Facebook Gamers Are a Dwindling Breed

A new report says the number of active users who play social games fell by half last year

Facebook fervor remains high leading up to the company’s IPO. It will be the biggest Web-based offering in history, with such a compelling argument that even major-league investors such as Warren Buffett could buy into the house that Mark Zuckerberg built, it seems likely that Facebook could raise that and more.

It’s hard to argue with the company’s promise: The network has grown from 100 million users in 2008 to 845 million users as of February. By Facebook’s estimation, each profile is worth around $4.39 in revenue — from advertising, Facebook Credits, and other services — so by that standard alone, Facebook users have fueled the company’s value jump from $439 million to more than $3.7 billion today.

There’s trouble in paradise, though. Those 845 million users may not be as valuable in the coming months as they are today.

The problem is video games. Facebook relies on games, specifically those made by Zynga (NASDAQ:ZNGA), such as FarmVille, for a significant chunk of its income. Facebook takes a 30% cut of all sales of virtual goods, items and services purchased within the games using Facebook Credits, a virtual currency bought with real dollars.

While that might seem like a raw deal, users spend in amounts that have made both Zynga and Facebook happy earners. Zynga’s games alone generated $445 million in 2011, 12% of Facebook’s total revenue. Great, right?

Here’s the problem: While Facebook’s user base continues to grow at an incredible rate, the number of those users playing and paying for games on the network has started to stagnate.

IHS Screen Digest released a report on Monday noting that Facebook’s gaming population has failed to grow in tandem with its overall users. While 50% of all monthly active users played games on Facebook in 2010, that figure fell to just 25% by the end of 2011. Screen Digest singled out Zynga as exemplary of the decline in social gaming on Facebook — 266 million users played Zynga games during the third quarter of 2011, but that figure fell to 225 million by the end of the fourth quarter.

The social-games business boom on Facebook appears to be over now that, as Screen Digest analyst Steve Bailey puts it, the market has “settled into a state of maturity.”

That spells trouble for Zynga, as well as other companies, such as Electronic Arts (NASDAQ:ERTS) and Disney (NYSE:DIS), which have spent heavily on Facebook game development and on acquiring studios, such as Playfish, that are already successful on the network.

The greater trouble is for Facebook. Even if games represent only a small portion of the company’s revenue, its advertising revenue will have to supplant the revenue previously brought in by Facebook credits.

The problem then, of course, is the loss of millions of display-ad impressions (the number of times an ad appears on screen) that will result from fewer and fewer Facebook users wasting time playing games on the service.

It’s possible that some of the problem will correct itself. Market saturation is a contributing factor here. Bailey, speaking to website Games Industry.biz, predicted that game makers that rely solely on Facebook for total revenue will migrate to other services, decreasing competition for Facebook’s biggest earners. Those earners, in turn. will have greater access to their users as Facebook continues to expand its services on mobile devices.

However, this won’t help game revenue resume its steady growth for Facebook. The burden is on Facebook’s partner to find the growth again, and it will simply have to do it the old-fashioned way: by innovating. It isn’t easy to create zeitgeist fuel such as FarmVille and MafiaWars, but Zynga, its peers, and Facebook will need to if they want the social network’s profitable gaming ecosystem to thrive.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

Article printed from InvestorPlace Media, https://investorplace.com/2012/02/facebook-gamers-are-a-dwindling-breed/.

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