After 12 years, the Internet search giant Google is still struggling to find a significant new revenue source to supplement its lucrative text advertising business. Facebook hopes to avoid these problems.
And now the company with its CEO Mark Zuckerberg are making a play to become the dominant player in virtual currency, a multibillion-dollar business in which Facebook, the world’s largest social network, will face stiff competition from other giant companies like Apple, Google, Amazon or PayPal.
Virtual currencies are a promising way to sell because users buy them in pre-paid chunks, rather than plunking down a credit card for each individual purchase, which increases transaction costs.
Right now, most virtual goods are acquired within games, but music, movies, and other forms of content could follow suit, increasing the stakes in the race to reduce the friction affecting in-app transactions.
Facebook began testing its virtual currency, called Facebook Credits, more than a year ago with some popular games on Facebook. This month, Credits passed a milestone when it became the exclusive payment method for most of the games created by Zynga, the number 1 developer of Facebook applications.
Zynga is expected to have $500 million in revenue this year, which tracks Facebook applications, as millions of users pay real money to buy virtual goods on social games like FarmVille and Mafia Wars. Through Credits, Facebook will take a 30 percent cut.
Because they are accepted by a number of companies, Facebook Credits are are more liquid than those credits within iOS and Android apps can be. And even though they are significantly less liquid than real dollars processed by PayPal they are often handed out in unorthodox ways — for instance, when you sign up for a Netflix subscription, view a video ad, or the like. Facebook itself gives every user 10-25 free credits when they join the social network.
By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network. To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month.
For now, Facebook says it simply wants Credits to help foster the growth of virtual goods transactions. But Mark Zuckerberg, the chief executive, said recently that the company may choose to do “a lot more” with Credits in the future.
Over time, the company plans to turn Credits into a system for micropayments that could be open to any application on Facebook, be it a game or perhaps a media company, people with direct knowledge of Facebook’s plans said.
Some analysts say that expanding Facebook Credits makes sense and could eventually put Facebook in competition with other companies like PayPal, Google or Amazon.
“If they can get 50 million registered credit cards, why wouldn’t they use them to pay for your newspaper subscription?” said Alex Rampell, the chief executive of TrialPay, an advertising company that offers free Facebook Credits to people who buy certain products.
Others say the potential for using Credits could extend beyond the Facebook site, through Facebook Connect, a service that allows users to log in to sites across the Web using their Facebook identities.
“There is a huge opportunity for Facebook to use Facebook Connect to offer seamless checkout on other sites,” said Ron Hirson, a senior vice president at Boku, a start-up company that enables online payments using a cellphone. “They are focusing on games and apps now, but it would make sense for them to go into other” product categories.
Facebook’s vice president for partnerships and platform marketing, Dan Rose, said that Credits work much like Apple’s App Store, which allows users to enter their credit cards or PayPal accounts once and buy applications from any developer.
He also said that while some developers might initially see a decline in revenue because of Facebook’s commission, the plan is for Credits to more than offset that loss over time, because Credits will make it easier to spend more in a game.
Mr. Rose also said that if Facebook succeeded, Credits “could grow it to a size where over time it will become a material revenue generator.” For now, he said, Facebook plans to reinvest revenue from Credits into improving its software for developers.
Facebook Credits is also backed by product team consists from PayPal veterans. “It is a lot like PayPal in the early days,” said Deb Liu, a former director of corporate strategy at PayPal who is now product marketing manager for Credits. “We are moving fast and changing the industry.”
However, Credits is not a rival to PayPal or other payment systems. In February, Facebook signed an agreement with PayPal, a unit of eBay, making PayPal one of the preferred ways to finance Credits accounts. Facebook users can buy Credits using their credit cards and some mobile payments services.
Analysts said Facebook’s ambitions might well run into the same obstacles that have thwarted Google and Amazon as they have sought to expand across the Web.
“Facebook is a very innovative company, but we have had two large innovative companies, Google and Amazon, that have spent a fair amount of effort on payments,” said Mark Mahaney, an analyst at Citigroup. Those companies have yet to gain much traction, he said. “I have to think that the odds against Facebook are steep.” [via NY Times and Wired]