Midday Report: Facebook Gaming On the Rise; How to Monetize?

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​Produced by Drew Trachtenberg

Game playing on Facebook (FB) is soaring: The company says the number of people paying to play games on the social network has jumped by 24 percent from a year ago.

Two hundred-fifty million people play games on Facebook each month. That's about one in five Facebook users, and represents a solid increase from a year ago, and shows that there's still plenty of room for growth in this area.

All of these gamers could help Facebook meet one of the big criticisms on Wall Street – that it needs to find a way to monetize its vast platform of more than one billion users.
A Zynga Inc. Farmville game screen shot is seen on a computer monitor in San Francisco, California, U.S., on Thursday, Dec. 15, 2011. Photographer: David Paul Morris/Bloomberg
David Paul Morris/Bloomberg

Games can help it do so in two ways. First, it makes money on the ads that show up when you play. Facebook also takes a percentage of the fees we pay to game companies.

Gaming also means a lot of money for game developers: Facebook says it paid developers $2 billion dollars last year. However, Zynga (ZNGA) is no longer the main attraction. With popular games such as Farmville and its spinoffs, Zynga grew rapidly by offering its games directly through Facebook.

But the two companies have had a falling out recently and are moving in separate directions. One problem from Facebook's point of view was that many of its users were angered by Zynga's onslaught of spam. So Facebook has sought out more developers, and placed tighter restrictions on how they can market to users.

As for Zynga, players of its games are no longer required to have a Facebook account to play. It's also setting up its own way of collecting customer fees on virtual purchases.

But users will no longer get prompts about challenging their Facebook friends to play Zynga games with them.

It hasn't been fun and games for shareholders of either company. Since going public in 2011, Zynga shares have lost 64 percent of their value. Facebook is down 33 percent since its stock market launch last spring.

Midday Report: Facebook Gaming On the Rise; How to Monetize?

1. Activision Blizzard (ATVI)

Life was easy when everyone was playing Guitar Hero. Facebook has reinvented the way game-hungry masses spend their time, logging into Facebook to tend to virtual farms, mafia campaigns, or item-finding experiences.

It's not a surprise that the traditional video game industry has been struggling for three years. Market leader Activision Blizzard doesn't even make Guitar Hero games anymore, and its World of Warcraft player count has been steadily declining over the past year. Call of Duty is still a growing franchise, but that can't last forever.

As traditional game companies are struggling, Zynga (ZNGA) -- which accounts for 18% of Facebook's revenue -- is thriving.

Diehard gamers are still firing up their consoles and are toting around their portable gaming systems. The problem is that mainstream gamers -- the casual players who didn't live and die by every franchise's latest release -- have moved on to casual and social diversions. They're free or nearly free, and the viral magic of Facebook connecting friends as players made it possible.

2. Google (GOOG)

Few will suggest that Google is in trouble. The world's most valuable Internet company is worth more than twice the market cap that Facebook is commanding. However, Big G is nervous.

Google's bread and butter business remains paid search, and what happens when folks stop trekking over to Google.com whenever they need to launch a query? If asking friends or simply relying on Facebook's own search box is easier, won't that hurt Google?

There are other ways that Facebook is having an impact on Google.

Google's YouTube may be the world's hottest video-sharing website with more than 800 million monthly visitors, but Facebook also allows its more than 900 million unique monthly users to upload clips on its site to share. We also have Gmail, Google's popular email platform. A lot of people are just sending private messages through Facebook that would normally go through traditional email.

3. Angie's List (ANGI)

Subscribers turn to Angie's List for unbiased reviews. Members pay dues to have access to customer reviews for local service providers. Need a handyman who can fix a pocket door? Is your clogged drain not clearing with your plunger? Who can tutor you daughter for her upcoming college entrance exam?

Angie's List prides itself on the vetted and unbiased opinions that can be found on its site. Well, as fate would have it, these are the same things that can be effectively tackled for free by posting a request as a status update on Facebook.

4. American Greetings (AM)

Remember when shelling out a few bucks for a greeting card was the most cost-effective way to commemorate a special occasion?

Well, thanks to Facebook, offering up birthday wishes or congratulatory acknowledgements is simply a Facebook posting away. Is it cold? Is it impersonal? It doesn't matter. It works. American Greetings has done its part to beef up its digital presence, but analysts still see earnings growth going the wrong way here this fiscal year.

5. Shutterfly (SFLY)

Facebook has also changed the way we consume photographs. We're no longer printing them out, and that's bad news for Shutterfly. The company turns digital snapshots into prints, photo books, and other customized merchandise.

Facebook is a hotbed for the sharing of photos, and that is something that has intensified since its recent acquisition of Instagram.

Shutterfly has managed to grow nicely even as Facebook ascends, but the perception that Facebook is turning Shutterfly and its peers into an elephant's graveyard exists.

All five of these companies may have cheered Facebook's plunge below its $38 IPO price on Monday, but their business models still have to reckon with the beast that the undisputed champ among social networks has become.

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