This move comes after both the companies unanimously made several changes to their business agreement through a regulatory filing late last year. According to the revised terms of the agreement, gamers would no longer be compelled to use the Facebook Payment system to buy Zynga’s in-game items.
Facebook got 30% share on all in-game items sold. This surely bodes well for Zynga as it no longer needs to pay the 30% share. However, Zynga would lose its preferential status on Facebook. It would have to abide by Facebook’s general terms and conditions that are applicable for all other game developers and contributors.
Moreover, Zynga can concentrate more on offering games on its own website or other platforms. Though Zynga is trying to diversify its revenue base but currently its revenues are heavily dependant on Facebook. In the last reported quarter, of Zynga’s total bookings, Facebook related bookings stood for 79%.
Nonetheless, Zynga is in a dominant position in the social and mobile gaming sector based on its innovative product pipeline. According to the IBISWorld report, revenue from the social network game development industry is expected to reach $6 billion in 2013. According to the report, the industry has grown by 184.3% per year on average during the past five years.
Zynga’s expansion in the advertising space is another positive going forward. Of late it has added new customers such as Progressive Insurance and LG Electronics, while old clients McDonald’s (MCD), Honda (HMC), and NBC Universal renewed their contracts.
Moreover, shareholder-friendly initiatives such as the buyback and cost reduction program will drive the stock in the near term. However, we also note that barriers to entry are low in the social gaming market and this will attract new entrants, thereby further increasing competition for Zynga over the long term.
Currently, Zynga has a Zacks Rank #3 (Hold).
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