The brewing fight between Facebook and Zynga is what is known in economic strategy circles as “buyer-supplier hold up.” The classic framework for analyzing a firm’s strategic position is Michael Porter’s Five Forces. In Porter’s framework, Zynga’s strategic weakness is extreme supplier concentration – they get almost all their traffic from Facebook.
It is in Facebook’s economic interest to extract most of Zynga’s profits, leaving them just enough to keep investing in games and advertising. Last year’s reduced notification change seemed like one move in this direction as it forced game makers to buy more ads instead of getting traffic organically. This probably hurt Zynga’s profitability but also helped them fend off less well-capitalized rivals. Facebook could also hold up Zynga by entering the games business itself, but this seemed unlikely since thus far Facebook has kept its features limited to things that are “utility like.”
The way Facebook now seems to be holding up Zynga – requiring Zynga to use their payments system – is particularly clever. First, payments are still very much a “utility like” feature, and arguably one that benefits the platform, so it doesn’t come across as flagrant hold up. It is also clever because – assuming Facebook has insight into Zynga’s profitability – Facebook can charge whatever percentage gets them an optimal share of Zynga’s profits.
The risk for Zynga is obvious — if they don’t diversify their traffic sources very soon, they are left with a choice between losing profits and losing their entire business. But there is a risk for Facebook as well. If buyers of traffic (e.g. app makers) fear future hold up, they are less likely to make investments in the platform. The biggest mistake platforms make isn’t charging fees (Facebook) or competing with complements (Twitter), it’s being inconsistent. Apple also charges 30% fees but they’ve been mostly consistent about it. App makers feel comfortable investing in the Apple platform and even having most of their business depend on them in a way they don’t on Facebook or Twitter.
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Classic conundrum. The fight between complementary businesses is just beginning.
Chris, I am not sure that I would use the word clever here. Perhaps, you meant to use the word 'cleaver' as in the following scenario. Facebook: “Hey Zynga, if you're not going to pay us 30% transaction fee to be on our platform, then we're going to take this cleaver and start chopping off fingers”.
But, seriously – if this was about Facebook charging a platform fee that would be one thing. But, this is about taking the existing payments that Zynga already accepts – telling them they can't do that any longer – and that they must use their solution going forward. Oh and this new payment process is going to cost them approximately 10X more (3% for credit card vs. 30%).
That's far different than the Apple distribution platform – they don't belong in the same argument. As you note, Zynga must start looking to diversify immediately.
Both Zynga and Facebook are highly invested by DST (@cdixon – how come you didn't mention that?). I am pretty sure that this guarantees that at the end they will find a solution that maximizes profits for both of them…
I also feel that this is just one big PR move by Zynga. They wanted to differentiate themselves out of Facebook for while and this is just a great timing it
I think DST owns pretty small % and I doubt has any control rights.
Suspect they aren't much of a factor.
I think DST owns pretty small % and I doubt has any control rights.
Suspect they aren't much of a factor.
I think we agree it's more about changing to 30% in the middle of the
game, so to speak
I think we agree it's more about changing to 30% in the middle of the
game, so to speak
I think we agree it's more about changing to 30% in the middle of the
game, so to speak
Yes, I can partially agree.
But, isn't FB saying to Zynga – no more regular payment methods (Visa, MC, Paypal, Rixty, etc.) that you've accepted since your inception and now you must use FB Credits only?
That's not a 'change' – that's extortion. Zynga is just the largest app maker that stands to lose the most. And, they are big enough to make their complaints heard.
So, the fun starts now as we get to watch this play out in the 'open' as I am sure that FB would like to keep this discussion behind the walls of the garden.
How is that different from what Apple does in the app store? You have to charge for your apps via apple's payment system and give them 30%. I suppose maybe once the app is downloaded you could charge using Visa etc so Apple is more flexible in that sense.
But mainly I think if FB said this from the get go people could have decided whether they want to build businesses around it or not. So mainly the issue is changing midcourse.
Ok – to me (and maybe I am the odd man out here) this is a vast difference because its not about the platform.
