Zynga Said to Plan Game Promotions to Lessen Facebook Reliance for Sales

Zynga Inc. (ZNGA), the online-game company that sold shares to the public in December, plans to unveil services designed to promote other developers and lessen its dependence on Facebook Inc. (FB), two people with knowledge of the matter said.

Through a new publishing program, due to begin in March, other game developers will be able to advertise their wares in Zynga (ZNGA) titles and on a separate Web portal, said the people, who asked not to be identified because the plan isn’t public. Zynga will keep a portion of the sales generated from the games, according to the people.

Zynga, the biggest developer of games played on Facebook, is seeking new sources of revenue after raising $1 billion in its initial public offering. By selling services to other developers, it may reduce its reliance on the social network, which accounts for more than 90 percent of sales and takes a 30 percent cut of virtual goods sold in Zynga games.

“Any progress Zynga can make in revenue diversification is a positive,” said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco, who downgraded shares of Zynga to “neutral” earlier this week.

Dani Dudeck, a spokeswoman for Zynga, said the company doesn’t comment on rumors or speculation.

Zynga shares rose 2.2 percent to $12.06 yesterday. The stock has climbed 28 percent this year.

Expensive Development

Promoting apps made by other developers is likely to carry fewer risks than Zynga’s main business of developing games itself. The company’s profitability has been crimped by the cost of creating new blockbuster titles.

The plan for a new publishing platform in March is contingent on talks with partners, as well as internal development, according to the people familiar with the effort. The release could come later, they said.

By becoming a publisher, Zynga emulates traditional console game companies such as Electronic Arts Inc. (EA), which distribute and promote games made by independent design studios in exchange for a cut of sales.

Over time, Zynga’s publishing business could become a significant driver of sales, depending on how much of the market it controls, said Robert W. Baird’s Sebastian.

“This could present a $500 million incremental opportunity in just a few years,” he said.

Facebook’s Role

Joining Zynga’s network will not exempt developers from giving Facebook (FB) a commission, a person with knowledge of the revenue agreement said. Because Facebook Credits are used by all developers selling virtual goods on the social network and games promoted by Zynga, participating developers will still pay Facebook a cut of sales, the person said.

Zynga, with more than 246 million users, operates six of the seven most popular games played on Facebook, according to research firm AppData.

“Hidden Chronicles,” released last month, has become Zynga’s third most popular game, with 30.7 million monthly users, according to AppData. It ranks behind two more established titles, “CityVille” and “Texas HoldEm Poker.”

During an event at the company’s San Francisco headquarters in October, Zynga debuted a new service, called Project Z, geared toward curbing its dependence on Facebook.

Project Z would be part of a larger corporate strategy, dubbed Zynga Direct, that is aimed at building “a direct relationship with consumers whether they are on the Web or mobile,” Chief Executive Officer Mark Pincus said at the event.

Earlier this week, Zynga’s shares had their biggest one-day drop since their Dec. 16 debut after an earnings report showed product-development costs are cutting into profitability.

To contact the reporters on this story: Douglas Macmillan in San Francisco at dmacmillan3@bloomberg.net; Adam Satariano in San Francisco at Asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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