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How Facebook makes money: 85 percent from ads, 12 percent from Zynga

How Facebook makes money: 85 percent from ads, 12 percent from Zynga

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We're digging through Facebook's SEC filing for details on the company in the wake of it's IPO announcement and came across this shocker: fully 12 percent of the company's revenue comes from Zynga ads and apps. Facebook makes no bones that it is a risk for the company if Zynga runs into problems.

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Zynga Logo 650
Zynga Logo 650

We're digging through Facebook's SEC filing for details on the company in the wake of its IPO announcement and came across this shocker: fully 12 percent of the company's revenue comes from Zynga — both ads Zynga buys and payments processed in Zynga games. Facebook makes no bones that it is a risk for the company if Zynga runs into problems:

In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected.

That's a significant change from years past, where advertising revenue made up for 98 percent (in 2009) and 95 percent (in 2010). Overall, of course, Facebook's total revenue and total profits benefited from the shift, moving from $606 million in net income in 2010 to a cool billion dollars in net income for 2011.

Given how critical Zynga apparently is to Facebook's revenue, Facebook and Zynga entered into an agreement in May 2010 that closely tied the social gaming company to the social network:

In May 2010, we entered into an addendum to our standard terms and conditions with Zynga pursuant to which it agreed to use Facebook Payments as the primary means of payment within Zynga games played on the Facebook Platform. Under this addendum, we retain a fee of up to 30% of the face value of user purchases in Zynga’s games on the Facebook Platform. This addendum expires in May 2015.

Naturally, Zynga could pull in revenues without giving Facebook its 30 percent cut by going to other platforms, so Facebook admits that it needs to ensure it maintains a good relationship. Following Zynga's acquisition of Newtoy and its Words with Friends game in December 2010, Facebook and the newly renamed "Zynga with Friends Studio" signed another developer addendum on December 26th, 2010. Details of that addendum were not disclosed.