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Economic Symbiosis Between Facebook and Zynga

Economic Symbiosis Between Facebook and Zynga

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An explorative research on the political economy of social games
An explorative research on the political economy of social games

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Published by: Kalina Dancheva on Jul 08, 2011
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Economic symbiosis between Facebook and Zynga

An explorative research on the political economy of social games

By: Kalina Dancheva (3721329) Course: Game studies Programme: New Media and Digital Culture Teacher: Dr. David Nieborg Date: 8 July 2011 University of Utrecht

Abstract
In the recent years social networks have given a rise to the game genre of social games, which currently enjoys an exponential growth among millions of users. In 2010 Facebook and the largest social game producer Zynga were on the edge of a potential split in their relations. The situation was overcome, but it marked a crucial moment in the policy of the social network towards social game producers and third parties. This paper explores the political economy between Facebook and Zynga by drawing a network of relations using the method of Actor-Network Theory. Social games will be examined from the perceptive of two-sided platforms that have matured into a potential competitor of the hosting platform of Facebook. By following the trail of the money in this network, the article will analyse the economic logic that underpins the decision of Facebook and Zynga to prolong their partnership. The paper argues that currently, there is an emerging new type of relation between the social network and the social games which is regulated by a specific business model. This tie creates an economic symbiosis, designed to benefit primary the social network but it also has an economic value to the social games developers as well as to other third parties. Based on this research, the article will suggest a model that illustrates this market logic which can be a valuable source in the future analysis of the economy of social games. Key words: Zynga, Facebook, social games, Actor-Network Theory, political economy, economic symbiosis.

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Table of contents

1. 2. 3. 4. 5. 6. 7. 8. 9.

Introduction CityVille – presenting the case study Method of research The two-sided service platform model CityVille as part of the monetary model of Zynga Facebook’s interest in CityVille The Facebook ecosystem Conclusion References

3 4 4 5 6 8 9 10 12 15

10. Appendices

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Introduction
Since 2009 the phenomena of “social games” has vastly spread through social networks, attracting millions of players all over the world. In Facebook, this type of games is reported to be played currently by 290 million users (Ozinawa 2011). This rapid proliferation and growth has provoked the discussion within the professional and academic community about the characteristics of this new genre as well as about its development in the future. Scholars and researches agree that social games possess a “hybrid nature” between video games and social networks in which economic, technological and design aspect are deeply intertwined (Deterding 2010). This article will look at the current political economy of social games within the social network. The particular reason which provoked this research was the potential split between Facebook and social game company Zynga in May 2010 (Eldon 2010). This case was a result of a continuous tension in which Facebook cut out some of the communication channels of Zynga and tried to force the game company to adopt the Facebook’s credit system. The situation was so fierce that Zynga’s CEO Mark Pincus announced that the company might leave Facebook permanently and move to a separate own social gaming service, called Zynga Live (Arrington 2010). In the end, the partnership between the two companies was saved and they signed in a five-year contract. This article starts with the research question of what kind of decisions led to this outcome and can we gain from it an important insight about the underlying economic processes? To answer this question the paper will deconstruct the business logic that underpins this deal. By doing so, the article will argue that currently, there is an emerging new type of relation between the social network and the social games within the network which constitutes a high barrier to entry. This relation is regulated by a specific techno-economic model which is embedded within the design of the games and it forms a common ecosystem within the social network. In order to present this trend, the research will focus on the economic tie between Facebook and the social game producer Zynga through the case study of the game CityVille (Zynga Inc. 2010). By exploring the relation between the game producer and Facebook, the paper aims to show the economic symbiosis that feeds their dominant positions which might be a valuable insight in analysing the future political economy of social games.

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CityVille – presenting the case study
The game CityVille was chosen for a case study because it was one of the newest games of Zynga and hence it can illustrate the latest business logic of its producer. CityVille was launched in November 2010 and since then it has been the fastest growing Zynga application. It reached 6 million daily active users in the first eight days after its launch (Schonfeld 2010) and it is currently played by about 88 million users a month according to AppData (2011). CityVille is a browser based social game in which players are progressively building their own virtual city beginning with simple streets and houses and moving to more sophisticated constructions (bakery, city hall, schools, and banks). It enables asynchronous gameplay wherein the relation between the players is mediated via game artefacts that the players interact with (such as gift giving). The progress in the game is based on repeatedly executed tasks (a practice known as grinding (Björk 2010)) and through gathering game artefacts like coins, boxes and crops. The collection of these goods is embedded in a time-based mechanics. Moreover, the building is not only time consuming, but also happens in stages in which players need the assistance of other gamers which are added as “neighbours”.

