Inside Facebook

Founded by PayPal co-founder Max Levchin in 2005, Slide has become synonymous with the explosion of social network applications in recent years. Its properties and widgets, including popular applications SuperPoke, Top Friends, FunSpace, and SuperPoke Pets, reach over 155 million people per month on popular social networks like Facebook, MySpace, Bebo, Hi5, Orkut, Friendster, and Tagged. And with around 24 million monthly active users on Facebook, Slide is (and always has been) one of the largest application developers on the Facebook Platform.

However, unlike other top app developers, Slide hasn’t been rolling out many new applications over the last year. Instead, it’s been honing and optimizing its core network of properties, and spending a lot of time and energy tuning its monetization efforts.

On the advertising side, Slide has built a sales team with several staff in New York and San Francisco that has been driving the company’s premium integrations like branded SuperPokes or viral FunSpace videos. However, the company has also quietly been building its direct to consumer business, selling virtual currency and subscriptions that give users access to premium features. For example, each bar of Slide Gold costs USD $0.10 (the same exchange rate as Facebook Credits), and unlimited premium SuperPokes can be purchased for a USD $4.99 monthly subscription fee.

Just how important has Slide’s virtual goods business become? As of today, a Slide spokesperson tells us its direct-to-consumer virtual currency sales and subscriptions account for 50% of the company’s overall revenues.

Furthermore, given the increasing importance of virtual goods sales to the company - and that Levchin, CFO Kevin Freedman, and VP Strategy and Business Development Keith Rabois all share a history at PayPal - we’ve been hearing increasing rumors lately that Slide has plans to bring more parts of the payments layer in house in order to be able to exert greater control over the payment user experience. Today, Slide confirms that that is indeed the case.

“We believe it’s important to improve the system for paying for virtual goods. We are working on innovating that technology to make the experience easier for our consumers,” Lily Lin, Slide’s Director of Communications, tells Inside Facebook.

Whether or not Slide will make its payment infrastructure available to other developers remains to be seen. Slide’s Lin, however, says that that is “not the plan.”

“The focus is just for our own users,” she says.

For a company like Slide, which has 150 million users around the world yet connects with many of them through social network platform partners, taking greater control over the payments infrastructure, which is of increasing strategic importance to the company as it grows its direct to consumer sales, makes a lot of sense. Unlike smaller developers, it has the resources and experience to potentially establish direct relationships with payment processing companies instead of working with social application payment service providers like Social Gold, Spare Change, Zong, or Boku - or the social networks themselves. (Facebook recently started testing a payments program for developers, and MySpace has said it plans to do the same later this year.)

Overall, we think these are all smart moves by the company. Virtual goods sales are booming on the Facebook Platform, and Slide is in a unique position to capitalize on both the advertising and e-commerce opportunities inside Facebook. We’ll continue to track the company as things progress on both fronts throughout the year.

This morning I gave the opening presentation at the Social Gaming Summit, discussing an overview of the major platforms, players, and monetization stats in the social gaming industry. For those interested in checking out the slides, they are embedded below.

Topics covered: Facebook, Facebook Connect, iPhone, MySpace, Hi5, Twitter, Monetization, ARPUs on Facebook and MySpace, IP, copycats.

Chain Rxn, a Facebook gaming application developed by Zwigglers, has been enjoying phenomenal growth over the last 30 days. According to AppData, this simple flash-based app grew from less than 400K monthly active users (MAU) in April to over 3.7 million today.

In the Games category, Chain Rxn has now earned a spot in the top ten, consistently making appearances in the daily and weekly gainers leaderboards. For such a simple flash game, the rate at which users are playing and sharing the game is impressive.

In the last 30 days, 800% MAU growth:

In the game, users play within a gray rectangle filled with colorful balls and earn points by exploding the balls via a series of chain reactions. The game is intended to be simple, fun, and relaxing. Users can then compare their scores with their friends or invite other friends to play.

While Chain Rxn is by no means a sophisticated gaming app, casual game developers may want to check it out. For many Facebook users out there, it seems that simpler is better.

On the conference call this morning discussing DST’s $200 million preferred equity investment in Facebook, CEO Mark Zuckerberg mentioned that while advertising is currently Facebook’s largest revenue stream by far, the company is looking at microtransactions as a potentially significant future business.

