The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
After the market close on Thursday, Zynga (NASDAQ:ZNGA) and Facebook (NASDAQ:FB) announced amendments to the Developer Addendums originally agreed to in 2010. Among other items, the original Addendums required Zynga to transition to Facebook Credits as the primary payment method for games played on Facebook, with Facebook remitting to Zynga 70% of the face value of the Facebook Credits used. Zynga began the transition in July 2010 and completed it by April 2011. The amendments disclosed on Thursday apply to Zynga’s use of the Facebook platform through May 13, 2015.
The amendments provide Zynga with greater platform and payment flexibility. Zynga is no longer required to use Facebook as the exclusive social platform for Zynga properties or to use the Facebook platform as the exclusive login means for games not hosted on Facebook’s website. However, any Zynga social game launched must be made available concurrently with, or shortly after, it is made available on another social platform. The requirement does not apply to mobile games, third-party games, any social game that cannot be launched on the Facebook platform due to technical limitations, any downloadable social games, or any games launched in China or Japan. In addition, Zynga may opt not to use Facebook Payments or display ads served by Facebook on its own sites. In our view, this means that the 70% / 30% revenue split between Zynga and Facebook will remain in place for social games on Zynga’s site where Zynga accesses the Facebook social graph, but Zynga will be allowed to keep 100% of revenues derived away from Facebook if it does not use the social graph. We estimate that less than 10% of Zynga revenue is currently derived from Zynga.com.
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As a tradeoff, Facebook gained the ability to develop its own games, and has an option to host Zynga’s real money gambling or acquired games. Under the new agreement, Facebook will no longer be prohibited from developing its own games. However, we see no real threat of Facebook attempting to compete directly with its game vendors, and we view this “concession” as a necessary quid pro quo to allow Zynga to obtain off-site freedom from the Facebook tax. If Facebook allows real money gambling games on its website in countries where Zynga already has real money gambling games…