Forget Zynga: Facebook's games business stronger than ever

Six months after Facebook and Zynga agreed to dissolve their special relationship, the unthinkable has happened: Facebook's gaming business is doing better than ever.

Facebook had its most successful three-month period as a games platform between January and March, and generated roughly $213 million in revenue from payments, 15 percent more than it made in the same period last year.

Yet Facebook's profits from games, a relatively small side business in terms or revenue, seem destined to evaporate. The social network takes a 30 percent cut when players on Facebook buy digital goods from game-makers on the Web, but on mobile, where Facebook users are spending more of their time, the company makes zilch from games. Thanks to a different set of gatekeepers, Apple and Google get to take Facebook's cut of in-app payments to game developers.

Still, Facebook is determined to win at games, with a strategy designed to attract a more diverse pool of developers, which should insulate the company from the downfall of any one studio.

What's in a game?
Compared with its advertising business, which made the social network $1.25 billion in the first quarter, Facebook's games business is small.

Even so, said Wedbush analyst Michael Pachter, games are just a means to an end, with the end being engagement. Engagement, in noninvestor speak, equates to more people using Facebook on desktop or mobile for longer periods. "Facebook is just trying to give people more options while on Facebook." Pachter said.

He has a point. Games keep Facebook members active, happy, and coming back for more. Sean Ryan, the social network's director of games partnerships, acknowledged this in interviews with CNET. But, in Ryan's view, you would be wrong to assume that Facebook can't boost the money it makes from games.

"Games is a big category for us," Ryan said. "The breadth of the business is broader than people realize."

The company publicly breaks out payments revenue. Privately, Facebook considers, in aggregate, how its 250 million gamers are engaging with the social network and what increased social-networking activity levels equate to in terms of revenue from its other businesses. Facebook doesn't share the percentage of its game makers who purchase desktop advertising or mobile app install ads -- a popular new ad unit primarily used by game developers to increase exposure for their mobile apps -- but developer ad spending is significant, Ryan said.

We see a sliver of data on games revenue, but Facebook looks at the bigger picture with fancy calculations that help it understand how games affect the bottom line. The picture is a pretty one, if you believe Ryan. It's also one filling in with more dimension and color.

A changing of the guard
Not that long ago, Facebook was Zynga's playground. The casual games studio pumped out hit title after hit title, dominated the developer leader board, and directly contributed 12 percent of Facebook's revenue in 2011. At the time of that revenue reveal, which came ahead of Facebook's initial public offering, Facebook was dependent on Zynga for a substantial portion of its income. For investors, it was a point of concern.

Fast forward to the present day, and those fears look silly. Last week, Zynga was dethroned by King, makers of the inescapable desktop and mobile game sensation Candy Crush Saga, as the top developer on Facebook based on monthly active users, according to AppData. The changing of the guard is underscored by the rise of fresher Facebook game publishers like Social Point and Pretty Simple.

The hierarchical disruption is a product of a game and developer diversification strategy that Facebook set in motion a few years ago. Facebook has witnessed a new set of games from a new set of developers, particularly in the last year, Ryan said.

All of which is to say that Facebook doesn't need Zynga anymore.

Once managed by a small team in the U.S., Facebook's game division has expanded to include teams spread across Europe, the Middle East, Africa, and Asia. To keep momentum going, Facebook now assigns a business manager and a product engineer to each of its top developers and consults on how best to keep hits coming and players happy.

Facebook: the hit maker?
In providing the players and letting them share their activities with friends, Facebook plays an active part in making hit games, according to Pachter. These mechanisms -- deciding, for instance, who sees what game and how often -- are so powerful that they're "responsible for Zynga going from a standing start to a billion in revenue," he said.

Facebook admits to assisting game makers with social-networking strategies. According to the company, hits are determined only by a developer's ability to take advantage of all available channels: News Feed, mobile, notifications, ads, and so forth.

News Feed, which Ryan calls a "sacred place," can and will, however, turn a no-name game into a viral sensation, as game-related items get exposed to Facebook's 1.11 billion users.

Hidden-object game Criminal Case by Pretty Simple, which AppData says has 34.5 million active users on Facebook, uses News Feed efficiently, Ryan said, by creating updates that look great there.

Meanwhile, the success of King's Candy Crush Saga, which has 45.5 million active Facebook users, can be attributed to how well the experience syncs up across desktop and mobile, as well as the smart social hooks that force players to turn to their Facebook friends for help getting more lives and moving on to new chapters.

The mobile mystery
But what if Facebook could do more to help much smaller game developers achieve the same level of exposure without the resource-heavy process it uses with the big guys? Could the company then be its own catalyst to drive more smash hits, attract more gamers, and bring in more revenue? The questions are ones Facebook is exploring by testing a mysterious mobile games distribution program.

TechCrunch reported that the experimental program has Facebook playing publisher for smaller mobile game developers, meaning the social network would take over an app's marketing and distribution efforts, presumably through its own app install ads, for a cut of future revenue. Such a program would provide the social network with a direct line of revenue from Facebook-connected mobile games for the first time.

"We're trying to figure out on mobile other ways to help developers succeed," is all Ryan would share on the semisecret mobile distribution system. "We don't know exactly how yet."

As members migrate en masse from desktop to mobile, it seems that Facebook quickly needs to figure out how to profit from mobile games, instead of banking of the payments revenue generated by games running on Facebook desktop. Yet Facebook insists otherwise.

"Developers are already bringing their games to mobile, yet our payments revenue from games continues to grow because of the user appetite for desktop gaming," a spokesperson said. Apparently, core gaming, including 3D games powered by partner Unity, is fueling the growth in Facebook's desktop gaming business and attracting a different breed of gamer.

But surely Facebook isn't satisfied ceding its cut from payments on mobile to Apple and Google. The seriousness with which the company approaches its gaming business means we should expect Facebook to try to level up on mobile with the same determination as your Candy Crush Saga-playing friends.