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We spoke with several companies in the virtual goods and social gaming industries about the recently-introduced Facebook payments platform. Here’s what we found:
- Initial testing indicates consumers are choosing Facebook’s new payment system over alternative payment options.
- Facebook is charging a 30% fee to publishers, while competing services charge in the single-digits in most cases (but Facebook offers other benefits).
- Revenue impact this year could be upwards of $125 million to $250 million or more, assuming positive testing results continue following a formal launch.
- Long-term goal is to go after PayPal as a general online payment system.
Facebook’s payments system offers its users the chance to buy credits to buy virtual goods on the Facebook platform. These include goods within games to gifts in its gift store. Until recently, Facebook has relied on third-party providers to offer these solutions to users and publishers.
Short-term, Payments will diversify Facebook’s revenue from a single revenue stream (advertising). Long-term, we believe the company’s strategy is to become a payment solution for any kind of online transaction. This has implications for the industry leader – eBay’s PayPal – but likely not for years.
INITIAL TESTING HAS SEEN A LOT OF VOLUME ON THE SERVICE
Facebook has only been testing the platform for a few months and on a limited number of games. However, those involved in the testing told us that the impact is immediate and noticeable. When the payments service is turned on for a given game, there is an immediate slew of transactions, indicating consumers prefer the Facebook system to other payment methods (and, equally important, that the Facebook system drives transactions).
It’s unclear what the timeline is for a formal launch, but we’ve been told that Facebook is continuously adding publishers, with most of the largest ones, like Zynga and Playdom, not yet integrated.
30% ROYALTY IS MEANT TO ENCOMPASS MARKETING, DISTRIBUTION AND PAYMENT SERVICES
Facebook is charging publishers 30% on each sale, which is far more than competing services, whose commissions can often fall into the low-single-digits.
Those close to the situation tell us that the royalty is part of a larger strategy to monetise the viral marketing and distribution services that game publishers have essentially been receiving for free from Facebook.
The strategy is to package payments into a larger service offering for game publishers that incorporates preferred placement in the games directory and better advertising rates to publishers who elect to offer the Facebook payment service to their users. All of this has become more important over the past year as the tools for game publishers to distribute their games virally have been phased out.
GOING AFTER PAYPAL
Though payments will make a nice business on Facebook (see below), the ultimate goal is to become a leading payments platform for many different types of online payments via the PayPal model.
Facebook Connect will be the driver of this initiative as an increasing number of people use their Facebook profile information to identify themselves and manage log-in accounts on many different websites across many different platforms.
As this proliferation increases and Facebook becomes even more entrenched in people’s online lives, both on Facebook’s own site and outside of its walls, the payments service will use this information to launch an off-network authentication and payment service that rivals leaders like PayPal.
This is promising, but will likely take years to fully build out. In addition, we’ve been told that Facebook has partnered with PayPal in its offering so its unclear how the competitive dynamics of that relationship would unfold.
ULTIMATELY THIS COULD BE A BIG BUSINESS FOR FACEBOOK EVEN IF IT REMAINS AN INTERNAL PAYMENT SYSTEM
Grand visions of taking a cut of all internet payments aside, in the near-term Facebook could build a nice business for itself if positive testing results continue following a formal launch. Calls with various gaming companies and payment providers support our belief that Facebook saw about $400 million to $700 million in virtual goods sales on its platform in the US during 2009. Here is how it likely broke down:
- 1/2 on Zynga games
- About $100 million in the virtual gift store
- The remainder on other leading gaming companies (Playdom and Playfish being the leaders).
Most of this growth came from zero in the beginning of 2007 so it’s not a stretch to assume the company may see double the volume in 2010.
If the company were to process 100% of $750-$1.5 billion of virtual-goods volume, this would represent about $250 million to $500 million of revenue. It’s unlikely Facebook will capture 100% of the market though. If Facebook payments is used in half of these transactions it would net the company $125 million to $250 million in high-margin net revenue.
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