Take FB and Zynga out of the equation for just a moment and replace it with a mall and anchor tenants. The mall generates traffic and then some of the tenants begin to draw in a lot of new customers. The mall has never charged rent (keeping it FB related) but has benefited from the traffic as they monetize the people in other ways as they visit the fast growing tenants. These tenants have allowed their customers to pay using Visa, MC, Paypal, etc. for their goods & services.
The mall grows and attracts millions of new customers who travel to see these big tenants. Suddenly the mall decides its is going to issue 'Mall Money'. And, they're now going to tell these big tenants that if they wish to remain in the mall, they must now accept 'Mall Money' and ONLY 'Mall Money'. And, this new 'Mall Money' will cost them 10X their current transaction costs if they wish to remain a tenant in the mall.
You see, the mistake here is that the mall, or FB in this case, never charged rent. So, now they're trying to acquire a big percentage of the profit from their tenant, Zynga. While you can argue that this makes sense from a platform support position (platform operational costs), the way that FB is going about doing this by going after the revenue at the transaction point is very questionable. Perhaps, you could say mafia-like
So, much different than Apple – they always have said, “You want to put your app in our store, then we charge a 30% commission”. FB hasn't and their approach here isn't the right way to do this. Charge for the platform use if anything – just like any landlord would do.
Appreciate the business breakdown. Certainly relying 100% for anything outside of your ability to influence (all visitors to Zyngas game from Fbook) is a serious pipeline vulnerability. No surprise Facebook is pushing here.
What Facebook is in serious jeopardy of is network collapse based on the ultimate primitive – trust. Both users and developers have a trust scale which diminishes when Facebook makes big moves. Consumer expectation is a helluva trap.
One of the signals of Facebook pushing so hard now is that there's an air of desperation, likely based on a lack of an IPO market and investor pressure.
My “far out” prediction, we are on the verge of seeing the fastest social network decline this side of 2000. a combination of government regulation and eroding user trust could pop Facebook's value bubble.
Admittedly I'm on the tech geek side of things and don't appreciate the exchange of my info with Facebook's utility.
I thought DST pumped in a few hundred million into Fbook?
That's gotta be at least a few %
Yeah but a few % of common doesn't give you control
I agree with your analogy, but also with Chris saying Apple is doing the same thing. They're both taking a piece of the action that goes through their “network”. Don't like paying protection fees? Move outta town.. just because this is happenig in a virtual space, doesn't make it sound any better.
You could argue that Facebook and Apple built the mall/space so they have the right to charge whatever they want. Competition usually has a way of fixing this, but it takes time to develop competitive options. I'm sure we'll all shake our heads in a year or two about how silly the business practices of Facebook/Apple were, but right now it's just good business to extort maximum value from their channels as much as I dislike it.
Most interesting! Thanks
> Apple also charges 30% fees but they’ve been mostly consistent about it.
Um. Yeah, except for the part where they may suddenly decide to pull your app or an entire group of apps. Or maybe not even approve it in the first place. Other than that, Apple has been very consistent.
Board seat, deep pockets and connections must count for something. When Yuri makes moves, I listen, and he hasn't invested a dollar in me
I did say mostly. They ban porn and enforce code/style rules mostly.
In March it was reported that DST had accumulated 10% of Facebook by buying out early employee shares. I understand that the majority of it's stock is “common”, but that's a pretty good amount of control.
As a potential Facebook developer this is very disheartening.
Thanks for the write-up Chris.
How do you think PayPal feels about this situation considering that Zynga is their 2nd largest merchant behind eBay? While Zynga is still a small % of TPV, I'm assuming PayPal was optimistic about the growth coming from social games.
I can agree that they are seeking to get a piece of the action – no doubt about that. And, yes, I think we will be shaking our heads when we look back
true, and might get a lot worse for PayPal if FB payments move beyond FB…
Chris, the Apple certainty you describe is the confidence of having different revenue streams. Facebook and Twitter are unsure and experimenting with their business models and the center of their business plans is morally shaky spy surveillance of people and their “likes”.
DST bought preferred, too. But they explicitly don't have control – one of the key parts of the deal was them *not* getting a board seat.
“App makers feel comfortable investing in the Apple platform and even having most of their business depend on them in a way they don’t on Facebook or Twitter.”
