Inside Facebook

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.

As we continue our in depth look at leaders the Facebook Platform monetization ecosystem, today we turn our attention to Offerpal Media, one of the largest players in the space. After raising $15 million earlier this year from D. E. Shaw Ventures, InterWest Partners, and North Bridge Venture Partners, the company has been expanding its efforts to help developers monetize their social apps and games through the company’s offer network and virtual currency platform.

Offerpal works with many Facebook app developers, and is led by Anu Shukla, Founder and CEO, Mitch Liu, Co-founder and Vice President, Naghi Prasad, VP Engineering and Operations, and Bill Lonergan, CFO. We recently spoke with Shukla about recent developments in the Facebook payments space and the company’s approach to monetization.

Inside Facebook: Anu, what is Offerpal’s role in the virtual economy?

Anu Shukla: Offerpal is a monetization platform for applications and websites with virtual currencies, digital goods, or subscription-based services. We launched in October of 2007 and entered the space because we initially built an app for Facebook and MySpace and integrated virtual currency, but then focused on building out a monetization platform.

How would you compare user behavior between social networks and standalone sites?

We focus half of our efforts on social networking based apps and half on standalone games and websites. On social networks, we’ve seen a big influx of new users - whereas on standalone sites, it’s the same user base again and again. On social networks, new apps are being launched all the time, and the old ones die. Apps grow virally, but users also lose interest faster.

What trends are you seeing around users and their payment method choices?

It depends on what type of app you’re dealing with, whether users are younger or older, female or male, and how much time they have on their hands. Users who don’t have much time tend to use cash payment methods. In Europe, mobile payments are more popular. Incentivized offers are used less, proportionally speaking. For example, 30 percent of revenue may come from cash payments, and 70 percent from other payment methods, such as offers – but this breakdown changes depending on the population at hand.

As an optimization platform, how does Offerpal optimize the experience for the different players you work with?

We have 3,000 offers in our system and add 100 new ones every day. We optimize our offers based on individual preferences and target the exact type of user, which optimizes revenue for our publishers. The publisher wants to maximize earnings and provide a good customer experience; the consumer wants to do something that s/he is interested in. We have a scalable rule-based optimization engine that’s based on the inclusion/exclusion of particular audiences, proprietary algorithms, and collaborative filtering at the individual consumer level.

From our perspective, all relationships are really important and make our business model work. The advertiser pays; consumers buy; and publishers attract consumers. The right match between the three ensures that the advertiser is seeing quality results, the publisher is maximizing revenue, and the consumer is finding offers relevant. We work extensively with advertisers, as well as publishers who can then turn their attention to the games themselves while we focus on monetization efforts and customer service.

And, what about your transaction model?

When a user completes a transaction, the advertiser pays us, and we share that amount with the publisher. Revenue share is negotiated on a case-by-case basis.

How is your partnership with IMVU going?

IMVU is a premier avatar-based site, and its tight integration with Offerpal has been quite successful. IMVU is one of our premier clients, and we hope to continue the partnership for many years to come. IMVU has done a great integration, as well as Real World and Mobsters. We have a team in house that helps publishers find the right integration.

The virtual economy in international markets in Asia, for example, is exploding. Are we seeing signs in the U.S. in that direction?

Yes, we’re seeing all the signs of that. Social networks are rushing to add virtual currency; and games and virtual worlds are being developed/created to generate income/revenue from virtual currencies. Virtual currency is here to stay.

Now that Facebook has launched its alpha “Pay with Facebook” test, what’s your reaction?

I think it’s going to open up the number of people who will participate in transactions. The net effect will be that more people are willing to buy virtual goods, subscription services, and digital goods on Facebook because they are familiar with the brand. This will add more people to the mix. The user base will expand, which is great for publishers and for us.

How is Offerpal doing financially?

Financially, we’re bucking the trends, which is not surprising. In a recession, the industry that expands the most is entertainment, and we’re seeing the effects of that. Combined with the fact that engagement on and growth of social networks are both increasing, we’re riding on these positive trends, and are on an upswing.

Can you share any statistics with us on the percentage breakdown of your revenues across certain regions?

Sure - here is what we’re seeing:

70% North America
17% Europe
7% Asia
2% Middle East
2% South America
1% Africa1% Central America

Thanks Anu! Do you have any last comments you’d like to share with our readers?

There’s no reason why micro-transactions won’t be as pervasive as evidenced in Korea and China. China’s Tencent QQ almost got regulated by the Bank of China because its virtual currency was so liquid!  And also, we’ve seen the positive benefits of businesses that are initiating loyalty points programs such as frequent flier miles. Virtual currency is the equivalent of that for gaming and social networking worlds.

Facebook recently celebrated its 200 millionth active user. Interestingly, according to Facebook, only 300,000 of those users are in China – a small figure considering the fact that China is the most populous country in the world and home to 300 million Internet users.

