Facebook sells the farm and renegotiates its partnership with Zynga

In 2011, Facebook relied on FarmVille studio Zynga for 12 percent of its total revenue. At the end of 2012, Zynga is a fast shrinking business with a equally shrinking audience. The social network and the game company have renegotiated their partnership.

FarmVille studio Zynga’s precipitous decline over 2012 has affected both individuals and massive corporations. On the micro scale, numerous employees at Zynga’s Austin, Chicago, and Boston offices were laid off at the end of October. On the macro, Facebook reported that revenues from its gaming business dropped 9 percent between the beginning of April and the end of September. Since Zynga accounted for 43 percent of the $176 million Facebook earned from its payments and fees segment, the studio’s fall has more than a little to do with the social network’s earnings trouble.

That’s no doubt why Facebook is no untangling its business from Zynga. Develop reported on Friday that Facebook has ended its exclusive agreements with Zynga that saw the game maker receive preferential treatment over other companies hosting games on the network. From this point on, according to an SEC filing detailing the new deal between the two companies, Zynga games will “be governed solely by Facebook’s standard terms and conditions for game developers.”

In 2010, Zynga signed an exclusive five-year agreement with Facebook that gave them undisclosed advantages compared to other social game makers, but it was suspected that Facebook shared more revenue than it did with others. Facebook agreed to those terms because at the time Zynga was responsible for a huge portion of the social network’s revenue. In 2011 alone, Zynga’s games like FarmVille and Mafia Wars accounted for 12 percent of Facebook’s total revenue.

The new deal isn’t just beneficial to Facebook. While the social network is freed from having to share a larger portion of revenue with Zynga than other publishers, Zynga no longer has to exclusively use virtual currency like Facebook Credits in its games. With user numbers down for Zynga games, its questionable how much the studio will want to rock the boat by introducing a new virtual currency.

In the short term, Zynga certainly came out on bottom in the new deal as it further shook investor confidence in the company. Shares in Zynga dropped 12 percent following the news.

Zynga’s short-lived empire was never sustainable. Its games grew popular in tandem with Facebook, and while it borrowed most of the ideas for its games, it benefitted from being so recognizable. Now its competition has overtaken it in every way and its audience has stopped growing. Zynga’s CEO Mark Pincus should invest in innovation rather than mass imitation next time.