Inside Facebook

It’s clear that with the looming slowdown in the US advertising markets, Facebook is ratcheting up its efforts to grow its direct-to-consumer virtual gifts business. While many different kinds of digital goods businesses have been big in the east for years, Facebook is hoping to bring virtual gifting to mainstream western markets in a big way for the first time. Current estimates put Facebook’s expected 2008 virtual gifts revenues somewhere between $50-$70 million, or about 20% of total revenues for the year.

Just two weeks ago, Facebook revamped its virtual currency system used for purchasing Facebook gifts. While they may appear minor at first, the changes enabled a more flexible pricing model designed to both 1) allow for increased variety in inventory “quality,” and 2) increase the total volume of gifts sold.

Now, this weekend, Facebook announced that it has launched a new service that will send users email notifications of upcoming friends’ birthdays. While this change also may appear minor at first, it’s a signal that Facebook is seriously eyeing the virtual gifts business, and is willing to play in a space that has several large players on the Facebook Platform.

We recently spoke with Raj Lalwani, CEO of SocialCalendar, one of the fastest growing applications on the Facebook Platform since the redesign launched 2 months ago, and the largest birthday notification and gifting app. Lalwani said a main factor he attributes SocialCalendar’s growth to is:

The compelling context of the application’s emails and notifications - reminding users to send a message or give a gift to their friends when it’s their birthday or a national holiday works quite well.

Lalwani also noted that:

SocialCalendar’s business plans call for pressing hard into gifting and gift cards, and the app has full integration with Amazon’s API for gift giving and wish lists. Soon, the company will make a natural move into high margin virtual gifts.

Facebook’s move is sure to make Lalwani, and other developers of large birthday notifications and gifting services like BigDates Solutions, makers of Birthday Calendar, quite nervous. However, it shouldn’t come as a total surprise. Birthday notifications have been a big business online for years, and Facebook has been showing upcoming birthdays on the home page for quite a while now.

It is important to note, however, that Facebook appears to be taking a careful approach with the launch of the service. It is currently an “opt-in” feature on the Notifications Settings page - all users will not start automatically getting birthday reminders from Facebook starting this week. However, it is possible that Facebook will encourage or make it very easy for users to turn on the feature in the future.

Ultimately, this is likely to be a market shared by Facebook and application developers. Facebook is unlikely to build out the robust calendaring, event planning, and in-depth shopping features that are core to the Social Calendar and Birthday Calendar user experiences any time soon. However, Facebook is quite likely to promote its own virtual gifting platform increasingly heavily around the birthday experience.

Just like any other social media service, Facebook needs to build diverse revenue streams in order to best handle challenges in the advertising markets. Adding reminders around events likely to drive virtual gifts sales probably looks like low hanging fruit.

AppData for Social Calendar:

AppData for Birthday Calendar: