Facebook Closing Gift Shop, Getting Out of Direct Virtual Goods Business

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In a move that will likely be surprising to some, Facebook has just announced that it is closing its Gift Shop for virtual gifts in three weeks on August 1st.

Facebook launched virtual gifts a little over three years ago, and has done a variety of e-commerce experiments since. For example:

However, Facebook was never seemingly able to get its direct-to-consumer virtual goods business over the hump. While other niche social sites have increased virtual gift monetization by integrating gift content more heavily into the user experience, Facebook has kept integration to a relative minimum, primarily only displaying them on a user’s wall as just another type of rich feed item.

Instead, Facebook has focused more on its core value proposition as a communication and identity utility, while letting third party developers on its platform develop the rich application experiences that have proven so potent at monetizing through the sale of virtual goods. Now that virtual goods on the Facebook Platform have become such a large business, Facebook is getting involved through its universal virtual currency, Facebook Credits, around which there are a variety of sentiments in the developer community.

In our latest estimates of Facebook’s revenues, which we put at $700 million in 2009 and $1-$1.1 billion in 2010, we estimated that virtual gifts made up less than $10 million in revenue for Facebook last year. Most of Facebook’s revenues in this category this year will come from the growth of its Credits virtual currency business instead.

Nevertheless, it is a symbolic moment in the evolution of the company. Facebook has decided that it doesn’t want to be in the business of creating virtual goods for users to buy, but rather to be the platform on which others can build applications within which users can buy virtual goods with house-issued universal currency.

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