For the small app developers who didn't really have a business prior to the introduction app store, that's probably true. For the media companies that Apple is trying to woo, that's definitely not the case. They look at the deals the music labels made w/Apple in 2003 and are trying very hard not to end up in the same place — where Apple is the primary gatekeeper for all of their digital revenue.
I guess I look at it as an angel investor. I'd feel more comfortable
at this point investing in an app totally dependent on Apple than
totally dependent on FB or Twitter (assuming it wasn't squarely in
Apple's roadmap, etc).
This brings up a good question (or at least I think so, bring on the formspring.me).
As an investor do you feel any bias investing in store app based products versus web apps?
Ps: any outlandish ideas how an unknown could get on Ron Conway's radar? as in: X users, social proofing, solid revenue..
Thank Pete.
I had guessed they got a seat but didn't read up on the deal. This captures their position/deal in case anyone besides me wanted to know.
Hostage capitalism. I love it
Though doesn't Zynga make more money than fb these days?
Zynga should…
Unify servers, for Facebook, Web Zynga Portals, and Mobile Apps, so that people can check in to the games, and their existing game info, (not some separate ghetto) from anywhere they please.
Become less dependant on Flash Development, particularly to get to mobile platforms. Create some IPhone and Ipad apps. The Mobile Platforms will allow a more trusted cashflow, if someone actually DID cave to buying their way into more gifts they can spread about socially. And they can put ads INSIDE the applications, rather than counting on pageviews to ads framed by Facebook.
They could still stay on Facebook to keep that population of players, but, they could do so in a less Spammy nature, and in a less codependant relationship with Facebook.
Games are probably MORE ANNOYING for Facebook users since they were taken off the front page as a segment of the page, and have had to rely on spamming the notification and news feed streams, which irritates more than entices non-players.
Yup. Makes sense. Also worth pointing out that both Twitter and Facebook
have yet to really land on a specific business model. Apple's is pretty
clear, and it's not in the app business. That makes it a lot easier to place
your bet.
OK let's get REALLY real here, you obviously do not work or have worked in the gaming industry and that is plainly obvious in your post.
Whenever a company starts a new platform they generally either offer incentives to publishers or developers to make games for their platform, this is true for Sony, MSFT, Sega, Nintendo -although Nintendo's model is based mainly around selling first party titles- etc.
The only recent exception to that recently has been Apples iPhone OS.
Extortion is essentially an idiotic term to use as it depicts a mafia style approach -I hope the irony of Zynga's Mafia wars has not been lost on you- of course their are many forms of extortion, albeit different shades of grey.
Some examples:
Let's say Company X which is a small company develops a basic HTML game that has a mafia style theme and it is a relative hit. Then company Z -I am trying to come up with a company whose name that begins with Z in the gaming industry- decides to make an identical game. After a while company Z realizes that if X's game was not around the community would shift to Z's game. So Z files lawsuits in over 150 jurisdictions, which if X wanted to defend would bankrupt the company. So Z says “hey we will drop the lawsuit and give you a million dollars to go away”, that to me sounds like extortion.
Then there is emotional extortion, let's say that was oh I don't know, a massive earth quake that displaces hundreds of thousands and kills a couple of hundred thousand. Company Z turns around and says “hey guys if you buy this virtual good, we will give 50% of the money to charity. Obviously the cost of creating that virtual good costs millions -except it doesn't, it would actually cost 2 artist hours and 30 mins engineering time. So now company Z gets to do two things:
1. Create the perception that they are swell guys, because hey they give money to charity.
2. They get to pimp dead and displaced people for profit and still come across as above as swell guys.
Yes, yes, I am saying that company Z is the Halliburton of the gaming industry.
Now let me address your nonsensical argument that credit card companies only take 3.5% -btw if you worked in the business, you would know that, that figure is more like 1.5% if you are pushing as many transactions as Zynga.
Now I went to the websites of the good companies of Visa, Mastercard, AmEx…heck I even went to paypal. I simply could not find their social networks and I could certainly not find their gaming platforms. Perhaps that is because they have not invested in one? Perhaps if they had invested 700M USD in a social networking platform they might actually want to see something us adults like to refer to as a return on investment?
Wow now their is a unique concept in the valley, a start-up albeit a very mature start-up focused on generating revenues? There must be something in the water over there at FB?