Western social networks have watched as their Chinese counterparts gained momentum over the last several years. Below, Inside Facebook’s Jessica Lee provides an introductory overview of the social networking scene in China, shedding light on the obvious question: Why hasn’t Facebook grown more in China?

1. China’s Anonymous Internet Culture

The Bulletin Board System (BBS) has had a huge influence in shaping how China’s Internet users interact with each other on the Web. BBS’s are traditional discussion forums that are run by individuals, companies, and government organizations on a variety of topics ranging from shopping to current affairs. In a ReadWriteWeb post last year on the BBS phenomenon in China, registered BBS accounts were said to have reached 3 billion: users typically have multiple accounts, most of which are anonymous.

80 percent of Chinese sites still administer their own BBS’s today, bringing in a total of 1.6 billion page views and 10 million comments each day. Examples of BBS’s can be found on the People’s Daily, a government-run daily newspaper, Sina, the leading infotainment web portal in China, and the blogs of Chinese celebrities such as actress Jinglei Xu. The BBS community is characterized by its topic-centered and anonymous nature – two traits that have set an expectation around how Internet users in China feel comfortable sharing information with each other, challenging Facebook’s goal to be a platform that’s focused on real identities (not anonymous nicknames).

This preference for anonymity makes sense given harsh Internet censorship in China that holds users accountable for the content they publish, especially when it comes to political opinions that may not be in line with the government’s. In this sense, establishing a real online identity does seem to be a luxury of sorts that’s more feasible in free market economies like the US.

2. China’s “Guanxi” Business Culture

Local Chinese companies are market leaders in the social networking space because they know how to navigate the entrepreneurial landscape in China. China is still at a stage of development in which entrepreneurs are more often copying ideas than innovating on their own - Intellectual Property laws remain weak.

Moreover, while many Chinese social networking sites claim to be open platforms, they don’t offer a level playing field when it comes to building an open ecosystem for the developer community. The concept of guanxi, referring to the social and political connections that make doing business in China easier for certain influential individuals or parties, is at work. Without knowing the right contacts, developers may not get the visibility that they would normally expect in an open platform system.

For Facebook and its application developers, this means that the innovation process in general, and in particular application development, is highly competitive and vulnerable to copycat developers who can replicate ideas in a cheaper, faster manner.

The following table briefly describes four of the leading social networking sites in China, using data from TechCrunch and Alexa, a Web intelligence site:

3. China’s Mature Virtual Goods Economy

Chinese social networking sites are surprisingly lucrative, generating the majority of their revenues from virtual goods as opposed to online advertising. In a recent market analysis on Chinese social networks, TechCrunch points out that Chinese spending on online ads is expected to be $1.7 billion in 2009 (four percent of total online ad spending). The US, by contrast, is expected to spend 15 times this amount. Relying less on online ads, Chinese sites earn the bulk of their money through virtual goods.

Targeting these small, but high-volume user payments has proven to be a resilient revenue strategy, given the cut in online ad spending companies are facing in today’s economy. +8*, an Internet consultancy in China, Japan, and Korea, predicts that while the US market for virtual goods is approximately $200 million, China’s online gaming market is around $3 billion. Although this market is both attractive and tempting, and Facebook has recently launched its own virtual currency system, the company may not be ready and may never be willing to position itself as a commercial marketplace, given its people-focused mission.

4. Different Social Applications & Games Popular in China

Social applications and games designed to give users a “virtual” experience outside of their daily reality may be more likely to succeed in China. Data from the Chinese app-tracking site AppLeap indicates that out of the top five performing apps on Xiaonei (as measured by application value in RMB), most of them pertain to the outdoors, either growing gardens or maintaining ranches.

1. 开心农场 (Happy Farm): 4.3 million RMB
2. 开心农民 (Happy Farmer): 1.4 million RMB
3. 阳光牧场 (Sunny Ranch): 0.8 million RMB

The concept behind these apps is similar: users maintain their own personal gardens, growing flowers, fruits, and vegetables and accumulating virtual currency along the way. Users can also visit their friends’ gardens and steal produce from them.

When asked why farming apps are so popular and highly capitalized in China, one young professional in Nanjing told Inside Facebook, “In China, we don’t grow up with spacious areas like many of our peers in the US, so there’s a greater desire for us to want to own our own land and maintain our own gardens even if they’re only virtual. In a virtual world, you can do things you’re not allowed to do in everyday life, like stealing carrots from your friends!”

The leading Facebook apps are deeply expressive and relational (Living Social, Causes, Super Wall), whereas the top apps on Chinese social networking sites provide users with virtual spaces that they don’t have real-world access to.

