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Zynga’s Q3 Profits Plunge 50%: Blame Facebook?

Fees Zynga pays to the social network are adding to other expenses


Today, it’s hard for IPO investors to think of anything but Groupon (NASDAQ:GRPN). But you shouldn’t miss some other interesting news items. For example, Zynga filed another amended S-1. In it, the company disclosed that revenues for the third quarter came to $306.8 million, up 80% over the past year. However, net income was only $12.5 million, which compares to $27.2 million in the same period a year ago. In fact, the online game maker posted a profit of $42.9 million in the fourth quarter of 2010.

True, Zynga has been ramping up marketing expenses and recently built a fancy new headquarters. The employee count is also 2,789 (Silicon Valley engineers don’t come cheap).

Yet, a more compelling reason may account for the drop-off in profitability: Facebook.

Why? To get some insight on this, I talked to Gene Hoffman this morning. He created eMusic in the late 1990s and now operates Vindicia, which develops billing systems for online properties (such as the social games Zynga is famous for).

Hoffman thinks Facebook’s Credit system has become a big drag on the bottom line for Zynga. Typically, a partner must pay Facebook a third of the gross revenues it receives for each transaction. And indeed, Zynga reported in its latest S-1 that it also pays this percentage — even though it operates at such large scale on Facebook. But even at this level, certainly a big chunk of change goes out Zynga’s door.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.

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