Zynga stock falls after Facebook terms change

Associated Press

NEW YORK (AP) — Shares of Zynga slumped Friday after it disclosed with its partner Facebook that they have loosened their close ties to one another.

THE SPARK: The companies said in regulatory filings Thursday that they have amended their 2010 contract to say Zynga will no longer have to display Facebook ads or use Facebook payments on its own properties, such as Zynga.com.

In addition, Zynga, which makes the games "FarmVille" and "CityVille," will no longer be required to use Facebook as the exclusive social site for its games, or to grant Facebook exclusive games. Any social game Zynga launches will also be available on Facebook either at the same time or shortly after it launches elsewhere.

Facebook, meanwhile, will be able to develop its own games after the end of March, though it said it has no plans to do so. Its deal with Zynga previously prohibited Facebook from developing games.

THE BIG PICTURE: While it's not exactly splitsville, the original 2010 contract gave Zynga special status among Facebook game developers. Zynga relies on Facebook for most of the revenue it generates even as it works to establish its independence.

Facebook also makes money from Zynga, though the portion of its revenue that the game maker accounts for has declined. In the third quarter, Facebook said that 7 percent of its total revenue came from Zynga, down from 12 percent in the third quarter of 2011.

ANALYSIS: Wedbush analyst Michael Pachter said while Zynga investors reacted badly to the news, he sees the changes as a long-term positive for both companies.

"Zynga now has an incentive to expand the reach of its most popular social games beyond Facebook and Zynga.com and be able to offer additional payment options, likely resulting in additional payers who are not Facebook users," the analyst wrote in a note to investors.

Pachter rates Zynga "Outperform" with a target price of $4.

STOCK ACTION: Shares of San Francisco'S Zynga Inc. fell 19 cents, or 7.3 percent, to $2.43 in afternoon trading. Zynga went public in December 2011 at a price of $10 per share but its stock have fallen sharply amid concerns about its ability to keep growing quickly.