Above: Buying seeds to plant in my virtual garden on Kaixin

5. China’s Entertainment-focused Youth

The 300 million Internet users in China are young. TechCrunch also reports that 67% are under 29 years old, and 35% are teenagers. Another report by Nanjing Marketing Group notes that in 2008, China surpassed the United States in total number of Internet users.

Contrary to popular thought, China’s Internet users don’t just come from the rising urban middle class: in 2008, 87 million were from rural areas. In terms of gender, the male-to-female ratio in urban areas is representative of the general urban population; however, it’s disproportionately higher in rural areas. In addition, the number of Internet users with a college education fell in 2008. This, combined with the popularity of Internet cafes, encourages an Internet culture of entertainment (e.g., online gaming and chatting).

Internet cafes have taken off in China not only because many Internet users don’t have access to computers with high-speed broadband connections, but also because it’s a space where users feel a sense of camaraderie with friends – and strangers. In addition, Internet cafes are affordable and free from parental supervision. With such a young entertainment-oriented group, Facebook’s social utility, which prides itself on connecting people and allowing them to share in honest, open ways, may not be the first thing on the minds of Chinese youth.

Conclusion

With these facts in mind, it’s not surprising that US-based Internet giants like Facebook face significant challenges penetrating the Chinese market. As Facebook eyes China, it must consider a whole set of questions, including: how to meet the demands of young Internet users in China who are entertainment focused and value anonymity and virtual escape; and how to monetize its platform alongside a transitioning command economy without compromising its identity as a social utility that gives people the tools to bring their real personalities and lives with them online.

In what is the first Facebook Connect integration we’ve seen on YouTube (or any other Google-owned property for that matter), Coca-Cola Europe just recently launched a new “social interactive music show” called Green Eyed World. Interestingly, YouTube has significantly demoted the placement of the the standard comments module and replaced it with a very prominent Facebook Connect integration.

The show is about a 23 year old singer from London who is selected to go to New York City to pursue her dreams of becoming a music star. Once users log in through Facebook Connect, they can leave comments and votes to influence her decisions, and see a stream of their friends’ comments and votes as well.

“This interaction between YouTube and Facebook is the first of its kind,” Google’s Benjamin Faes, Head of YouTube & Display for Europe, Middle East and Africa, said in a release. “We are creating a new technology implementation with these platforms. At any time during Green Eyed World, viewers can comment or vote, creating a live dialogue between themselves, their friends and the hero. The video pauses, and a small window pops up where the interaction can take place quickly and easily”

As we’ve documented before, content producers are finding that Facebook Connect can increase the authenticity of user comments and community. Users logging in with their real identities are less likely to leave lower quality comments as commonly happens on YouTube, which is especially valuable in the case of branded content.

In addition, Facebook Connect’s ability to share content back into users’ profiles and their friends’ news feeds can be a powerful driver of traffic. Facebook sent more traffic to Perez Hilton than Google did in January, and video sites are currently some of the most popular Facebook Connect integrations.

Despite the fact that Google founded the OpenSocial movement and is building its own competing product in Google Friend Connect, YouTube opened up and partnered with Facebook for the Coke integration. While the companies still have some unresolved questions about the way Google Friend Connect itself works with Facebook, the presence of Facebook Connect on YouTube is part of a bigger initiative on YouTube’s part to be more flexible with content partners and brands, and is a good sign for Facebook Connect.

As Liz Gannes over at NewTeeVee writes, “YouTube is showing increasing flexibility about what partners and sponsors can do on its pages, allowing CBS and ESPN to embed their video players of choice on its pages. Enabling Facebook Connect more broadly could be a very effective and appealing next step.”

Green Eyed World is directed by Tony Valenzuela, who previously worked on “America’s Next Top Model,” “CSI: Miami,” and “The Closer.” It is being produced by Austria-based FFP.

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The newly revised, expanded, and hot-off-the-press Facebook Marketing Bible: 40+ Ways to Market Your Brand, Company, Product, or Service Inside Facebook - February 2009 Edition is now available!

The Facebook Marketing Bible has been purchased by hundreds of agencies, marketers, social application developers, entrepreneurs, and educators, and is the leading resource on Facebook marketing today. It is also available in French and Spanish.

The densely-packed Facebook Marketing Bible contains three detailed sections: Tools for Guerilla Marketers, Tools for Advertisers, and Tools for Application Developers. Each part outlines the best available channels and strategies for reaching your audience inside Facebook. Please see the full table of contents below.

The February 2009 edition includes updates on the following topics:

• The latest data on US age and demographic data. Facebook is growing in every age bracket in the United States. The fastest growing group? Those over 45! Learn the details about the 45 million people in the US using Facebook each month.
• The latest updates on performance advertising on Facebook. For those interested in driving e-commerce transactions, Facebook offers new opportunities to reach your target audience. However, how you target the right audience requires new thinking. Learn more about how to reach the people you want to reach.
• Updates on ways grassroots marketers and application developers are using Facebook Status Updates to get the word out. Status updates are highly visible “micro blog posts” that you can use to get the word out. Learn how experts are doing this both through the Facebook Platform APIs and on an individual ad hoc basis.
• Plus, updates on Custom FBML Tags, Wildfire’s contest platform, AdNectar’s sponsored virtual gifts platform, and more.

