The Industry Standard - Facebook makes millions from the sale of virtual goods, but can it rival advertising? - Comments

Marta, Very good statistics.

Jenny — Thu, 25 Sep 2008 14:57:43 -0700

Marta,

Very good statistics. Where are they from though? They'd be great to use and to keep handy, but I always like to have a solid source to keep with it.

Thanks!

Jenny

Small potatoes? Don't be so

Marta Kagan — Wed, 10 Sep 2008 05:45:15 -0700

Small potatoes? Don't be so sure. Facebook may only be scratching the surface with virtual goods, but there's compelling data elsewhere that's sure to make Google (and a few other industry giants) take a second look. A few examples: Korea's Cyworld takes in $160M annually, entirely from virtual goods; Nexon (also Korean) says 80% of its $230M in revenue is generated by in-game virtual goods sales. Last year alone, we collectively spent $1.5Billion on virtual goods; and that number is projected to exceed $7Billion over the next 18 months.

It's too soon to say ultimately whether virtual goods are "no match for advertising" or not... but consider this: interruption advertising is quietly but clearly going the way of the dinosaur. Younger consumers are particularly likely to ignore traditional advertising, but quite open to branded virtual goods and other forms of "brand infiltration" online. By 2010, young consumers will outnumber Baby Boomers and wield over $350 Billion in direct spending power (they already make up 1/4 of the US population). Call me crazy, but I suspect they'll be putting more of their attention (and their dollars) behind virtual goods than interruption-advertising-driven clicks.

They may be virtual goods, but there's real revenue behind those 1s and 0s.

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Alexander Irigoyen — Wed, 03 Sep 2008 15:25:41 -0700

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Facebook makes millions from the sale of virtual goods, but can it rival advertising?

Jordan Golson — Wed, 03 Sep 2008 12:07:49 -0700

Facebook is making around $35 million a year from digital gift sales, according to an analysis by Lightspeed Venture Partners. That's a significant amount -- about 10 percent of the $300-350 million in revenue that Facebook expects to book this year.

The "gifts" -- things like a "box of chocolates" or "birthday cake" -- can be given from one user to another for $1 on special occasions -- or "just because." Thirty-five million dollars is not chump change, and as Facebook's userbase grows, I expect this incremental revenue will continue to rise.

However, virtual good sales are no match for advertising. I don't have precise numbers to reference, but Lightspeed's research found that the most popular Facebook gifts by far are the "free" gifts that are paid for by advertisers -- a bottle of Sprite, for example.

The money to be made from advertising is far greater -- and more consistent -- than virtual goods sales. Looking at these numbers, an associate asked if virtual goods had piqued Google's interest as the company moves into virtual worlds like Lively. My reaction? Highly doubtful.

E-Flowers may generate a few million dollars for Facebook, but for a multibillion dollar company like Google, it's small potatoes -- not even worth handling. Google is an advertising company and there aren't enough virtual goods in the world to make it more compelling than advertising. Google's 3D initiatives like Lively are merely Google flinging the proverbial poo at the wall to see what sticks (so it can sell more advertising on it).

Mark Zuckerberg may like the virtual goods adding some money to his bottom line (for just about zero cost), but it definitely doesn't make Facebook worth $15 billion -- the value that Microsoft assigned to the company after its investment last year. Facebook has a unique platform to reach a lot of discretionary income -- it best focus on getting advertisers in touch with its users, and not get too excited over virtual goods sales. I've put in a request to Facebook for more information on its virtual gifts, but haven't heard back yet.

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