Facebook Caves To Zynga, Enters Long-Term Relationship

Just when you thought Zynga was preparing to take the leap and leave Facebook permanently, the two companies have announced a formal “long-term relationship”. While terms of the agreement were not disclosed, we can make some pretty good guesses as to what took place behind closed doors. For those that haven’t been following the drama, a week and a half ago Zynga threatened to leave Facebook due to the massive cut the company was trying to take from Zynga’s business through Facebook Credits.

So what does this partnership mean? Here’s our speculation about what each company has conceded:

Zynga agrees to keep Facebook as their primary platform for games
Zynga agrees to further integrate Facebook Credits into their games, eventually moving toward an exclusive, or almost exclusive level of integration
Facebook agrees to take a significantly smaller cut through Facebook Credits (this has since been dismissed)

The dynamic between Zynga and Facebook is an extremely complex one. Most significantly, Zynga is reportedly the largest advertiser on Facebook, spending millions a year to drive new installs to their Facebook applications. When Facebook wanted to force many game developers to use Facebook Credits as a payment platform, it substantially altered the business model for social game developers, reducing the margins significantly.

As such, Zynga threatened to leave the Platform all together, potentially launching their own site and possibly threatening to use Google AdWords or alternative ad platforms as their source of installs, cutting off a large percentage of Facebook’s revenue. If Zynga were to leave Facebook all together, it would be a massive blow for Facebook, and potentially a life-threatening one.

While Fox News tried to quote a source at Facebook, suggesting that it would be best for Zynga to leave the Platform, it was an inaccurate portrayal of how the cards are distributed in the relationship between the two companies. As today’s announcement illustrates, the companies now have a symbiotic relationship and it’s more important that they work together rather than function as enemies.

Not only does it solidify Zynga as the most dominant platform (and social games) developer, but it also illustrates how important social games have become to Facebook. We’ll be sure to follow this story as we learn more.