For those interested in learning more, click the purchase link above. The price is $49, or $59 with three months of free updates emailed directly to your inbox. As always, please make suggestions if you’d like to see more attention paid to any topic!

Table of Contents

Introduction

I. Tools for Guerilla Marketers

1. Profile Page

2. Groups

• Strategy: What about spamming existing groups?
• SEO
  

3. Pages

• Strategy: Groups and Pages are very similar. Which makes more sense?
• Strategy: I’ve just created a Page. How do I promote it?
• Group to Page Migration
• Guidelines for Promoting Pages Outside Facebook
• Official vs Unofficial Pages
• Pages and SEO
• Ways Page Owners Can Restrict Content for Underage Users
  
• More Features Coming Soon

4. Events

• Events API
• Events SEO
  

5. Notes and Photos

• The Viral Dynamics of Photo Tagging
• Photos as a Facebook Marketing Channel: Opportunities and Limitations
  

6. Messages

7. Status Updates

8. Share / Posted Items

9. Mini Feed and News Feed

10. Feed Importing

> Data: Tracking Facebook’s International Growth by Country

> Data: Latest US Facebook Age and Gender Demographics

> Recommended Strategies for Guerilla Marketers

II. Tools for Advertisers

11. Social Ads

12. Engagement Ads

• Summary of ad units available to Facebook advertisers
  1. Sponsorship Units on the New Facebook Home Page
     • Social Video Ads
     • Sponsored Virtual Gifts
     • Events Ads
     • Pages Ads
     • Polling Ads
  2. Advertising in the New Facebook News Feed
  3. Advertising on the Profile Page (and other pages)
     

13. Virtual Gifts

• The Future of Virtual Gifts on Facebook

14. Performance Ads

15. Localization Opportunities

16. Integrated Opportunities

17. Facebook Platform Ad Networks

• List of Leading Facebook Platform Ad Networks
• What eCPMs do apps charge? Data from Facebook application developers

18. Facebook Platform Application Sponsorships

• List of Leading Facebook Platform Sponsorship Resellers/Rep Firms
• Strategy: Why sponsor applications when I can sponsor Facebook itself?

19. Specialized Facebook Platform Advertising Service Providers

> Recommended Strategies for Advertisers

III. Tools for Application Developers

• Strategy: What is the Right Way to Market Through Facebook Applications?
• Strategy: Where do most new application users come from?

20. Profile Box

• 5 Things Developers May Not Know About the Facebook Redesign
• Profile Integration: Tour of New Facebook App Settings

21. Application Tabs

22. Application Info Sections

23. Designing Feed Stories

• Strategy: Designing High Performance Feed Items
• News Feed Optimization: Strategies and Techniques

24. Feeds 2.0

• Feed Forms
• Feed Clustering
• Action Links
  

25. Feed Publisher

• Publishing in the Feed with Feed Comments

26. Requests / Invitations

• Policy Updates: Requiring Invites to Access Hidden Features, Offering Incentives for Invites, Ads on Profile Page Prohibited
• Strategy: Facebook’s Evolving Approach to Platform Governance
• Sending Application Invitations to Non-Facebook-Members

27. Facebook Notifications

• Chat Integration: Facebook Wants More Synchronous Notifications
• Policy Update: Bulk Pre-Selection Prohibited
• Spammy Affiliate Marketers Sure to be Shut Down
  

28. Email Notifications

• Updates: Email’s Status as Core Application Marketing Channel in Doubt

29. Application Bookmarks

30. Application Directory

31. Status Updates & Donations

32. Demographic Restrictions

33. Verification and Certification

• Great Apps Program
• Application Verification

34. Translations

• Data: Stats on Facebook Apps Built for International Markets
• Tutorial: Translating Your Applications Using Facebook’s Crowd-sourced Translation Service

35. Facebook Connect

• Overview: Integrating Facebook Connect with Your Website
• Related: Google Friend Connect
• Examples: 40 Sites Live with Facebook Connect Today
• Variety of Facebook Connect Plugins Now Available for Blogs and Wikis

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36. Analytics Tools

• List of Leading Third-Party Facebook Platform Analytics Providers
• New Metrics for Developers with Facebook Profile Redesign

37. Search Engine Optimization

38. Mobile

• Facebook for iPhone and Connect for iPhone

39. Customer Service

40. Custom Tags

> Poll: Which viral channels do Facebook users hate most about apps?

> Recommended Strategies for Application Developers

Conclusion