Facebook’s High Expectations for Credits Revenue Imply Its Commitment to the Platform

In case you thought Facebook wasn’t interested in the social gaming ecosystem on its platform, the company is actually hoping to make a large amount of money from it. At the TechCrunch Disrupt conference last week, former Facebook president Sean Parker said that he thinks that Credits, Facebook’s new virtual currency, will account for a third of the social network’s revenue over the next 12 months.

Some developers have been cynical about Facebook’s goals for gaming, given changes it has made to the platform that have led to major recent traffic declines. Yet, if Facebook is planning to make this much money from Credits, the implication is that the company is trying to make the platform very successful overall. Otherwise, if it kills the platform, it will  not be able to make a third of its revenue from Credits.

Facebook could make up to $1.1 billion this year without factoring in Credits, according to our estimates; other reports have put the total number as high as $2 billion. Parker didn’t state what he thinks the company’s revenue will be, of course. But going by our outside numbers, he could mean somewhere around $350 million.

That money is coming in the form of a tax, at least for now. We’ve previously estimated that social gaming (mostly on Facebook) will contribute $835 million to the $1.6 billion US virtual goods market for 2010. This is where the Credits revenue will be coming out of — and sometime soon.  Within the last couple of months Facebook has publicly confirmed that it will take a 30 percent fee out of Credits transactions, and make Credits somehow mandatory for all developers on its platform.

If Credits is to account for a third of Facebook’s revenue in the next 12 months, like Parker said, another implication is that the mandatory roll-out is coming sometime very soon. Either that, or Credits is going to be so wildly possible that it doesn’t roll out for months, but somehow still accounts for a third of Facebook’s revenue.

The big catch here is that while some developers may currently see Credits as a big tax on their businesses, Facebook doesn’t.

The company’s vision, as it described at its f8 developers conference, is to have Credits help all developers make more money. It thinks it can provide more than enough payment options, convenient interfaces, volume and other benefits to make up for the fee. Developers who see holes in their finances should at least take comfort in the fact that Facebook is confident about its plan working well enough that Credits won’t significantly hurt the platform.

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7 Responses to “Facebook’s High Expectations for Credits Revenue Imply Its Commitment to the Platform”

  1. Facebook takes 60%, not 30% says:

    Let’s be clear when we talk about what cut Facebook is taking. It is closer to 60% than 30%. There are three main things that they are taking from us:

    1) Flat 30% of transactions
    2) Breakage (see definition below), commonly 15-25% on my games. Today this goes to me. Tomorrow, it looks like Facebook is going to take this for themselves.
    3) Lack of control (no more currency sales, limited (no?) ability to give away free points)

    Add those up and you are easily over 50% going to Facebook, maybe 60%.

    Maybe the rest of you are okay with FB taking that much, but I personally will be rooting on the alternatives. Let’s hope MySpace gets their act in gear and opens up some viral channels. Maybe Y!/Zynga will pave the way to another viable gaming platform.

    Definition of breakage from Wikipedia, “Breakage is a term used in accounting to indicate gift cards that have been sold but never redeemed. Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards.”

  2. fel says:

    Making credits mandatory would be a crazy move by Facebook. It would be a classic bait & switch, with Facebook having initially lured developers to develop on platform with the promise that they could monetize however they wished and keep 100% of revenues.

    What FB need to so is to make Credits attractive enough to developers so they *want* to make the switch, by demonstrating that they’ll get that 30% back in added value.

    Making Credits mandatory would both admit the failure of Credits to provide that added-value, and would also provoke huge loss of trust in Facebook (those rumors of charging normal users a monthly fee to access the site don’t seem so far fetched all of a sudden!)

  3. Lee Lorenzen says:

    Eric,

    Within Facebook, the percentage of payers out of all game players is typically under 2%. One of the main reasons for this is the inconvenience of providing a credit card to each game company to buy their currency. This payment hurdle for 98 out of 100 players is simply too high.

    So, Facebook’s theory is that by pushing Credits to all Facebook users (e.g., by priming the pump and giving them some initial credits and only requiring them to provide their credit card information one time for the entire platform), the percentage of people willing to pay for something inside a Facebook game is going to go up significantly.

    It is hard to see a scenario where the numbers of payers for a specific game won’t at least double if Facebook Credits can make the current purchase process as easy as Amazon’s one-click buy button. All things being equal for any individual game developer (especially ones that aren’t already dominant like Zynga), this means that many more of a game’s players will be just a click away from buying each game’s virtual currency or game items. Consumers won’t have to worry about whether a given game company can be trusted with their credit card and they may also already have some left over Facebook Credits burning a hole in their pockets from their last purchase inside another game.

    My prediction is that game developers will see at least a doubling in the number of payers in any individual game after Facebook Credits are fully deployed. Assuming the revenue per payer stays flat (which is probably conservative), this means that if each payer in a game is worth $50 per year today with a 0% tax, then the total revenue to the game developers with a 30% tax but with twice the payers will be $70 vs. $50.

    The most interesting aspect of all of this is what happens when Facebook Credits can be used for virtual good purchases out on the web (in the same way that Facebook has extended the Like button out onto individual web sites).

    Thanks,
    Lee Lorenzen

  4. Facebook takes 60%, not 30% says:

    @Lee

    I challenge your math a little. If you would go back up to my post you will see why.

    While I agree that a lower friction payment method will increase the percentage of users, it is difficult to see how that will offset the potential 50-60% cut once you take into account breakage and loss of control.

    Using your numbers you come in with at best a break even scenario, or more likely a drop of 20% ($50 vs $40).

    Especially when you go off Facebook, their revenue model is going to have to change. How can you justify a 30% fee for purchases when someone like Paypal charges single digits? Do you think the “trust” factor will be large enough to overcome that difference?

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    [...] Zusammenhang, den Eric Eldon auf Inside Facebook herstellt: Facebooks Engagement bezüglich Credits, Facebooks virtueller Währung, deutet auf eine im [...]

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    [...] their friends, will soon account for one third of Facebook’s total revenue, according to a statement made by founding president Sean Parker last [...]

  7. Bootup: ISP data cap protests grow, Apple iPhone 5 and iPad 2 to replace wallets | FP Tech Desk | Financial Post says:

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