Facebook's Decision To Print Money Out Of Thin Air

Earlier today Facebook announced a partnership with PayPal who will now become a payments provider for Facebook Credits. While it’s easy to see how these services can work together, many tech pundits have continuously speculated about Facebook’s decision to create a massive payments system. Dave Morin, an ex-Facebook employee, even confirmed in 2008 that the company was working on a payments system but didn’t go into specifics. So what does the future hold for Facebook payments?

While Facebook has not made their monetization vision clear cut, the company has been continuously iterating on the credits system, most recently making it an integral component of the site via the games dashboard and new settings menu. So where does the money come from within the Facebook Credits system? There are a number of ways, all highlighted below.

The Holding Period

When you purchase Facebook credits, you are required to purchase either 50, 100, or 200 Facebook Credits at a time. Let’s start off with a rough calculation. If 100 million Facebook users (25 percent of their total user base) purchase the minimum number of credits in a given year, Facebook would have somewhere around $500 million sitting in a bank account until items were purchased.

While the amount of credits varies from country to country, most users find that they typically have extra credits remaining in their account. Let’s say 10 percent of credits aren’t used right away, which means Facebook may have an account of somewhere around $50 million that is constantly gaining interest. Is the interest going to pay back Facebook shareholders? Not at all but an extra 500 grand to a million bucks can pay for a few servers at least.

Facebook Gifts

When Facebook sells gifts 100 percent of that money goes directly to Facebook. If we were to assume that the majority of Facebook’s Credits are being used on Facebook gifts, then Facebook can at least add an additional $250 million in revenue (based on our ball park figures) to their bottom line. Selling Facebook Gifts is an incredible business, however there’s clearly an upper limit to the revenue potential.

While that limit could be upwards of a few hundred million dollars a year in the long-term, Facebook needs to come up with other revenue streams to support the company.

Transaction Fees

The best way for Facebook to expand revenue beyond their own gifts business is to provide developers with the ability to let users make virtual goods purchases through Facebook. With this market expected to be larger than $1 billion this year, and Facebook responsible for a large portion of the market, Facebook has a great potential to at least double their current Credits business.

A Long-Term Vision

Mark Zuckerberg, the founder of Facebook, is well known for holding a long-term vision. As Matt Marshall previously wrote, Mark Zuckerberg “thinks in terms of decades”, not years. While it’s a risky strategy (playing chess 10 steps ahead doesn’t always turn out too well), it has enabled the company to grow into becoming one of the largest internet companies in the world, now second only to Google, all while operating near break-even.

No matter how you add up the numbers, they don’t come close to the $6 billion that Google generates every quarter. With investors betting that Facebook will indeed become the next Google (or at least half the size of Google in terms of revenue), Facebook will need to go searching for other revenue streams.

Credits Are Great But Brand Advertising Is Huge

While Facebook Credits will become a major component of the virtual goods industry, Facebook is truly targeting the madison avenue coffers. With brands shelling out billions of dollars every year on advertising, and with Facebook commanding the most attention of internet users, Facebook is poised to take a large portion of the brand advertising business.

Whether or not Facebook’s engagement ads are the solution brands were looking for, the company is constantly iterating and trying to perfect the brand advertising system on the site. With the company’s Brand Lift partnership with Nielsen, it’s clear that Facebook is making adjustments to try and decipher the code to the vault of money which holds brand advertising dollars.

Facebook Can Afford To Keep Growing

What Google and other internet companies are scared of from Facebook is not the company’s current revenue stream but the future potential for revenue. With two revenue streams, Credits and self-serve advertising, that can support the business for years to come, Facebook continues to grow at a rapid pace with their eyes set on a billion users.

As long as the company can keep growing on money which appears to be printed out of air, Facebook has plenty of time to figure out the best way to unlock the vaults of cash that await the company down the road.

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