2009: The Year Facebook’s Platform Monetization Efforts Kicked In

As we’re on the cusp of entering 2010, the Facebook Platform is now over two and a half years old. While that time has gone by quickly, the Platform has come a long way, and is starting to show signs of maturity. After the “wild west” of 2007, Facebook primarily opted for Platform stability and growth instead of monetization in 2008. But while Facebook continued expanding by leaps and bounds this year, 2009 was also the year that Facebook’s platform monetization efforts really began to take shape – in somewhat unexpected ways.

It’s somewhat hard to remember now, but during much of the last couple years the tech press was heavily focused Facebook’s plans to build a “PayPal killing” payments service. The idea was basically that Facebook would monetize its platform by owning both the payments layer and the identity layer, eventually spreading its tentacles further throughout the web via Facebook Connect, which would serve as the underlying infrastructure for both an ad network and payments service in the future. Less attention was paid to the role Facebook would play in paid customer acquisition for developers, primarily due to the fact that for a long time developers were able to distribute their applications very widely and very cheaply through aggressive use of Facebook’s “viral” communication channels.

So, what actually happened in 2009? While Facebook has indeed been working on its payments service, it’s looked quite different than many expected – primarily focused on currency, instead of building out broader direct payments infrastructure and operations – while in the meantime, developers have been playing a leading role in Facebook “beating the shit” out of its advertising numbers (we believe as many as 7 out of Facebook’s top 10 performance advertisers are Platform application developers). Let’s take a closer look at what has played out in each area and why.

1) Facebook: Monetizing Virtual Goods Through Currency

Although Facebook is building a payment service for app developers, it’s focusing more on partnerships with other types of payment services rather than building out the payments layer itself. Facebook still requires users to purchase Facebook Credits (its universal virtual currency) using a credit card, and it has begun testing additional payments partnerships. For example, earlier this fall, Facebook began testing mobile payments with Zong, and we expect Facebook to start testing more payments integrations with other payment services (from mobile, prepaid, and regional providers) in 2010.

Ultimately, however, Facebook has shown so far that it wants to rely on payments partners to manage deposits, and we think that will continue next year, instead focusing mostly on its currency experience. Why? Basically, currency is a much higher margin business. While we believe identity is vital to payments, and Facebook is in an interesting position to expand its role as a more generic payments platform in the future, we don’t believe Facebook is likely to build up the global operations necessary to build out such a service soon.

However, Facebook is interested in playing a more meaningful role in creating a universal currency that could assist the expansion of the virtual goods market. Although a couple payments aggregators have tried to create a quasi-universal currency on the Facebook Platform, no one has really succeeded as of yet.

Facebook believes it can add significant value to the Platform virtual goods market through its currency, and has started experimenting with efforts in this direction with developers. If Facebook Credits can provide a better experience for users, who might trust Facebook with their data more than they do third parties, thereby increasing conversion rates for developers, Facebook could create the most valuable currency on the Platform, even without any mandatory Credit-use policies. At that point, it could reasonably charge 30% transaction fees and build a relatively substantial revenue stream.