This is not a blog on “in defense of”, but I wanted to paint a picture that is different from what many people tend to think of Facebook. A CEO in one of my classes called Facebook and third party developers “rubbish”. I argue that there are several third party developers who are making tons of cash on Facebook platform. Facebook has built a thriving platform, which is growing fast and can be a great source of additional revenue for Facebook.
Facebook Ecosystem:
In order to understand who is who in the ecosystem, I present a few definitions here.
(i) Game developers – individuals or companies that develop casual social games. Examples are Zynga and Social Gaming Network (SGN).
(ii) Application developers – individuals or companies that develop applications for Facebook platform. Often these are developed by existing companies, such as Flixter who want to make sure they have presence on Facebook, and sometimes by companies that focus only on social networks such as Facebook, MySpace, Hi5 etc.
(iii) Payment companies such as PayPal, Amazon, Google, SocialGold, TwoFish, PlaySpan, Zong, Paymo, MobillCash etc. These enable other developers to add virtual payment to their applications so that users can buy virtual goods.
(iv) Analytics companies such as Kontagent.
Developers make money typically from 3 sources: virtual currency, branded sponsorships and ad-network inventory. An example of how a game developer can make money from offering virtual currency follows. Players can opt in to fill a survey, or sign up for a subscription (such as Netflix) – which they might be thinking of doing it anyway – to get more virtual coins that would then enable them to buy virtual goods or climb up levels in a game. Companies that offer these surveys or subscriptions make payments to payment companies, which then share the revenue with game developers.
Facebook Revenue:
Projected Facebook revenue for this year is $550 million. Here is the revenue breakdown:
US ad spending = $230m (from $210m in 2008)
Non US ad spending = $70m (from $40m in 2007)
Virtual gifts, ecommerce, other = $200-250 million
In all cases, the figures include spending on display, video, search and other forms of advertising appearing within social network environments. Excludes other sources of revenue, such as e-commerce. Facebook is rumored to have done between $30-$40 million in virtual gift sales in 2008
Third Party Revenue:
Zynga is expected to make $100 million in revenue this year. Slide is making around $20 million primarily through advertising. Social Media is making $15 million. Top few developers are in total making $150 million. There are several smaller developers making $1/4-1 million a year, totaling total revenue from developers to $500 million. Third party revenue is soon expected to bypass Facebook’s own revenue! Most of these companies are profitable and have high profit margins.
The top Facebook applications are:
1. LivingSocial by LivingSocial 31million (Monthly Average Users)
2. Super Wall by RockYou! 20m
3. MyCalendar by MyCalender 14m
4. Causes by Causes 14m
5. Movies by Flixster 14m
6. We’re Related by Familylink.com 13m
7. Top Friends by Slide, Inc. 13m
9. Texas HoldEm Poker by Zynga 12m
10. Pet Society by Playfish
Conclusion:
Facebook doesn’t charge third party developers today but considering that several developers are making tons of money, Facebook might soon start taking share of the revenue. Additionally, Facebook is working on its own virtual currency system and would then be able to take share of the revenue going directly to payment companies today.
Cost data is hard to get and according to some sources Facebook is barely breaking even. However, as I said above, third parties are generally quite profitable. In addition, Facebook with its Haystack implementation should be able to bring down the bandwidth costs, which are a big portion of the total costs.
Speaking of third party applications, what do you need to do if you want to devlop a profitable Facebook application? How do you rise above the noise? To get these answers, stay tuned for a later post.