Method of research
The tie between of the social game CityVille in relation to the social network Facebook will be analysed by employing the principles of the Actor-Network Theory (ANT) (Latour 2005; Law 1992; Akrich 1994). For ANT scholars social systems should be studied by tracing the relations between human as well as non-human actors (or actants). I chose this approach, instead of social-network analysis, because it studies the role of non-humans as an essential part of the social structure. In the perspective of this research, such an actant is money. In the view of ANT money can be defined as a “quasi-object” (Latour 1993, 51) which is a mobile object that is passed between actors and has the ability to transform their relations (Boje 2002, 3). Moreover, quasi-objects can mobilize new actors in an existing system and by this way they can change the network. In this sense, by following the transactions between the actors Facebook and Zynga, the paper aims to show their complex multilayered relation thereby revealing other actors. The viewpoint in the research is based on observation and personal experience by playing CityVille and testing its payment platform as well as on secondary sources of information. Before tracing the relations of the main actors – 4

Zynga’s CityVille and Facebook, the paper will first present the economic focus towards social games and the social network.

The two-sided service platform market
When analysing political economy of social games it is important to determine their business model. For this I turn to analysis of scholars in the fields of games studies as well as to experts in business and management and innovation studies. According to game scholars Olli Sotamma and Tero Karppi social games mark a transitional moment in game industry in general from games being “products to games being services” (Sotamma and Karppi 2010). In the same vein, game designer and producer Andrew Mayer supports the service driven paradigm by stating that gameplay is “another point along that service chain” (Mayer 2009). The service economy of these games is characterized by a freemium model1, which, as analysed by online management expert Marín de la Iglesia, is a typical business model in the Web 2.0 economy (Marín de la Iglesia 2009). Social games rely on “micro-payment models” (Deterding 2010) which replace the high-investment and high-risk strategy of commercial video games. To gain a deeper understanding on the business model of Zynga games as well as the Facebook, the paper will introduce the notions of “two-sided markets” and “platforming”, which derive from the fields of business and management and innovation studies. Two-sided markets are defined by economist Michael Vogelsang as “markets with agents on both sides who interact through a platform” (Vogelsan 2010, 129). The platform model connects these separate groups and according to economists Thomas Eisenmann et al there is a relating “networked effect” (Eisenmann et al 2006, 94) between them. In the two-sided market model, there is a demand side (called consumers which are end users) and a supply-side (customers - for instance advertisers). The platform owner is dependent on both sides and its role is to balance between them. The two sides are directly related to each other and as the demand of one of the groups grows, so does the demand on the other side (Parker 2008). As a result, the platform benefits by increasing its value to both sides. The platform strategy as a characteristic of the video game market has been addressed by French economists Jean-Charles Rochet and Jean Tirole (2004) as well as by game scholar David Nieborg (2011). In Internet, as analysed by economists Yannis Bakos and Evangelos Katsamakas, an increasing number of intermediaries adopt the two-sided

1

A model in which the majority of users use the service free of charge, while few pay for premium goods.

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networking model (Bakos and Katsamakas 2008). Facebook is a typical example of a platform as it links users with advertisers and developers. In this two-sided market of Facebook, the role of Zynga games is dual. On one hand, Zynga is a game developer and at the same time it is a direct advertiser in Facebook. But on top of that, I’d like to argue that currently social games are not only in the role of one of the sides, but have adopted the two-sided strategy and herby becoming subplatforms within the main platform of Facebook. Social games provide a separate and unique scope of services that attract players and advertisers in a different way than the services, provided by Facebook. In the case of Zynga games, having an audience of more than 250 million users (Mashable 2011) and developing a diverse range of in-game options for branding, has become the “advertiser’s paradise” (Sadanandan 2010). In this sense, Zynga and Facebook have turned into competitors that strive to serve the same consumers, and more over – the same customers (advertisers). Thus, the tension between them is a logical step in their relation. In the following part, the paper is going to deconstruct the underlying business logic which led Facebook and Zynga to function in a “multiplatform bundle” (Eisenmann et al 2006, 100).