Your argument is that because FB created wealth at their own expense that this is a trend that should continue, your argument is that business models should never be modified or corrected and your argument is that there is no difference between a social network and a credit card company. All of your arguments are basically pure fantasy.
Now lets move on, let's imagine for a moment that Zynga turns around -ok PIncus turns around- and say's “Screw you FB, and I AM NEVER GOING TO TALK TO YOU AGAIN”, this will cause a chain reaction of biblical business proportions:
1. Any institutional investors that were waiting for the Zynga IPO will thank Allah, Budda, Jesus, Moses or whoever they worship that they found out that the CEO was crazy as bat shit BEFORE they invested in the IPO.
2. EA will laugh their ass off and smile like a doting father at their Play Fish acquisition.
3. FB will still make a ton of cash on gaming.
I would also like to address the competitive landscape for a moment:
Currently most of the tier one publishers either have games on FB or have games in some stage of production on FB. Costs are and will continue to sky rocket do to the cost intensive nature of making great games.
In the coming months, you will see companies like zynga's revenues run a decline because as the competition -and up until now, they have not really had decent competition and by decent I mean ACTV, EA, Ubisoft etc.
You will see the quality of the titles increase graphically and from a game play perspective way beyond what Zynga has in the toolbox currently and make no mistake, it is REALLY difficult to build a T1 games studio inside a year.
In terms of what is coming down the road, all you need to do is a youtube search for Brave Arms or even go to http://www.WGT.com and you will see what I mean.
Chem
I can see where your coming from and btw your post was pretty good. Although I think that you may be overstating the danger for FB.
The way the market used to work was like this:
You had an idea for a game
Built up a GDD -Game Design Document
Drove/Flew to Redmond to the Entertainment and Devices division and pitched the Xbox team your idea.
If the team gave you the tumbs up, you put the game into pre-production and then production.
At each stage of production you would show the xbox guys and that is when you would negotiate the royalty, if they liked it, they would reduce the royalty, if they REALLY liked it they would offer marketing support and a christmas tree full of incentives to get an exclusive i.e. not developed for the PS.
End game, the title comes out and you have spent millions
What iPhone and FB does is allows you to release beta versions and polish it from that point onwards and then you can look at bringing it to other platforms. So in this environment it is much easier to manage risk and in a hits business it is ALL about managing risk.
Yeah, that is not going to happen. DST invest and observe from afar unless they think the management are nuts and got lucky but have a decent product.
[...] Facebook, Zynga, and buyer-supplier hold up cdixon.org – chris … [...]
[...] Facebook, Zynga, and buyer-supplier hold up cdixon.org – chris … [...]
This is a false comparison.
Facebook is not offering an alternative to consoles as a distribution platform, different users and different functionality. Facebook is offering an alternative to the web, where Zynga would have been (and will be) otherwise.
Apple's App Store though, is apt to comparison to the carrier's previous model of being horrifically closed and taking 50%+ revenue cut.
In reading your response, I just honestly don't get your point. Yes, I am not from the gaming industry. But, correct me if I'm wrong, the disagreement isn't about gaming – its about processing fees. And, the fact that FB wants to increase them to 30% where Zynga is currently paying around 3% (estimate-who knows).
So, to me (solely speaking for me), this is about FB stepping in and saying that if Zynga chooses to remain on the FB platform, they will need to swallow 30% fees – or a 10X increase in the current operating costs. Yes, I meant my mafia reference to be ironic.
But, to control the platform and force organizations to pay you a 10X higher premium to continue business – well, how would you define this?
BTW, I've never played a Zynga game in my life. My entire interest here in the power being leveraged through transactional costs when one entity controls the platform.
I also see this conflict in the Automotive industry. It's very common for OEM suppliers (i.e. Delphi, Showa, Denso) to be suppliers to almost exclusively one automaker (i.e. GM, Honda, Toyota). In some of these cases the OEM is a major stakeholder of the supplier (Honda owns some 30% of Showa).
These automotive supplier are not real businesses, they do not exists to make profit for the share holders. They exits to make parts for the OEM. They are ALLOWED to make a small margin by the OEM.
As you say, Zynga needs to diversify their base. I think they would also benefit from an outright, 100% sale to Facebook. It's the middle ground that will have them on the same road as the automotive suppliers
Zynga needs to pay the piper and get more aggressive about revenues.