“We’ve tested and are continuing to test a number of things with user payments,” Zuckerberg said. “It’s not a large part of the business now, but we hope it can be in the future. It’s interesting that around the world, these products are creating a lot of value for users, and there’s a lot of different ways to monetize them.”

Facebook’s payment initiatives have been speculated on for a long time. In late 2007, Facebook announced that it was beta testing a payment platform for developers. However, those plans have since apparently been tabled, and Facebook instead appears to be moving in a “universal virtual currency” direction. Under this approach, users would pay Facebook for virtual currency (called Facebook “credits”), which they can spend in the Facebook gift store or in any Facebook applications which have integrated Facebook credits. Facebook confirmed to us two weeks ago that it will start running virtual currency integration tests with application developers soon.

As an indication of Facebook’s current plans to build out its payments initiatives, the company is now looking to hire a “Manager, Payment Systems” that will have “broad responsibility for both expanding our business metrics such as accessibility of payment marks, revenue enablement via payments, and processing costs (including interchange and vendors).”

The recently posted job listing says this hire will “serve as cross-functional company lead for payments initiatives, including driving strategy for payments acceptance,” and will be responsible for “expanding available payment methods to drive incremental revenue.” In addition, this hire will “structure, negotiate, and manage relationship with payment partners and vendors” and should have “knowledge of stored value payments systems and instruments such as gift cards, virtual currencies, or similar.”

As Facebook increasingly becomes a global business, user micropayments offer a promising way to build revenues in countries with significantly lower per-capita GDPs than the US and other markets where advertising can drive big revenue numbers. New Facebook investor Yuri Milner has portfolio companies with a lot of experience monetizing social networks in Russia and eastern Europe through various forms of user payment, so Facebook may be looking to Milner for advice.

Now, Facebook has the opportunitiy, along with competitors like DST portfolio company VKontakte and global social network hi5 (which also recently launched a universal virtual currency for its application platform), to figure out how to make e-commerce work at low price points across highly fragmented markets. Developers are welcoming Facebook’s work in the space.

“We think that solving [the payments] problem is where the platform has unique advantages of scale,” Playfish COO Sebastien de Halleux recently told our sister site, Inside Social Games. “I’m not sure you can beat the platforms in terms of payment friction.”

As always, we’ll keep tracking Facebook’s monetization plans closely. The full job description is below:

Check out the top headlines and insights this week from Inside Social Games:

Monday, May 18

• WonderHill Raises $7 Million, Building “Wholesome” Social Games
• Pet Society Expands to PetSociety.com with Facebook Connect

Tuesday, May 19

• Playdom Launches Poker Palace on hi5, Integrates hi5 Coins
• Some Social Games Have Facebook Pages With Over a Million Fans
• Leaf Trombone is an “MMMG” that’s Turning iPhones to Brass Worldwide
• Twitter – Now With Dating?

Wednesday, May 20

• Girl Wars on the iPhone is “Mobsters in Dresses”
• SGN Bringing Dogfighting to the iPhone

Thursday, May 21

• Acclaim Partners with Peanut Labs to Monetize its MMORPGs
• Girls in Tech Holding Panel on Casual & Social Games Next Thursday

Friday, May 22

• Funji Launches Avatar-Based Social Networking App for the iPhone
• Compare People - What Do You Think of Your Friends?

Check out the top headlines and insights this week from Inside Social Games:

Monday, May 11

• Cooking Meets The Sims In Playfish’s Restaurant City on Facebook
• Social Gaming Summit 2009 Coming June 23rd in San Francisco

Tuesday, May 12

• Viximo Raises $5M in Funding and Hires New CEO
• Android Grows, But Lags Behind iPhone
• Zynga’s Virtual World YoVille Generating Real Donations

Wednesday, May 13

• KP Startup Booyah Building “Cause-Oriented” Social Games for the iPhone
• Chain RXN is a Soothingly Simple Facebook Game That’s Growing Fast

Thursday, May 14

• Catch Me If You Can is a Great Social Strategy Game Out of Korea
• RockYou Pets Becomes First hi5 App to Launch with Virtual Currency Integration

Friday, May 15

• Spotmania - Can You Spot the Difference?

