Facebook makes millions from the sale of virtual goods, but can it rival advertising?

Jordan Golson — Wed, 03 Sep 2008 12:07:49 -0700

Facebook is making around $35 million a year from digital gift sales, according to an analysis by Lightspeed Venture Partners. That's a significant amount -- about 10 percent of the $300-350 million in revenue that Facebook expects to book this year.

The "gifts" -- things like a "box of chocolates" or "birthday cake" -- can be given from one user to another for $1 on special occasions -- or "just because." Thirty-five million dollars is not chump change, and as Facebook's userbase grows, I expect this incremental revenue will continue to rise.

However, virtual good sales are no match for advertising. I don't have precise numbers to reference, but Lightspeed's research found that the most popular Facebook gifts by far are the "free" gifts that are paid for by advertisers -- a bottle of Sprite, for example.

The money to be made from advertising is far greater -- and more consistent -- than virtual goods sales. Looking at these numbers, an associate asked if virtual goods had piqued Google's interest as the company moves into virtual worlds like Lively. My reaction? Highly doubtful.

E-Flowers may generate a few million dollars for Facebook, but for a multibillion dollar company like Google, it's small potatoes -- not even worth handling. Google is an advertising company and there aren't enough virtual goods in the world to make it more compelling than advertising. Google's 3D initiatives like Lively are merely Google flinging the proverbial poo at the wall to see what sticks (so it can sell more advertising on it).

Mark Zuckerberg may like the virtual goods adding some money to his bottom line (for just about zero cost), but it definitely doesn't make Facebook worth $15 billion -- the value that Microsoft assigned to the company after its investment last year. Facebook has a unique platform to reach a lot of discretionary income -- it best focus on getting advertisers in touch with its users, and not get too excited over virtual goods sales. I've put in a request to Facebook for more information on its virtual gifts, but haven't heard back yet.

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Facebook makes millions from the sale of virtual goods, but can it rival advertising?

Jordan Golson — Wed, 03 Sep 2008 12:07:49 -0700

More news, commentary, and predictions fromThe Industry Standard:

Special Feature: The Digital Home of 2013: 10 consumer technologies that will succeed, and five that will fail
Special Feature: Where are they now? The Industry Standard tracks down 10 dot-coms from the Web bubble of the late 1990s
Special Feature: The Industry Standard's Top 25 B-to-Z List Blogs

Facebook makes millions from the sale of virtual goods, but can it rival advertising?

Jordan Golson — Wed, 03 Sep 2008 12:07:49 -0700

More news, commentary, and predictions fromThe Industry Standard:

Special Feature: The Digital Home of 2013: 10 consumer technologies that will succeed, and five that will fail
Special Feature: Where are they now? The Industry Standard tracks down 10 dot-coms from the Web bubble of the late 1990s
Special Feature: The Industry Standard's Top 25 B-to-Z List Blogs