But is isn't like Apple, once the app is on the device, Job's is out of he picture.
The thing is: the law must change to go beyond the monopolies and attack huge concentration of power (btw look at: http://baselinescenario.com/2010/03/04/monopoli...).
Web APIs and supposedly open platforms are just a big carrot.
Microsoft Windows closeness make me laugh compared to FB or Apple platforms.
Facebook is not offering an alternative to consoles as a distribution platform, different users and different functionality. Facebook is wedding dressoffering an alternative to the web, where Zynga would have been (and will be) otherwise.
Apple's is pretty
clear, and it's not in the app business. That makes it a lot easier to place
your bet.that's probably true. For the media companies that Apple is trying to woo, that's definitely not the case. They look at the deals the music labels made w/Apple in 2003 and are trying very hard not to end up in the same place — where Apple is the primary gatekeeper for all of their digital revenue.
Chris is right, “Control” is a myth. When a VC firm, and even a board member, has interests in two firms, they certainly cannot and do not dictate how the companies are run on a decision like this- especially a company as large and powerful as Facebook. Also note DST invested 5 years after FB started, thus has very little historical leverage vs. prior investors who *would* want to see FB maximize profits at Zynga's expense.
If FB is really going to allow only FB payments on their platform, am I totally off or how is that different from Apple disallowing Flash, 3rd party analytics, etc.?
What I'm getting at is either people critiquing Apple and not FB are hypocrites, or the DOJ should be going after FB real soon now.
The licenses are identical, the business conditions are identical and the deal structure is identical.
So I have done around 17 FB licenses and hundreds of others on various platforms, my role involves licensing across all platforms and understanding everything about each one. Basically what I am saying is that I have ten plus years XP doing this stuff.
I know of you from your teamtalk days, but with all due respect, you are theorizing, while I am describing what actually happens.
The hardware in which the content terminates does not even enter my mind except when I look at install base. What I do focus on is the ecosystem.
Facebook is absolutely offering an alternative to the consoles, what do you think XBLA, PSN and DSi are? Social gaming has been around long before consoles, due to the cost of building connected games, this was mainly devoted to the PC. The owner of the ecosystem normally dictates the terms and the developer community dictate the ecosystems success rate.
On top of that just this week, I did two deals where the licensor asked my client to bundle in FB rights.
Your 50% rev-share from the operators is just not true, because very few operators do a 50/50 these days. They mainly try to get 65/35 or 35/65, depending on the operator. 50/50's used to be popular in Europe, but that has not been the case for a couple of years.
I started my career in mobile about 94' and was part of a 66M USD exit to VeriSign, so I know that space pretty well also. You worked for Teamtalk, so you probably know the company I am talking about.
Here is the thing, the 10X thing is not abuse, it is normalization.
Let's say I was going to buy your house for $500 and then you figure out “actually my house is worth 500K” that is a 1,000X increase, should you not stick to your original valuation? Morally perhaps, but in reality would you?
Isn't this just the perfection that is the law of supply and demand however virtual it may be.
Exactly
Yeah that is against the T's and C's of FB
Well, 30% of, to pick a number out of thin air, say $650m/yr run rate is ~$200 million dollars.
Straight off the top, off what Zynga might now consider profit. Or maybe, what Facebook might now consider profit.
What would that be off Zynga's valuation? some multiple + > future risk? $1b? $2b? more?
With all the talk of Facebook revenue models, $200m is pretty solid rent to show, for-one-site. Wonder what it's going to cost Southwest Airlines, Lady Gaga, or the rest of the internet to communicate to their Fan page followers in 2012…
Arguably, Zynga has the most leverage out of the developers. If Facebook is willing to shoot Zynga in the head, how hard will Facebook squeeze the lemon of the small developers in the future, because they can? or if at some point they need to.
haven't yet trying facebook marketing…. hope it wont be late to try it now..
Seems like a smart use of leverage to me. Btw, landlords of high value retail spaces often do charge revenue shares. They don't change their contracts mid term but if their power grows over the course of the term of a contract, they use if the next time they do a new contract. Seems like FB just has more leverage now so they are renegotiating the “contract”. That's life. Zynga should figure out a way to be less dependent on FB otherwise it's just going to get worse for them as they get assailed by competition (who see Zynga's big numbers) on one side and FB on the other.
