Here's One Of The Biggest Risks To Facebook's Business That Gets Overlooked

Facebook payments

Photo: Morgan Stanley

Facebook has tried very hard to become a business that’s not strictly advertising supported.It hasn’t worked. Over 80% of its revenue comes from ads. Most of the rest comes from payments, which is a cut of revenue it takes from developers like Zynga, EA, and others.

Unfortunately for Facebook, and its investors, the payments revenue might not ever take up a bigger portion of the overall business.

In fact, the payments business is going to become a smaller and smaller part of Facebook’s business, it seems.

As Facebook’s users are increasingly mobile, the amount of revenue it can bring in from payments will be hurt, says Scott Devitt of Morgan Stanley.

When people focus on Facebook’s mobile transition, they tend to focus on the fact that Facebook has just begun to advertise on its mobile apps. That’s not that big a problem, according to Devitt. He says Facebook’s mobile app is a the most downloaded on all platforms, and Facebook will release a bunch of great ad formats.

The real mobile risk is that people will play casual social games on their phones instead on the desktop. Facebook can’t take a cut of that revenue, which will severely limit its “payments” business.

Unless Facebook can expand its payments business outside of the social gaming realm, it’s at risk of declining.

Why does this matter? Because Facebook didn’t want to be entirely reliant on advertising. It wanted to find a bunch of revenue lines. It hasn’t happened.

Is this a bad thing? Not necessarily. Facebook has a lot of room for growth with online advertising.

However, if it was thinking that it could have two powerful engines powering the business, it was mistaken.

Here’s Devitt on the mobile threat to payments:

Does mobile pose a threat to payments revenue?

A mobile could challenge payments growth if Facebook does not expand outside of social gaming

Facebook’s payments business today is entirely comprised of revenue from virtual goods sold in social games produced by companies such as Zynga, Electronic Arts, and Facebook allows these companies to leverage its large active user base to scale their audiences, and in return, these companies agree to share 30% of the value of any in-game transactions. In our view, however, a broad shift to mobile app-based gaming may negatively impact growth in Facebook’s payments business unless the company is able to improve its positioning.

Mobile games on iOS and Android devices that leverage Facebook’s social graph to enhance multiplayer gaming do not contribute to Facebook’s payments revenue. Apple and Google take a 30% revenue share from paid apps and in-game transactions, while Facebook does not participate. eMarketer believes that smartphones and tablets represent the next wave of growth for social / casual games, and the company projects US mobile gamers to grow +26% in C2012E and +19% in C2013E, compared to its prediction of just +10% / +6% growth in web social gamers in those same periods, respectively.

Facebook’s recent App centre launch does not appear to change this relationship, at least initially. However, if Facebook can demonstrate that it instigates a meaningful number of iOS and Android game downloads, we see the potential for the company to attempt to negotiate a revenue share.

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