CityVille as part of the monetary model of Zynga
CityVille boosts the revenue of Zynga in several ways in which we can distinguish the overall marketing strategy of the company. First of all, CityVille sells virtual currency to the users through a micro-payment model which offers two types of currency called coins and cash. Coins are used for buying the basic houses, buildings and crops and they can be gained within the game through bonuses which buildings provide. In contrast, cash is a premium currency which cannot be collected by gameplay. It is the only way by which users can acquire special buildings and decorations and can speed up the process of building without relying on the assistance of other players. Users can buy coins and cash by one of the payment options online (Appendix 1) or by buying Zynga pre-paid cards, which are sold in offline stores. As part of the strategy for creating a demand and a sense of urgency for game items, exclusive virtual goods are promoted in the Facebook fan page of CityVille (Appendix 2) which is perfectly optimized according to the Facebook’s algorithm.2 For Zynga, virtual goods account for
In 2009 Facebook changed the news feed algorithm by embedding the highlights as default view so that users see only the most popular content (Kincaid 2009). In this sense, CityVille’s promotions of goods on the Facebook wall provide a perfect visibility to the fans and by July 5th are 2,435,915.
2

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80% of their revenue (GreenCrest Capital 2011) which for 2010 was about $600 million (Schonfeld 2011). Another way by which CityVille gains capital for Zynga is by providing marketing and branding services. There are two main options for this. On one hand, Zynga provides a leaderboard banner below the game space (Appendix 3) which can be used for separate ads or as part of a larger sponsorship programme. Sponsorships and branded in-game goods were announced by advertising Manny Anekal to be the prime focus of Zynga for 2011 (Duryee 2011). We can see one of the examples in such partnerships3 in the promotion of the animation movie Kung-Fu Panda 2 (Appendix 4), for which CitiVille built a themed movie theatre and a branded collection with a prize for completing of the mission (Slutsky 2010). Following the path of the quasi-actor of this network, money, we can see that a third actor has been mobilized and has become a part of the monetization tools of CityVille. This actor is the transactional advertising company TrialPay (2011). It provides users with an alternative way to gain the exclusive currency by adding city cash as a bonus to other advertising options such as free surveys, flower deliveries, mobile subscriptions, etc. The ads are displayed outside the gameplay in a separate tab Earn City Cash (Appendix 5). As stated by TrialPay, game developers get paid when the currency is redeemed into the game (Kindra 2011). It is important to notice that this method of additional revenue is promoted by Facebook since 2010, when TrialPay became the “exclusive free payment partner for Facebook credits” (Van Buskirk 2010). It is not announced how much Zynga benefits from this deal, but game developers report to have increased their revenues using not only the offer wall, but also other services provided by TrialPay (Appendix 6). To sum up, by having access to the users of Facebook, Zynga generates its revenue from CityVille by selling virtual goods, by serving as an innovative platform for branding and by gaining additional profit from Facebook’s partner TrialPay.

Collaborations were recently done in other Zynga games – such as FarmVille’s promotion of the movie "Megamind" which gathered 9 million farmers to play in less than 24 and also branded Lady Gaga GagaVille and McDonalds’ tems (Slutsky 2011).
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Facebook’s interest in CityVille
Although Facebook is used by Zynga to build its million dollar business, here I’d like to argue that that the contract between them was possible, because the social network gains considerable amount of benefits from this partnership – directly in a short term and more importantly –indirectly in the long term. First of all Facebook generates revenue from the advertising that Zynga invests in the platform. It is reported that the company spends about $100 million per year in ad spending or about 20% of Facebook's annual advertising revenue (Slutsky 2010) which makes it one of if not the biggest advertisers in the social network. Furthermore, since the game play takes place within the overall design of the social network, Facebook users are exposed to the advertising banners on the right part of the screen, unless they move to full screen mode (Appendix 7). Game users are profiled by interests and used as a target audience, through which Facebook monetizes its platform (Scholtz 2010). Zynga games also increase the users’ visits and retention in the network. In the times when attention is the scarcest resource (Baalen and Moratis 2001), social games account for 40% of the time spent in the social network (Siegler 2010) which means that a potential split between Facebook and Zynga would decrease the users’ motivation to visit the network. But the most significant advantage that Facebook has from the deal with Zynga came from the clause that Zynga had to adopt the payment platform of network, related to the Facebook’s credits system (Smith 2010). The credit system provides virtual currency which Facebook aims to develop as a unified transaction model within the network. It was launched in the beginning of 2010 and since then Facebook has been encouraging developers to implement it in their applications. The social network even announced incentives for developers such as “early access to product features and premium promotion on Facebook” (Facebook Developers’ forum 2010). As a consequence of the contract, Facebook is charging a 30% tax for every purchase made through the system, which as reported to be around $30 million per month (Kincaid 2011). Although the virtual currency in CityVille and in other games still have their own name (city cash, horseshoes, empire points) the system is built in a way that the currency is bought through the Facebook’s payment platform (Appendix 8). When users need city cash, they choose the amount they want and the system automatically calculates the money they have to pay in Facebook credit rates. Hence, what players