I agree that DST doesn't control Facebook, I noted the lack of a board seat above. But influence is the word I'm talking about, again maybe they have no say.
As to control, no individual has unchecked authority or absolute control over a multi-billion dollar business, not even it's CEO. There's a board which has final say, and precise control requires knowledge of every detail.
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as a developer I see a company competing with complements as the biggest concern. Apple in os4 with iads ( admob), and game center ( ngmoco, openfeint) as two examples of how apple has no issues with this. In the same sense with Facebook getting into offers and payments, they are in sense cleaning up the mess started by companies like Offerpal.
Interesting thread.
I realize this is a tangential argument, though I don't think it's a matter of “if FB payments move beyond FB.” Facebook's intention is quite obviously to become the online identity for the masses. If they succeed in doing so, they'll have the ability to monetize users' implicit and explicit attention streams.
The former will come from harvesting all the data they capture to have the only behavioral ad platform that poses any threat to Google's dominance at all.
The other – explicit – data stream should manifest at the point of purchase. As a company that has taken some calculated steps to build a user base, expand key features and begin to offer those features web wide, why would they stop short at the point when they've got the key piece in place, their own currency, that potentially changes the game? If this Facebook has proven one thing, it's that their ambition is gargantuan. From an outsider's perspective, I think it will give them great pleasure to crush PayPal, alongside their impending war w Google.
Personally, I'd love to see Amazon be more aggressive in this space to keep *some* balance and fairness in place.
Very interesting. Questions on mechanics.
“The former will come from harvesting all the data they capture to have the only behavioral ad platform that poses any threat to Google's dominance at all.”
mechanics: they launch off FB display ad network. user who Likes Avatar gets shown Avatar 2 ads. Very clear to me how this works and they make $.
“explicit – data stream should manifest at the point of purchase. “
mechanics: Are you just saying they would have a payment system that would have lower friction because users are already FB connected in? Or would there be other ways to monetize.
Amazon & Apple are both possible counterbalances as both have giant db's of credit cards and lots of user trust. Agree would like to see them get more aggressive off of their own properties. Personally I've always disliked Paypal from a trust and UX pov and would like to see them go.
While I appreciate your experience, as an actual consumer of these games, I can assure you that you are addressing very different markets — the competition for FB is Apple Apps and web-based Flash games, absolutely not Xbox and PS3 gamers regardless of whether they are engaged in disc-based games or downloaded ones (much to Microsoft and Sony's chagrin). Nintendo maybe has a bigger overlap.
I do agree with your original comment that they are vastly different development, launch and marketing cycles, however. It's amazing how quickly you can get something out and versioned on these new platforms. Of course, the ratings and comments can live forever on an app store and I think some developers forget that.
Chris, I think your point would be highlighted by looking at a total cost of business. People are understandably saying “Hey, 30% isn't bad relative to Apple or XYZ platform.” But, to your point, they are also (from what I've seen written) the largest ad buyer on FB. So what is Zynga's total contribution to FB, what is their cost of doing business on FB and what is their net return on FB going forward?
If Zynga, for example, needs to lay out 75% of revenue between ads and payments to continue its desired growth plan, it's probably an easy choice to move away from FB. If it's “just” 35-40% of revenue, well, then the other choices probably aren't all that enticing. Of course, Zynga also has enough consumer momentum that they may have a choice that others lack.
I also agree with the overall premise: FB can certainly do anything legally in its power to extract value from its partners *but* there will be a “willingness to invest” impact. It is no different than the defect of big retailers from Amazon's ecomm platform to whether an oil company wants to buy a field in Venezuela today. Investors and partners loathe playing on fields that suddenly tilt mid-game.
> “mechanics: they launch off FB display ad network. “
10-days back I made a comment on a friend's blog suggesting FB will launch an ad network that will be better than Adsense. With “Like” button, they have superior information. Check my comment here.
http://frontiernxt.com/blogs/shyam/audacity-pok...
