Inside Facebook

When we look back in a few years, 2009 will be remembered as the year virtual goods-based businesses exploded on the Facebook Platform.

Whereas 2007 will be remembered as the “wild west” for Facebook’s powerful application viral channels, and 2008 was the year that Facebook stabilized the Platform for long term growth, 2009 has clearly become the year in which sustainable virtual goods-based business models have been developed and are beginning to be scaled.

Let’s quickly glance at the top 40 applications on the Facebook Platform by total reach. While these aren’t necessarily the highest monetizing applications on the Platform, the list shows which types of applications are most popular now a full two years since the Platform launched:

Source: AppData

		Name	MAU	Developer
1.		Causes	24,433,363	Causes
2.		FarmVille	24,322,458	Zynga
3.		LivingSocial	23,988,733	LivingSocial
4.		Movies	20,482,745	Flixster
5.		We’re Related	18,131,449	FamilyLink.com
6.		Farm Town	16,877,110	Slashkey
7.		Mafia Wars	16,508,150	Zynga
8.		MindJolt Games	16,461,693	MindJolt
9.		How Well Do You Know Me?	15,496,280	Unknown
10.		Pet Society	15,480,645	Playfish
11.		Texas HoldEm Poker	15,250,897	Zynga
12.		MyCalendar	13,722,642	MyCalendar
13.		Top Friends	12,574,933	Slide, Inc.
14.		YoVille	12,429,508	Zynga
15.		Restaurant City	10,084,240	Playfish
16.		RockYou Live	10,035,212	RockYou!
17.		Music	9,627,515	iLike, inc
18.		Zoosk	9,422,442	Zoosk
19.		Mobile	9,137,468	Facebook
20.		MyCalendar	8,971,005	My Calendar
21.		Slide FunSpace	8,546,734	Slide, Inc.
22.		Facebook for BlackBerry	8,219,146	Research In Motion
23.		Birthday Cards	7,231,752	RockYou!
24.		Bejeweled Blitz	6,535,047	Popcap Games
25.		FARKLE	6,240,050	Viral, s.r.o.
26.		Give Hearts	5,546,407	6 waves
27.		Barn Buddy	5,525,258	TheBroth, Inc.
28.		YearBook	5,496,727	ClassTop
29.		Sorority Life	5,351,975	Playdom
30.		Bumper Sticker	5,321,315	LinkedIn
31.		Friends For Sale!	4,684,859	Serious Business
32.		Pieces of Flair	4,421,843	RockYou!
33.		Birthday Calendar	4,397,174	BigDates Solutions
34.		Daily Horoscope	4,392,745	6 waves
35.		Geo Challenge	4,256,481	Playfish
36.		Family Tree	4,035,530	Familybuilder
37.		Hug Me	3,763,729	RockYou!
38.		Who Has The Biggest Brain?	3,743,587	Playfish
39.		Word Challenge	3,539,615	Playfish
40.		Biotronic	3,522,093	Metrogames

The majority of these apps and games are monetizing through a free to play virtual goods model. To sum up, here’s how it works: players interested in purchasing virtual items in the app (like functional items to help them complete a quest, decorative items to help them dress up their avatar, or time saving items to help them progress more quickly) must do so with that application’s virtual currency.

That virtual currency can either be earned through in-application achievements, or purchased directly or indirectly through a variety of methods. Users can buy virtual currency with real currency using direct payment methods like PayPal, Amazon, SocialGold, or Google, mobile payment methods like Zong, Allopass, or Boku, stored value cards sold at retail like the Ultimate Game Card, or through an intermediary (“universal”) virtual currency like Facebook Credits or Spare Change – amongst others.

Users who don’t want to fork over cash directly can participate in advertiser-financed offers and surveys managed by firms like Super Rewards, Offerpal Media, Peanut Labs, AdParlor, Gambit, Sometrics, TrialPay, and others. In these cases, the advertiser pays the developer when players sign up for subscriptions or participate in other CPA campaigns, and the player is then credited with the in-game currency.

Of course, free to play virtual goods-based business have been thriving internationally for years – one recent estimate pinned total virtual goods revenues in Asia at $5 billion last year, 25x the US estimate of $200 million for 2008. But the market is really gaining steam in the US this year. Just last week, Piper Jaffray released numbers estimating that total virtual goods sales in the US will reach $600 million in 2009, but we believe those numbers are low.

Ask any sophisticated developer building apps on the Facebook Platform and you’ll hear the same answer: business is very strong. Most of the top social game developers are very profitable, despite major hiring ramps throughout the industry this year. Companies like Playfish, Zynga, and Playdom have dozens of open positions, and many smaller companies are growing too.

Slide, one of the largest developers on the Facebook Platform, recently refocused its model around virtual goods as well. “Think of us like an e-commerce business,” VP strategy and biz dev Keith Rabois says. Several top developers like Slide are also developing parts of the payment layer in-house.

And because top app developers are seeing healthy lifetime user value numbers, they’re starting to spend a lot more on user acquisition too – a good sign of health. Although Facebook itself isn’t in the middle of most virtual currency transactions today (its Facebook Payments program is still in very limited alpha testing with only a few applications), it is deriving substantial revenues from developers paying to promote their applications to new users. For example, here are a few ads live on Facebook today:

Developers’ ad spend is carrying over to Facebook Platform ad networks like those operated by RockYou, Cubics/Adknowledge, and AdParlor as well – the “CPI” (cost per install) market is still alive and kicking.

While not all Facebook applications are going the virtual goods route, it’s clear that social networking applications and games are becoming an increasingly important category for digital goods transactions in the United States in 2009. And as Facebook’s growth continues, things are only looking better and better in 2010.