Facebook Could Buy Zynga

Now that Zynga's stock has cratered, there are reports thatFacebook could buy Zynga.

Could Facebook buy Zynga? Of course it could buy Zynga. And with its pile of cash Apple couldbuy Facebook.

Just because something could happen doesn't mean it will.

And yet, Zynga's stock got a tiny jolt this morning when NBC picked up on a Seeking Alpha report that Facebook could buy Zynga. (Welcome to public markets, guys! Fun times.)

Given Zynga's very close relationship with Facebook a rumor like this might make sense to outsiders. But you should be extremely skeptical.

First off, the whole acquisition talk is centered on a conspiracy theory that Facebook is no longer featuring Zynga's games to drive its stock price down. Zynga confirmed that Facebook changed its algorithm to feature newer games on its earnings call, and this has actually not hurt Zynga much, for two reasons:

• The decline of Zynga's web games wasn't a result of the algorithm change. That happened late in Q2, and Zynga's web games were already declining well before that.

• The change in Facebook's algorithm favors newer games, which also includes Zynga's new games. The Ville, for example, received a 4.5 million install bump once Zynga turned on cross-promotion.

Second of all, it just doesn't make sense for Facebook to spend money buying a company that makes Facebook games, because it already gets money from every gaming company on the platform. Facebook charges a 30 percent fee for every transaction, whether it's on a Zynga game or any other company.

Buying a big company like Zynga would be a huge risk. If Facebook were to buy Zynga and a new gaming company like Kixeye suddenly shot to the top of the charts, Facebook would be caught flat-footed.

Facebook would benefit the most by doing what it has always done — working with whichever companies are popular at the time — given the short shelf life of Facebook games.

We've also already made the case that Facebook games are already declining in favor of mobile games, with newer Facebook games not reaching the same peaks they used to catapult to after launch.

Zynga is in the process of evolving into a mobile gaming company, with nearly half its users coming from mobile games. If Facebook were to buy Zynga, it would receive 100 percent of the income from in-game purchases in mobile games, but already mobile games do not monetize as well as Facebook games.

Zynga is also getting ready for its third act: real-money gambling games. We have made the case that real-money gambling games are at least a billion-dollar opportunity for Zynga, which would at least double the value of the company.

Pincus confirmed that Zynga's first "real-money gaming" products in international markets in the first half of 2013 — referring to that same real-money gambling opportunity.

Right now, buying Zynga represents too much of a risk, even if the company's stock is floating around a cheap $3. And it would be a disservice to Zynga for Pincus to sell, because there is a huge potential upside for Zynga if real-money gambling games work out.

reprinted from

Mafia Wars by Zynga blog