Social games maker Zynga it has a revenue-sharing agreement with Facebook.
The agreement, disclosed in a filing with the Securities and Exchange Commission, gives Zynga a slice of the revenue generated by ads that Facebook serves alongside Zynga’s games on future Zynga websites — such as a “FarmVille.com” property.
In the filing, the company quotes Facebook’s sharing deal as follows: “Each month during the term, for all Properties on which you implemented, during the previous month, the Facebook Ad Unit, we will pay you a percentage of net revenue (“Ad Share”) arising from such properties for the previous month.”
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According to its initial S-1 filing, the company made $22.8 million off advertising revenue last year. Most of its revenue came from the sale of virtual goods — it made $575 million off the sale of those goods in 2010.
“We don’t have agreements with any developers, including Zynga, to share revenue from ads next to their Facebook canvas apps,” a Facebook spokesperson said. “We did agree with Zynga to work together in the future on providing ads on their properties beyond Facebook, but we have no current timeline for when we might start working on that.”
Facebook takes a 30 percent share of all transactions that use Facebook Credits, similar to the revenue sharing program Apple runs with its App Store sales. So it isn’t clear whether Facebook is getting a larger amount of money by facilitating Zynga’s sales of virtual goods or by sharing revenue from advertising with the company.
Zynga has agreed to exclusively use Facebook Credits in a number of its games, assuming they continue to meet certain growth targets. The games included in the exclusivity agreement are PetVille, FarmVille, Treasure Island, Café World, Mafia Wars, YoVille, Live Poker, FishVille and “all other covered Zynga services.” CityVille and Empires & Allies are absent from the list, and it isn’t clear from the filing whether those are covered in the last blanket statement in the exclusivity agreement.
The exclusivity agreement lasts for five years per agreement, according to the filing. Zynga is also basically left hanging if the system that handles Facebook Credits goes offline for any reason, and it can only sell “gift cards” that are converted into Facebook credits directly, according to the filing.
Zynga filed for an initial public offering earlier this month. It’s the most profitable Web 2.0 company to file for an IPO this year after making $90 million in 2010. The company made a net profit of $11.8 million in the first quarter this year, compared to $6.4 million in the first quarter of last year. Zynga has raised $845 million across three rounds of funding in four years.
The company has since become a Facebook distribution powerhouse like no other game company. That makes it a lot easier for Zynga to generate revenue, since a percentage of users usually pays for items in otherwise free games. The company has delivered hit after hit to Facebook.
Zynga’s latest social game, Empires & Allies, is another hit for the company. It attracted more players than Farmville, its first breakout hit, in just 25 days. Empires & Allies is gaining new users at a rate of a million a day and 8 million a week now, according to AppData.
The company is the fourth high-profile Web 2.0 company to file to go public in the past several months. Business social network LinkedIn also recently made its debut on the New York Stock Exchange (NYSE), soaring to a valuation of nearly $9 billion during its first day of trading before backpedaling to a $100 share price. Group-buying site Groupon also filed to go public earlier this month.
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