Check out the top headlines and insights this week from Inside Social Games:

Monday, April 27

• Scoreloop Brings Social Gaming Platform to the iPhone
• Fast 140 is a Social Twitter Typing Game

Tuesday, April 28

• Bill Gossman Joins hi5 as New CEO
• Nonoba Creates Microtransaction API for Flash Games
• FriendFreak is a New Social Game for the iPhone with Facebook Connect

Wednesday, April 29

• PopCap Brings Bejeweled Blitz to Facebook
• SuperSecret.com is a New Virtual World for 9-13 Year Olds
• SGN Opens Cross Promotion Network for iPhone Game Developers

Thursday, April 30

• Zynga Making $100 Million/Year?
• Making Games Better Doesn’t Always Make Them Good
• Flower Garden for the iPhone - Virtual Nature at its Finest

Friday, May 1

• Who’s Your Friend? on Facebook

While Facebook has focused its Platform efforts over the last 18 months on growth over monetization, several payment providers have moved quickly to fill the gap by providing payment processing services to Facebook Platform application developers. Based on what we’re hearing, those payment companies experienced very strong growth in Q109.

Although most of the companies we spoke with did not want to publicly disclose specific revenue figures, Inside Facebook’s survey of leading payment providers on the Facebook Platform shows that payment providers overall experienced about 35% growth in both overall transaction volume and dollar volume on Facebook for the first quarter. Some reported growth as high as 300% for the quarter, largely due to new distribution partnerships.

Challenging Economy Not Slowing Growth of Microtransactions

Although the impact of the economic slowdown on traditional advertising has been well documented, social applications and games monetizing through direct or indirect payments have been less affected. Analysts have offered explanations for this disparity, citing entertainment’s historically strong performance in a bad economy (because people have more free time and need more diversion) or consumers’ general preference for small purchases (because they’re holding off on making big buys like cars). Regardless, consumers on the whole are showing increasing demand for virtual currency - not only within Facebook but across social networks (like MySpace and hi5), emerging mobile platforms (like the iPhone), and online games in general. (You can track the social games space in detail at Inside Social Games.)

As a result, many social app and game developers large and small are posting strong profits - one developer of a leading analytics platform said recently he couldn’t believe how much some game developers are making. For example, Zynga, one of the largest developers of social games on Facebook and MySpace, is rumored to be profitable on $10-15 million in quarterly revenues, and Playdom recently told Inside Social Games that they were profitable as well. However, for every Zynga and Playdom, there are a dozen smaller developers focused on iterating just one mechanic or game. Nevertheless, social games and other applications which monetize through user micropayments are garnering significant attention from venture capitalists in Silicon Valley who are attracted to the margins and economics of virtual goods.

Growing Ecosystem of Players

As a result, a growing number of payment providers have begun focusing on serving application developers monetizing through user payments for virtual currency, virtual gifts, or other in-app features or items. It’s a complex ecosystem: some companies having previous experience in online or mobile payments, often with focus on particular international markets, while many new startups have also formed hoping to gain a foothold inside Facebook and other emerging social platforms.

Developers interested in moving beyond simply integrating PayPal, Amazon, or Google now have a plethora of payment companies to work with:

• SocialGold, TwoFish, and PlaySpan are three startups aiming to help developers optimize their virtual economies by providing analytics tools layered on top of the payment system. SocialGold has built their own credit card processing product, while TwoFish’s model is based on revenue sharing.
• Zong, Paymo, and MobillCash have increased their focus on social app and game developers in the last two years. These companies enable users to pay with premium SMS messages which are billed to their mobile phone providers. Zong has a mix of direct and aggregator relationships with international carriers, while Paymo works primarily with aggregators.
• Spare Change has developed its own currency, called “credits,” that users can purchase with a credit card or Paypal and spend on a variety of Facebook applications.
• Offerpal Media, Super Rewards, AdParlor, Peanut Labs, Sometrics, and Gambit provide developers with managed offer networks that users can pay for either directly or indirectly (i.e. through CPA offer completion). These companies have partnered with many of the payment providers above and help developers optimize which payment options to display most prominently (for users who choose paid offers) in order to optimize revenue.
• Other payment companies, like Global Collect, CC Bill, and Zuora are also active in the space.

