Why Facebook Killed A $100 Million Baby

This evening Facebook announced that they will officially kill the company’s gift shop on August 1st of this year. Currently generating tens of millions of dollars for the company a year, one has to wonder why the company would take such dramatic steps. Facebook regularly touts how few developers run each segment of their business, but even if the company was generating tens of millions on a couple of developers, apparently more can be generated with the small gifts team working on other projects. So what does this really mean?

A $100 Million Business, Gone

We are to assume that Facebook’s gift shop has been growing since they were projected to have a $35 million annual run rate back in 2008, there’s no doubt that the company could easily be selling tens of millions of dollars in gifts each year, at a minimum. However the rise of FarmVille and the social gaming ecosystem on Facebook has driven virtual goods transactions away from Facebook’s core gift shop. The result is that Facebook’s virtual goods business may have been somewhat damaged.

If you had been offered to purchase all the revenue of Facebook’s gift shop going forward in 2008, you may have been willing to pay a pretty penny, if the company was really generating $35 million a year from the shop. While $100 million may be pushing the limits on the value of future virtual goods cash flows, it’s not an unreasonable number. However now the gift shop has become filled with damaged goods that no longer stand out from the numerous other gifts.

A Virtual Goods Ecosystem Rises

As Facebook prepares to wind down the company’s virtual goods store front, the company is also pushing full-force into the Credits business. While the distribution of those goods are currently taking place within games, one has to wonder what future integration points Facebook has planned. The gift shop as it exists today is not a robust platform. While multiple developers had access to the gift shop as a distribution channel, it was still limited in scope.

A Bigger Marketplace

Regardless of the growth or decline of Facebook’s gift-shop, the marketplace for virtual goods is expanding. Projected to reach $10 billion globally, this year, Facebook is aiming to take a big chunk of the marketplace through their Credits service. Additionally, one has to wonder if Facebook is planning on opening up a broader virtual goods marketplace. Given that Facebook believes the future resides off-site, there’s no guarantee that there will be any new distribution points of virtual goods within Facebook aside from the stream and profile tabs.

While we believe Facebook could open up a massive marketplace, there is a greater opportunity in play and Facebook doesn’t want to miss the momentum they are building as the virtual goods market explodes.

HTML5 Presents New Opportunities

One of the largest competitors to Facebook in the Credits space is Apple. Apple is selling applications across their platforms and now offer in-app purchases as well. These in-app purchases account for the majority of virtual goods transactions and while Apple has a monopoly on apps distributed through iTunes, the web will once reign again as the leading Platform. With this in mind, Facebook is ramping up their efforts to provide integration with mobile applications.

We recently saw the beginning of these efforts with the MyTown app promotion, however we would only expect that to continue. Facebook’s acquisition today of nextstop highlights not only Facebook’s interest in location, but also an investment in the future of HTML 5 on mobile devices (as effectively articulated in this interview with Robert Scoble). If all goes well, the $10 billion global virtual goods market, could grow 1,000% and Facebook could be standing as the primary intermediary in the market.