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There’s a reason why Google seems like it’s in a big rush to get games up and running on its Google+ social network. That’s because games are the way that Google will put financial pressure on Facebook.
This may seem obvious, but there is some interesting analysis behind it from at least one analyst company. Joseph Ranzenbach, vice president of operations at PrivCo, a New York company that evaluates financial data for private companies, had some interesting analysis of the Facebook-Google fight.
Ranzenbach, vice president of operations at PrivCo — which analyzes companies such as Facebook, Groupon, Zynga and others — says that Google+ games could badly damage a major source of revenue for Facebook. That’s because Google will start by only taking a 5 percent cut of virtual goods transactions from third-party game makers, while Facebook is taking 30 percent. If developers sell virtual goods for a game on Facebook, they have to use Facebook Credits and Facebook gets to keep 30 percent of every transaction. That has made a number of developers angry.
Bradley Horowitz, vice president of product at Google, said that games were a key part of the Google+ strategy from the start and Google thought long and hard about how to do them. Google knows that games are critical to the success of its social network. It is interesting that Zynga, which Google invested in last year, is part of the Google+ launch. If Google can rally one of the big players to its side, it can neutralize Facebook’s advantages in games and hurt its money-making engine.
PrivCo calculates that roughly two-thirds of Facebook’s revenues come from advertising, while the remaining third comes from Facebook Credits. So Google+ games is attacking a third of Facebook’s revenues. Of course, lots of Facebook’s ads are placed on pages where users are playing games, so a significant chunk of the ad revenue is related to games as well.
“Facebook brought this on itself by demanding such onerous terms,” said Sam Hamadeh, chief executive at PrivCo. “This has created a lot of animosity in the app development community and Google+ is well poised to capitalize on Facebook’s overstep by offering lower pricing, looser terms, and no exclusivity.”
PrivCo concludes that the result will be a major financial impact on Facebook that could affect its planned initial public offering. That seems a little drastic, given that Facebook has outlined its own case tonight. But it’s certainly a bold prediction.
That reminds me of the motivations behind Microsoft’s entry into the video game business a decade ago. Sony launched the PlayStation 2 and said it would become the gateway to entertainment in the home and replace the PC. This scared the wits out of Bill Gates, CEO of Microsoft. But Sony spoke too soon, talking about its master plan before it could execute on it. Gates saw that the bulk of Sony’s profits came from games. By attack games, Microsoft could ruin Sony’s diabolical plan to take over the world.
Microsoft had the luxury of having very profitable operating system and Office applications businesses, so it didn’t have to worry about making money as it attacked Sony’s PlayStation business.
That plan pretty much succeeded, and Microsoft now has a thriving business in games and its hardware market share exceeds Sony’s in the latest generation.
Google looks like it is taking the same game plan, directly attacking a huge profit center for Facebook. Google has huge profits coming in from search, so it doesn’t necessarily have to make a ton of money from Google+ or games yet. Isn’t this going to be a fun battle to watch? Who do you think will win? Please take our poll.