Facebook Platform Payment Providers Report Strong Growth in Q1

Although most of the companies we spoke with did not want to publicly disclose specific revenue figures, Inside Facebook’s survey of leading payment providers on the Facebook Platform shows that payment providers overall experienced about 35% growth in both overall transaction volume and dollar volume on Facebook for the first quarter. Some reported growth as high as 300% for the quarter, largely due to new distribution partnerships.

Challenging Economy Not Slowing Growth of Microtransactions

Although the impact of the economic slowdown on traditional advertising has been well documented, social applications and games monetizing through direct or indirect payments have been less affected. Analysts have offered explanations for this disparity, citing entertainment’s historically strong performance in a bad economy (because people have more free time and need more diversion) or consumers’ general preference for small purchases (because they’re holding off on making big buys like cars). Regardless, consumers on the whole are showing increasing demand for virtual currency – not only within Facebook but across social networks (like MySpace and hi5), emerging mobile platforms (like the iPhone), and online games in general. (You can track the social games space in detail at Inside Social Games.)

As a result, many social app and game developers large and small are posting strong profits – one developer of a leading analytics platform said recently he couldn’t believe how much some game developers are making. For example, Zynga, one of the largest developers of social games on Facebook and MySpace, is rumored to be profitable on $10-15 million in quarterly revenues, and Playdom recently told Inside Social Games that they were profitable as well. However, for every Zynga and Playdom, there are a dozen smaller developers focused on iterating just one mechanic or game. Nevertheless, social games and other applications which monetize through user micropayments are garnering significant attention from venture capitalists in Silicon Valley who are attracted to the margins and economics of virtual goods.

Growing Ecosystem of Players

As a result, a growing number of payment providers have begun focusing on serving application developers monetizing through user payments for virtual currency, virtual gifts, or other in-app features or items. It’s a complex ecosystem: some companies having previous experience in online or mobile payments, often with focus on particular international markets, while many new startups have also formed hoping to gain a foothold inside Facebook and other emerging social platforms.

Developers interested in moving beyond simply integrating PayPal, Amazon, or Google now have a plethora of payment companies to work with:

• SocialGold, TwoFish, and PlaySpan are three startups aiming to help developers optimize their virtual economies by providing analytics tools layered on top of the payment system. SocialGold has built their own credit card processing product, while TwoFish’s model is based on revenue sharing.
• Zong, Paymo, and MobillCash have increased their focus on social app and game developers in the last two years. These companies enable users to pay with premium SMS messages which are billed to their mobile phone providers. Zong has a mix of direct and aggregator relationships with international carriers, while Paymo works primarily with aggregators.
• Spare Change has developed its own currency, called “credits,” that users can purchase with a credit card or Paypal and spend on a variety of Facebook applications.
• Offerpal Media, Super Rewards, AdParlor, Peanut Labs, Sometrics, and Gambit provide developers with managed offer networks that users can pay for either directly or indirectly (i.e. through CPA offer completion). These companies have partnered with many of the payment providers above and help developers optimize which payment options to display most prominently (for users who choose paid offers) in order to optimize revenue.
• Other payment companies, like Global Collect, CC Bill, and Zuora are also active in the space.

Facebook Staying Mum on Plans

Despite having announced a beta program for its own in-house Facebook Platform payments system in December 2007, Facebook has remained mum on its plans since, and no system has ever been publicly launched.

While the company is certainly evaluating a payments solution for developers, the lack of announcements from Facebook has led many to conclude that building a payment system is not currently a high priority for the company – a move that many in the industry have questioned, citing the overall strength of the space. While Facebook will most likely build its own payments system eventually, the company seems to be more focused on making sure Facebook Connect and the Facebook Platform continue to grow and provide substantial value for the larger application and publisher ecosystems rather than focus on building a robust payments solution right now.

A platform-wide payment system or virtual currency could certainly benefit developers, who are always interested in making payments as frictionless as possible. It could also benefit publishers interested in developing social commerce on the web through Facebook Connect. However, many say that even if Facebook were to build a system itself, it would be challenging for the company to provide a better set of products across a market very fragmented by geography and demographics than those the current ecosystem of third party payment providers have collectively built. (As a point of contrast, global social network hi5, which reportedly laid off half its staff a couple weeks ago, has refocused its business around a gaming portal model and has been striking deals with multiple payment companies.)

Even if Facebook were to build its own system, it would likely not want to stifle third party innovation, lest the company make it harder for developers to monetize the Facebook audience and grow the Facebook Platform economy.

Facebook Continues to Develop Gifts, Credits

Nevertheless, Facebook has still been experimenting with its own virtual currency, “Facebook credits,” which are used to buy Facebook Gifts and paid for via credit card in the Facebook Gift Shop. Facebook is rumored to have done between $30-$40 million in virtual gift sales in 2008, and the company has been conducting multiple experiments with virtual gifts in recent weeks and months.

For example, it’s done several tests around birthday gifts and holiday gifts on user profiles, and recently also started experimenting publicly with a new credit gifting system that allows users to give virtual credits to each other as a reward for sharing good content. There was also a little stir a couple of weeks ago around a comment Facebook’s Gareth Davis made about Facebook “looking at” its own virtual currency options, but based on what we know that reaction was overblown.

Conclusion

While it is still early, the payments market on the Facebook Platform is growing quickly, and significant opportunities exist for application and game developers to optimize their services for better monetization through user-pay. The promise that virtual currency monetization and virtual economy optimization are showing is attracting many wannabe game developers who see an opportunity to apply principles of economics and retail dynamics inside Facebook apps in a systematic way. While the sustainability of user pay and freemium models is still yet to be borne out, the revenues that app and game developers – and payment providers – are seeing are real, and we expect them to grow significantly throughout 2009.