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Zynga's Virtual Cash a Big Part of Facebook's Bottom Line

 & Damon Poeter Reporter

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There is an avalanche of new information about Facebook to sift through in the company's $5 billion IPO filing, but one number that's getting a lot of attention in the early going is 12 —as in the 12 percent of Facebook's 2011 revenue generated by just one company, Zynga.

Zynga contributed about $445 million to Facebook's balance sheet last year. The San Francisco-based social gaming house, which had its own initial public offering in December, appears to be Facebook's single biggest customer, though that's not directly stated in Facebook's Form S-1 registration statement filed with the SEC Wednesday.

What Facebook does say is that no customer accounted for 10 percent or more of the company's revenue in 2009 or 2010, so Zynga's 12 percent contribution in 2011 looks to be the record.

Facebook receives "substantially all of our revenue derived from Payments" via social game-related apps, the filing states. Such revenue comes from "developers of social games, particularly Zynga," the company goes on to say.

In the filing, Facebook tells potential investors that it sees a bright future in the monetization of virtual and digital goods traded by players of social games like Zynga's FarmVille, explaining:

"When users purchase virtual and digital goods from our Platform developers using our Payments infrastructure, we receive fees that represent a portion of the transaction value. Currently, substantially all of the Payments transactions between our users and Platform developers are for virtual goods used in social games, for example virtual tractors in the social game FarmVille."

According to an undisclosed industry source that Facebook cited in its prospectus, the worldwide revenue generated from the sale of virtual goods increased from $2 billion in 2007 to $7 billion in 2010, and is forecasted to increase to $15 billion by 2014. Payments integration is currently required in apps on Facebook that are categorized as games, and we may seek to extend the use of Payments to other types of apps in the future.

"Our future revenue from Payments will depend on many factors, including our success in enabling Platform developers to build experiences that engage users and create user demand for their products, and the fee arrangements we are able to negotiate in the future," the company said.

So how healthy is the relationship between Facebook and Zynga? So far so good, says Rita McGrath, an associate professor at the Columbia Business School, but as social gaming's technology and revenue models evolves, that could change.

"The most powerful relationships between partners are when both parties have considerable power and there is low potential for conflict, which has certainly been the case with Facebook and Zynga so far," McGrath told PCMag.com. But she added that "the emergence of new kinds of rewards and playing fields ... can create tension in the relationship" between even strong strategic partners.

"So you could certainly see conflict over who is going to call the shots with things like augmented reality games on hand-helds, banking-like money transfers that move real dollars into the Zynga world, and control over who captures user data and has the opportunity to resell it. That's when the relationship is likely to become more fraught," McGrath said.

Several tech companies have gone public in recent months, including Zynga, Yelp, Groupon, and LinkedIn, but none have been as large and influential as Facebook.

For more, see Before Facebook: A Look Back at Major Tech IPOs, Before Facebook: A Look Back at Major Tech IPOs, Facebook By the Numbers: Steady Growth, Big Profits, and What Facebook Fears, as well as the Facebook history slideshow above.

About Our Expert

Damon Poeter

Damon Poeter

Reporter

Damon Poeter got his start in journalism working for the English-language daily newspaper The Nation in Bangkok, Thailand. He covered everything from local news to sports and entertainment before settling on technology in the mid-2000s. Prior to joining PCMag, Damon worked at CRN and the Gilroy Dispatch. He has also written for the San Francisco Chronicle and Japan Times, among other newspapers and periodicals.

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