Facebook and Zynga -- 'It's Complicated'

Tickers in this article: FB ZNGA

NEW YORK (TheStreet) -- Facebook's second-quarter earnings disappointed investors as revenue growth slowed once again, hurt by its longtime relationship with Zynga .

Facebook posted revenue of $1.18 billion, but just $192 million came from what's called Payments. (Facebook gets a 30% transaction fee when users pay for services through the social-media site; Zynga offers its games on Facebook.com.)

On its conference call, Facebook CFO David Ebersman noted that Payments revenue has been flat for the past three quarters. "We believe this trend is due to the fact that gaming, in general, has been growing mainly on mobile devices, where our payment system is generally not utilized," he said. Payments revenue was $186 million in the first quarter and $188 million in the fourth quarter.

Zynga and Facebook have a close business affiliation (11% of Facebook's Payments revenue came from Zynga in the first quarter). If Payments revenue continues to stay stagnant, there may be a fraying of the dependency when the agreement to use Facebook Payments as Zynga's primary means of payment ends in May 2015.

The Palo Alto, Calif.-based social network is trying to move away from Zynga now, said Sterne Agee analyst Arvind Bhatia in a note. Facebook is making changes to its platform, Bhatia noted, and "these changes make the discovery of content, including games, easier on FB and, as such, level the playing field for other companies. Ultimately, this should help FB diversify away from Zinga," he wrote. Bhatia rates Facebook shares "buy" with a $37 price target.

Facebook's recent announcement of its own App Center should help, noted Wedbush Securities analyst Michael Pachter. "The App Center reduces this dependence somewhat from Facebook's perspective, but in the near term, Zynga will still have a meaningful impact on Facebook's results," Pachter wrote in a report. He rates Facebook shares "outperform" with a $35 price target. Apple , Amazon and Google also have app stores, with Apple's being the largest.

Zynga has also tried to diversify away from Facebook, which takes a 30% fee of user purchases in Zynga's games on Facebook's platform. The San Francisco-based social-gaming company recently cited "a more challenging environment on the Facebook web platform" as the second major reason for cutting its 2012 earnings forecast. Aside from the increased number of Zynga's games being played on mobile devices, Zynga recently released Zynga.com, where users can also play games, and launched its own social network, "Zynga With Friends" in an attempt to move away solely from Facebook.

Over time, the two companies, which have been closely linked for so long, may continue to drift apart. To put it another way, Facebook and Zynga will go from "in a relationship" to "it's complicated."

Shares of Facebook dropped 1.8% in Wednesday trading to $21.32, while Zynga slumped 4.1% to $2.83.

Interested in more on Facebook? See TheStreet Ratings' report card for this stock.

Check out our new tech blog, Tech Trends. Follow TheStreet Tech on your wireless devices.

--Written by Chris Ciaccia in New York

>Contact by Email.

Tickers in this article: FB ZNGA