Facebook Is Experimenting With Becoming A Mobile Games Publisher

Facebook is testing what could finally bring it direct revenue from the mobile gaming ecosystem beyond advertising.

The company is working with a handful of small mobile game developers to do publishing by offering distribution through mobile ads in exchange for a cut of revenue, according to sources familiar with the program. Facebook confirmed it's working on tests for new mobile game distribution, but didn't share more details publicly.

While Facebook has been earning a little over $200 million per quarter from payments and other fees, with most of that coming from virtual currency transactions inside social games, it hasn't been able to replicate that business on mobile devices, because Apple and Google both control the world's two major smartphone app stores and already take a 30 percent cut on digital transactions. It does, however, earn a big chunk of revenue from mobile game developers through normal mobile ad buying, a business that made Facebook $373 million in the first quarter.

The thinking is that publishing is a very, very old model that goes back to the world of console gaming, so it's a structure that is already familiar for gaming studios. In the console era, a big gaming company would market, distribute (and often edit) games from smaller studios that lacked the resources to promote their work.

At the same time, smaller developers are having a hard time finding audiences when they are competing against bigger companies like Kabam, King and Supercell, which now have the power to spend millions of dollars per month on marketing. The initial costs of producing and distributing a competitive mobile game have gone from the hundreds of thousands into the millions of dollars for titles that have a shot at the top-25 grossing spots.

So in this experiment, Facebook is partnering with smaller, independent developers, not the bigger guys. They're also primarily focusing on distribution. They aren't really editing or tweaking games for content or financing their production, which is what other publishers sometimes do.

From a global perspective, other social networking platforms in Asia, such as Kakao in South Korea and WeChat in China, are starting to exercise power on mobile platforms in some fascinating ways, despite operating on platforms like Google's Android and Apple's iOS.

Kakao is the publisher of nine of the top-10 grossing games in South Korea on Android, the biggest smartphone platform there. Tencent has said it will bring games to its hit messaging app WeChat later this year.

So again, perhaps we're seeing Western social networking platforms and messaging apps taking cues from Asia, instead of the other way around. Facebook introduced sticker packs earlier this year, a feature that became popular on Japan's dominant messaging app Line.

But sources familiar with the program at Facebook say that the Kakao model is not exactly what the company is aiming to replicate, since Kakao's distribution methods might be a bit too untargeted and spammy to make for a good user experience. Instead, Facebook is emphasizing highly targeted ads.

On the developer side, some of the feedback I'm hearing is the typical skepticism that comes with the publishing model in general. Today, since mobile developers can simply "self-publish" just by putting their apps in the store, there's a pretty longstanding debate about what value publishers can really add. When games aren't successful, neither the developer or the publisher make very much money.

But when games are hits like with the original Angry Birds, which was published by EA's Chillingo label, there can be friction later when the original developer questions why they're paying a massive revenue share to another party. They can also go down other routes by releasing games that are similar to the original and re-routing users to the new version of the game, where they won't have to pay the original publisher.

Then there is some historical tension between app developers and Facebook, with the company tweaking and dialing up and down traffic for certain categories of apps like the original quiz and vampire biting apps back in 2007, to news readers and social video apps last year, and so on. Developers might be wary about partnering with a company that has a record of being sometimes capricious with delivering traffic to certain apps.

In any case, Facebook may feel that it isn't fully realizing the potential of the mobile app economy. Through mobile advertising, the company basically turned on a $1.5 billion-a-year business in about six months. While advertising has always been the mainstay of Facebook's model on desktop PCs and mobile devices alike, there are many revenue possibilities on mobile devices that the company has yet to fully explore.