Facebook: Real Money for Virtual Goods?

First, thanks to my great friend Brian Olson for this blog title.

Second, if you've read me before you know I have this crazy idea that sooner rather than later, regardless of how popular you are, if you're going to be in business you have to make money. You also know I have my lens focused on the social media industry. It's great that Facebook is getting itself valued at $10 billion with a "b," but the crash is looming if it can't leverage its membership toward profit.

The latest thought thrown on the wall? Here it is, as reported by Rich Cherecwich of iMedia (iMedia has lots of great stuff) on June 3, 2009:

Facebook has officially entered the mainstream, but the über-popular social network still faces doubts about a monetization strategy. That may change with a new internal payments plan the social network is currently experimenting with that could help it become less reliant on advertising, the Financial Times reports.

The new system allows Facebook members to purchase credits and then use those credits to buy virtual goods through third-party applications that run on the social network.

Users are apparently spending big money on games and applications that run on the Facebook platform, to the tune of an estimated $500 million this year. Facebook will retain a percentage of every transaction, which could represent up to one-third of the company's income, according to the Times.

So I put this out there on Facebook and asked my friends for their thoughts. Then I stole them and put them in a blog. I'm like that.

Andy Mikesell, MBA, Director of mCommerce:

I think the application play is a tough one and creating revenue will be a small organic play. iTunes-like stores for digital goods is pretty saturated and Facebook as a concept is a free commodity. The statistics for Facebook are impressive; has it peaked at the consumer level in North America?

Andy also suggests a custom, enterprise-level model for revenue. Andy's pretty sharp and now that I don't live in a frat house with him I can say that with a straight face. Here's why Andy's right, that it's a "tough play:" 1) Most of these third-party applications are junk. The fact that they're free reduces user expectations and mitigates complaints about poor product quality. Dealing with complaints costs money. 2) A difference between Facebook and LinkedIn (you needed another one?) is that the former lets anybody just post their applications. The latter has a rather stringent approval process, the opening criteria for which most who submit to Faceook cannot satisfy. Will this move bring about a change in Facebook's standards? That would mitigate its profit from the move.

Admittedly, when it comes to calling Facebook applications, "junk," mine is but a layman's opinion. Karen Pellegrin, owner of Kelpworks Creative, however, is a bona fide expert:

As one of a team of game designers myself, none of the games and apps on Facebook are good enough to start charging me. Most of those apps are created by inexperienced people on facebook and just random thoughts... which is fine if it's free. That's just part of the fun of Facebook.

However, they better start hiring actual game developers and boosting their monies to hire those developers, or they are going to bomb out in the end. Just take a look at
the success of mini-game sites like Popcap. They hire lots of designers and developers for their games and they know who they are... a game site, not a social networking site.

So, yes, Steve, some people will buy anything. The question then becomes, what does it cost you to sell it to them?

Karen's right about something else, too: Trying to be all things to all customers is a sure path to failure. Going through an identity crisis on Other People's Money is a great way to go broke, quickly.