I'm waiting for Facebook to launch their own physical credit cards. This way every purchase you make is explicitly tied to a rich digital profile – the ultimate solution for brick-and-mortar merchants who are trying to “close the loop” on ROI of online marketing. I think this idea is a big part of Blippy's $46.2M valuation (their CEO told me they are planning to release their own CC), and maybe the Blippy plan is to do it enough for Facebook to acquire them.
That's a strong analogy. Would you be surprised by the DOJ going after Facebook? I'm not sure I would be.
Interesting parallel
Virtual currencies is an intriguing but rebellious prospect. Once a service demands something other government currencies it opens up some incredible disruptive forces, or government regulation. Kinda neat to be able to see this play out.
“mechanics: Are you just saying they would have a payment system that would have lower friction because users are already FB connected in? Or would there be other ways to monetize.”
I was referring to the frictionless opportunity. I can't stand PayPay either – from my perspective, after the initial innovation, the service has not evolved at all. In fact, when I see PayPal as the only payment option, I typically abort a potential transaction immediately, unless it's something I really want to buy. Just not worth the annoyance.
Facebook's opportunity here is to offer the exact opposite experience for users. If they offered a “Pay w FB” button that would be a huge improvement over PayPal on the two attributes you highlighted – trust & UX. On the experience piece, it's almost too easy… they'll already have our payment info, so paying would be a snap.
While it wasn't what I was suggesting, I do believe there will be other adjacent revenue opportunities in Facebook's “wallet” business ranging from virtual currency to points programs to possibly the most obvious way to leverage the social graph – and biz model du jour – group buying (Beacon 2.0?). At the very least, they'd be able to cull all that transaction data to feed back into the behavioral ad business. No matter which path they wind up traveling, these two revenue streams clearly offer a scenario where the sum is greater than the individual parts.
BTW, I should have mentioned Apple alongside Amazon. Narrower business focus today, but that can obviously change. In fact, I've recently been wondering why they don't offer the credit card phone gadget their Apple Store employees use to compete in the offline market Square is going after.
Ok, but an added risk is now that Facebook can't be predicted. They're searching for a profit model. At some point in the future, they're going to jiggle the terms, reduce your ability to communicate with the customer, etc. At least with Microsoft most changes are very slight and usually happen at upgrade time, not anytime the provider thinks they could extract more rent.
The core reason that I would trust Apple and their App Store platform more than Facebook and theirs is that Apple has (at least historically) been in the hardware business, while their suppliers have been in the software or attention-monetization business. Facebook and their suppliers like Zynga, on the other hand, have always both been in the attention-monetization business, leading to this friction. FB and FB devs are natural frenemies.
Apple has now moved up the stack into ads, putting them in the attention-monetization business, just like a lot of their suppliers/devs. I might revise my investing thesis for iPhone app devs because of this.
Still, Apple will never have the same level of power over it's devs that FB does over theirs because mobile is a somewhat healthy market with Android, Blackberry, (HP) WebOS, etc., and perhaps most importantly Web Apps/HTML5. Where can FB devs go when FB mistreats them? Myspace…?
IMHO, I think Facebook is doing the right thing and whatever happens to Zynga is just collateral damage. Though it is feeling it's way through creating a viable business and scaring people in the process by constantly changing the way the ecosystem works, it does make sense that Facebook try to maximize their monetization ability. But they should do this “figuring out” fast and settle on a model so there is not so much uncertainty around using their eco-system.
Part of Zynga's profitability is most likely due Facebook's extraordinary reach and it's likely that off Facebook they may not do or grow just as well. I haven't played their games though…
[...] The risk for Zynga is obvious – if they don’t diversify their traffic sources very soon, they are left with a choice between losing profits and losing their entire business. But there is a risk for Facebook as well. If buyers of traffic (e.g. app makers) fear future hold up, they are less likely to make investments in the platform. The biggest mistake platforms make isn’t charging fees (Facebook) or competing with complements (Twitter), it’s being inconsistent. Apple also charges 30% fees but they’ve been mostly consistent about it. App makers feel comfortable investing in the Apple platform and even having most of their business depend on them in a way they don’t on Facebook or Twitt… [...]
I'd agree that the Apple app store is a pretty close comparison. However, wonder how one would compare the value FB delivers for their 30% in fees to the value, say, ebay delivers to the auction sellers for the ~3-5% (guess) they charge in posting & paypal fees?
