was hired in January 2011 to interface with game publishers, called Zynga "an incredible partner" but said his company wants "the entire games ecosystem to do well."

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.

Facebook has also been working closely with key developers such as Kabam and Kixeye to create new game-specific features to make it easier for players to communicate and play with one another. And it's spending more time with publishers to help them identify inexpensive ways to find new players.

The efforts have paid off.

"We currently have 235 million people playing games on our platform every month," Ryan said. "That's up 14% from 205 million a year ago."

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

"There's been a shift in tone among developers in the last two months as Facebook became more responsive to them," McNealy said. "Depending on how they manage things, Facebook still has a chance to maintain its position as the premier platform for social games. At the end of the day, Facebook still has an audience and reach that no one else can touch."


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