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actually buy is credits. Previously, Zynga was using its own merchant infrastructure, but now Facebook has become the merchant itself. Moreover, Facebook needs the audience of Zynga because the credit system has to be popularized among users and hence, ensuring that the largest social game company would adopt the system was crucial for the proliferation of the model. The actor TrialPay is also part of this Facebook ecosystem, because it’s the exclusive free payment partner of Facebook and its offers are directly connected to the Facebook’s credit system (Van Buskirk 2010).

The Facebook ecosystem
After exploring the relations between the CityVille, Facebook and the third party TrialPay, I’d like to suggest a model, which visualizes the ecosystem that Facebook is building with social game developers (Figure 1). The model shows that social games and Facebook are intertwined in a closed system that benefits their business models. In that sense, by letting Zynga utilize the user database and expand its business on the Facebook platform, the social network directly gains profit and indirectly boosts the unified virtual currency market of Facebook credits. This model is accelerating because the more users get familiar with the credit system, the more third parties will be willing to cooperate with Facebook for all sorts of virtual and real goods. Therefore, more companies will use the currency and will pay the 30% tax to Facebook. Although Zynga benefits from the partnership with Facebook, the model visualizes the notion of the power of the “platform leader” (Gawer and Cusumano 2002) in the two-sided markets because by being the merchant of credits, Facebook influences the monetary model of developers and advertisers. Moreover, this model is designed to serve the business models of large game companies because the 30% fee builds a high barrier to entry by smaller companies.

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Figure 1: Facebook-social games ecosystem

Conclusion
In the time of ubiquitous spread of social games in platform of Facebook, both sides are intertwined in a complicated and dynamic system of relations. In order to deconstruct this system, I followed the transactions between the largest social game producer Zynga with Facebook and with the third party TrialPay. This analysis revealed that Zynga and Facebook could overcome their tension in 2010 by building a new type of relation based on symbiosis, rather than on competition. As a result, this partnership creates a synergy that is constantly strengthening the dominant positions of both companies and is building a monopolistic virtual currency ecosystem. Based on the findings of this research, I suggested a model that visualized the business logic and the political economy that Facebook is creating with social game developers. This new economic model, imposed by Facebook, constitutes a market which can benefit the large game developers and holds back smaller ones due to the high tax rate. This article comes just few days after Facebook enacted its virtual currency as mandatory for all developers providing virtual goods (Kincaid 2011). In the US, this obligation has already provoked the public interest group Consumer Watchdog which filed an antitrust 10

complaint with the Federal Trade Commission arguing for anticompetitive and unfair business practices of Facebook (Consumer Watchdog 2011). In this sense, the analysis, presented in the paper, can be a useful basis for the understanding and further study of the relations between social games and the platform leader Facebook.

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Appendices
Appendix 1: Coins and City Cash online options

Appendix 2: Promotion of exclusive virtual house in CityVille’s fan page. This item was offered within a certain period, which creates a sense of urgency.

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The in-game announcement of the promo good

Appendix 3: Banner advertising

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Appendix 4: Sponsorship for the promotion of the animation “Kung Fu Panda 2”

Appendix 5: Earn City cash tab

Appendix 6: Revenue increase by developers using TrialPay

Source: Breaden, Andy. 2011. Facebook Roundup: Palihapitiya Starts Fund, Safety, OnLive, PunchTab and More. Andy Bearden Blog. http://andybearden.com/tag/trialpay.

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Appendix 7: Facebook advertising outside the game

Appendix 8: Buying virtual currency through Facebook credit’s platform

The transaction is calculated in Faacebook credits, not in city cash.

Facebook’s payment platform.

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