[...] Read the rest of this post on the original site Tagged: Facebook, Internet, Voices, economy, entertainment, social networking, business, Chris Dixon, Facebook, Zynga | permalink Sphere.Inline.search("", "http://voices.allthingsd.com/20100510/facebook-zynga-and-buyer-supplier-hold-up/"); « Previous Post ord=Math.random()*10000000000000000; document.write(''); [...]
[...] Chris Dixon terms this the “buyer-supplier hold up.” Zynga depends on Facebook’s network for their business, so if Facebook imposes this kind of tax, the company’s options are pretty limited. But Zynga is at least keeping the window of independence cracked a bit–they’re letting users play Farmville at Farmville.com, for one thing. It remains to be seen if Farmville could remain popular without the warm nerdy embrace of Facebook, but it’s not in Facebook’s best interest to let them find out. Facebook wants Farmville and its dedicated users on its network, looking at ads and submitting data. If Zynga flees, Facebook is worse off. [...]
[...] Chris Dixon terms this the “buyer-supplier hold up.” Zynga depends on Facebook’s network for their business, so if Facebook imposes this kind of tax, the company’s options are pretty limited. But Zynga is at least keeping the window of independence cracked a bit–they’re letting users play Farmville at Farmville.com, for one thing. It remains to be seen if Farmville could remain popular without the warm nerdy embrace of Facebook, but it’s not in Facebook’s best interest to let them find out. Facebook wants Farmville and its dedicated users on its network, looking at ads and submitting data. If Zynga flees, Facebook is worse off. [...]
[...] Chris Dixon terms this the “buyer-supplier hold up.” Zynga depends on Facebook’s network for their business, so if Facebook imposes this kind of tax, the company’s options are pretty limited. But Zynga is at least keeping the window of independence cracked a bit–they’re letting users play Farmville at Farmville.com, for one thing. It remains to be seen if Farmville could remain popular without the warm nerdy embrace of Facebook, but it’s not in Facebook’s best interest to let them find out. Facebook wants Farmville and its dedicated users on its network, looking at ads and submitting data. If Zynga flees, Facebook is worse off. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Facebook, Zynga, and buyer-supplier hold up cdixon.org gosh no-one saw that comming Name: Required [...]
[...] Chris Dixon terms this the “buyer-supplier hold up.” Zynga depends on Facebook’s network for their business, so if Facebook imposes this kind of tax, the company’s options are pretty limited. But Zynga is at least keeping the window of independence cracked a bit–they’re letting users play FarmVille at Farmville.com, for one thing. It remains to be seen if FarmVille could remain popular without the warm nerdy embrace of Facebook, but it’s not in Facebook’s best interest to let them find out. Facebook wants FarmVille and its dedicated users on its network, looking at ads and submitting data. If Zynga flees, Facebook is worse off. [...]
[...] simply kept before the introduction of the credit system, and the company is understandably irked.Chris Dixon terms this the "buyer-supplier hold up." Zynga depends on Facebook's network for their business, so [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] simply kept before the introduction of the credit system, and the company is understandably irked.Chris Dixon terms this the "buyer-supplier hold up." Zynga depends on Facebook's network for their business, so [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] post here analyzes the potential business implications for the two parties. It definitely sets the stage for [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] is a test of linking through on my [...]
[...] their ad system to grow their audiences. Chris Dixon referenced this the other day in his post the Facebook-Zynga hold up. Saying that facebook is trying to hold Zynga hostage by forcing them into their payments platform [...]
[...] their ad system to grow their audiences. Chris Dixon referenced this the other day in his post the Facebook-Zynga hold up. Saying that facebook is trying to hold Zynga hostage by forcing them into their payments platform [...]
[...] their ad system to grow their audiences. Chris Dixon referenced this the other day in his post the Facebook-Zynga hold up. Saying that facebook is trying to hold Zynga hostage by forcing them into their payments platform [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Facebook Zynga buyer supplier hold up [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]
[...] Distributed ad networks are quite powerful because over time the ad unit can change as personal preference and advertiser preferences change. And with each ad load the network is collecting more data, which can be used to make the network more efficient and price gouge advertisers. [...]