Facebook Staying Mum on Plans

Despite having announced a beta program for its own in-house Facebook Platform payments system in December 2007, Facebook has remained mum on its plans since, and no system has ever been publicly launched.

While the company is certainly evaluating a payments solution for developers, the lack of announcements from Facebook has led many to conclude that building a payment system is not currently a high priority for the company - a move that many in the industry have questioned, citing the overall strength of the space. While Facebook will most likely build its own payments system eventually, the company seems to be more focused on making sure Facebook Connect and the Facebook Platform continue to grow and provide substantial value for the larger application and publisher ecosystems rather than focus on building a robust payments solution right now.

A platform-wide payment system or virtual currency could certainly benefit developers, who are always interested in making payments as frictionless as possible. It could also benefit publishers interested in developing social commerce on the web through Facebook Connect. However, many say that even if Facebook were to build a system itself, it would be challenging for the company to provide a better set of products across a market very fragmented by geography and demographics than those the current ecosystem of third party payment providers have collectively built. (As a point of contrast, global social network hi5, which reportedly laid off half its staff a couple weeks ago, has refocused its business around a gaming portal model and has been striking deals with multiple payment companies.)

Even if Facebook were to build its own system, it would likely not want to stifle third party innovation, lest the company make it harder for developers to monetize the Facebook audience and grow the Facebook Platform economy.

Facebook Continues to Develop Gifts, Credits

Nevertheless, Facebook has still been experimenting with its own virtual currency, “Facebook credits,” which are used to buy Facebook Gifts and paid for via credit card in the Facebook Gift Shop. Facebook is rumored to have done between $30-$40 million in virtual gift sales in 2008, and the company has been conducting multiple experiments with virtual gifts in recent weeks and months.

For example, it’s done several tests around birthday gifts and holiday gifts on user profiles, and recently also started experimenting publicly with a new credit gifting system that allows users to give virtual credits to each other as a reward for sharing good content. There was also a little stir a couple of weeks ago around a comment Facebook’s Gareth Davis made about Facebook “looking at” its own virtual currency options, but based on what we know that reaction was overblown.

Conclusion

While it is still early, the payments market on the Facebook Platform is growing quickly, and significant opportunities exist for application and game developers to optimize their services for better monetization through user-pay. The promise that virtual currency monetization and virtual economy optimization are showing is attracting many wannabe game developers who see an opportunity to apply principles of economics and retail dynamics inside Facebook apps in a systematic way. While the sustainability of user pay and freemium models is still yet to be borne out, the revenues that app and game developers - and payment providers - are seeing are real, and we expect them to grow significantly throughout 2009.

Check out the top headlines and insights this week from Inside Social Games:

• Live from GDC: Mobile Social Games - Are They As Big on Phones as They are on Social Networks?
• Live Notes from GDC: Games That Connect People
• Loudcrowd is a New Social Music Gaming Site
• The Fellowship is a New Turn-Based Facebook RPG
• Facebook Game Developers Raise $100,000 for Charity
• Ngmoco Raises $10 Million in a Second Round of Funding
• China Increases Restrictions for Foreign Online Games
• In Brief: Bebo Growing Mobile Virtual Gifts Service, MySpace Virtual Goods Launch Date Unknown
• Data from PlaySpan Consumer Insights Report on Retail Video Game Cards
• Aurora Feint: The Arena – Tips, Tricks, & Cheats
• The Attack on Glowbuleville: Whack-o-mole Comes on Facebook

Check out the top headlines and insights this week from Inside Social Games:

• iPhone Game Developers Eye Increasing Monetization Options
• Live from iGames Summit: Lessons Learned - Why iPhone Games Work
• Apple Launches iPhone “In-App Purchase” Virtual Goods Platform for App & Game Developers
• Two New Twitter Games Remind Us of Radio Contests
• Facebook Connect for iPhone Released, Several Games Now Live
• Playfish Announces First Social Game for iPhone and iPod Touch
• SGN Launches Agency Wars & Adds Facebook Connect to iBowl
• InComm Reporting Growth in Game Currency Cards
• In Brief: Virtual Goods Updates from hi5 and OutSpark
• Aurora Feint Launches “Social Platform” for iPhone Games
• Shopping is When Monetization Feels Good