Facebook Exchanges Dollars for Virtual Credits, Eyes Expanding Virtual Gifts Revenues

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For as long as gifts have been available for purchase in the Facebook Gift Shop, users have been able to send virtual gifts to their friends for $1 each.  Now that Facebook is making millions of dollars a month on direct virtual gift sales, the company has decided to change the way it sells gifts to increase its pricing flexibility.

Starting this weekend, Facebook converted gift shop dollars to “credits.” From now on, Facebook virtual gifts will be priced in credits: gifts that were previously priced at $1 are now priced at 100 credits, but new gifts will be priced differently.  Facebook writes,

One hundred credits can be bought for $1; we’re making this change without raising or lowering prices on existing gifts. The new system means we can introduce a wider variety of gifts, allowing you greater freedom in expressing appreciation for your friends, just like in the real world. It also makes gift pricing more accessible to people around the world, no matter what their home currency might be.

Many will remain available for free – Facebook says that “a limited number of virtual gifts for free to represent sponsors or special occasions.”  However, expect to see the the proportion of non-sponsored free gifts promoted in the shop to decrease with time. Sponsored gifts will still likely represent a valuable part of the growth of this revenue stream for the company.

The Future of Virtual Gifts on Facebook

The people at Facebook think about Facebook as a market for the exchange of social capital.  In that sense, nearly every interaction on the site is either a “gift” or exchange of some kind.  Introducing variable pricing on explicit “virtual gifts” makes them a more flexible currency for trade in the social capital markets.

This should allow more users to give and receive more value on Facebook over time. This means more users will be more engaged with Facebook over time, which is a good thing for the greater ecosystem in the long run. (That is, assuming variable “worth” of virtual goods can be differentiated by Facebook users.  That will probably take some time, but Facebook will certainly try hard to “educate” the marketplace in a variety of ways by designing subtle signals into the gift delivery experience.)

It’s possible that some developers could feel some competitive pressures from an expanded and more sophisticated virtual gifting infrastructure owned and operated by the Platform on which they depend. The challenge for application developers will always be creating markets for the exchange of social capital that are too deeply vertical for Facebook to play in just by adding another item to their store. It’s unlikely that Facebook is going to “take on” a given vertical aggressively any time soon for obvious reasons.

Facebook is going to offer up a payment platform to developers someday (the beta program was announced a year ago), which should make it easier for developers to process virtual goods sales themselves. This should be a good thing for everyone, since it doesn’t make sense for app developers to build duplicative infrastructure, and Facebook will open up another revenue stream by charging service fees for the commerce infrastructure it will provide.

As for Facebook itself, as virtual gifting on Facebook matures, flexible pricing will allow the company to capture a greater portion of the market’s demand at more efficient prices, which should lead to significant revenue increases. Facebook’s direct gift sales efforts could even reach 9 figures on the top line in 2009 (ok, perhaps that’s a bit aggressive). The bottom line? Both users and advertisers should expect to see more robust ways to spend their money on Facebook Gifts in the coming months.

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