Facebook’s online game dependency problem

By Xavier Bremner

Facebook’s planned $5 billion initial public offering set for later this year has generated plenty of investor interest and media speculation that the social network could fetch a market valuation of $100 billion or so. At that kind of valuation, the company would trade at 26.9 times 2011 sales. By comparison, search engine operator Google (GOOG) now trades at about five times sales.

However, one worrisome development has surfaced that may give some Facebook enthusiasts pause: The site’s success as an online game platform may be waning, according to a new IHS Screen Digest Media Research report.

Here’s the takeaway:

Following fast growth during the previous two years, the number of Facebook gamers languished in 2011. At the end of 2010, about 50 percent of Facebook’s monthly active users (MAUs) were gamers. At the end of 2011, the absolute quantity of gamers changed little, and the percentage of Facebook MAUs that were gamers slipped to just 25 percent.

On top of that, most active users for Facebook game leader Zynga, the developer of FarmVille and Mafia Wars, fell 15 percent to 225 million at the end of the fourth quarter of 2011, from 266 at the end of the third quarter.

Why does this matter? In its S-1 filing with the Securities and Exchange Commission, Facebook cited its relationship with Zynga as a major risk factor:

In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga.

Additionally, the Facebook noted in its SEC filing, “Zynga’s apps generate a significant number of pages on which we display ads from other advertisers.” So, if Zynga starts to stumble or migrates games to other platforms, the revenue hit to Facebook could be meaningful. In short, the ties that bind Facebook to Zynga could be a future vulnerability for the social network.