There’s a feud taking place on Facebook. And, it’s about money. And, like most feuds over money, it’s about who pays whom and how much. And, just like the Hatfields and McCoys, the party that fired the first shot may have aimed at the wrong target and for all the wrong reasons.
You may have read over the last week about two decisions that Facebook made recently and that were directed to Zynga, which developed the popular Farmville game. These decisions were to (1) limit the number of notifications that can be disseminated about Farmville activities via the status updates, and (2) to force Farmville farmers to use Facebook’s payment method to buy stuff for their virtual farms.
The first is controversial given Zynga’s stature as one of Facebook’s biggest advertisers, spending tens of millions last year to drive more farmers to Farmville. As a non-Farmville fan, I secretly applauded this move by Facebook since I was getting pretty tired of having my news feed constantly co-opted by friends’ Farmville updates (I don’t play and never have tried.) But, setting aside my personal bias, Facebook has grown its business because it has been able to attract developers who want to leverage its awesome social graph. It touts, as a selling point, its power to drive messages virally and with great velocity. The notion now that developers have embraced the platform, only now to have Facebook limit how viral applications can become in order to drive their advertising revenues higher seems pretty short-sighted.
It’s the second decision related to payments that I think is the most interesting and potentially the most problematic, but not for Zynga. Facebook wants Farmville farmers to use Facebook Credits exclusively since it wants to charge Zynga a 30% fee for the revenue that flows through Credits. I get that Facebook wants to drive adoption and usage of their payment product. And, when drawn on a whiteboard and subsequently put in a powerpoint deck, the notion of picking one of the most popular applications on their platform as a strategy to make that happen probably seemed logical. But, as many a failed payments company will attest, adoption and usage of new payments products doesn’t happen because someone decides to force it, and especially when the one doing the forcing has picked the wrong side of the platform to strong-arm.
Let’s look at the Facebook payments ecosystem for a minute as it relates to Zynga. There are Farmville fans, who play the game on Facebook and who want to keep their farms pretty and buy stuff to do that. We have Zynga that has created Farmville, and has brought to Facebook a huge base of people now who play the game on Facebook and because they are on Facebook, are available for Facebook to monetize in many other ways, like selling advertising to merchants who want to reach these people and enticing Farmville farmers and their friends to buy other things that are for sale on the site. In fact, Zynga’s games brought with it more than 80 million monthly active users. This was, until recently, a happy little ecosystem. Everybody got something of value.
Now, Farmville farm owners have to establish a Facebook Credits account if they don’t want their artichokes to wither and die. That means that they have to move away from whatever they are doing now and do something they have never done before – create a new account. Some people will probably be okay with doing that but some people might chose not to, for a lot of reasons, including privacy and security. That means that Zynga will lose customers at the same time they are being told to pay up on the advertising side and to pay up on the payments side. In platform speak, this has the potential to become a death spiral, where customers leave, and then their friends who used to plow their fields leave, and then more people leave, and soon, everybody loses, including Facebook.
As I said, I get that Facebook wants to monetize payments on their platform. Who doesn’t? But I don’t understand this strategy. These two decisions have managed to alienate one of their customers – Zynga – and has the potential to alienate their other customer – the Farmville farmer and their friends. The offline analog here is a mall owner telling their store tenants that their customers can only use wampum to buy the stuff that they sell in their stores. And, that they’ll take a third of their revenue. And, that this decision gets a couple of years into the lease period without any prior warning. All of a sudden, customers that were used to using money to pay for things now have to go find wapum, or more likely, find stores that still accept money since that is what they have and that is what is accepted everywhere else they like to shop. Playing this out, it’s not hard to see how the mall owner loses in the end since customers find other places to shop. Stores, logically, follow customers as soon as they can exit – and those who can’t go belly up. The mall loses because stores and customers will find each other again in a more convenient platform where the transactions costs are not as high for either side.
So, I think this is a risky move for Facebook to make. There’s talk that Zynga is looking to create its own gaming social network which doesn’t seem all that far-fetched given the network they have built and the affinity that people have to the game. They just might be able to pull that off. The big question for Facebook is how many developers, entrepreneurs, and merchants – all important customers of their platform, are now looking at this decision and making new plans. We won’t know for a while. What we do know is that we’ve seen this movie on social networks before. The first movie was titled Friendster, the second was MySpace.
Karen Webster is the President of Market Platform Dynamics (MPD), a management consulting firm that helps companies profit from industry disruption. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.