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App Revenue Is Poised to Surpass Facebook Revenue

Social Network Looks to Cash in on Growth of Its Third-Party Ecosystem

By Published on . 2

NEW YORK (AdAge.com) -- More than a social phenomenon, Facebook harbors a lively and growing ecosystem of game and other application makers, ad networks and retailers of virtual goods. What happens when businesses running on Facebook become bigger than Facebook itself?

Facebook apps
That could very well be the case in 2009. Facebook, which just surpassed 200 million global users, is expected to bring in about $500 million in 2009 revenue, mostly from advertising. Tech blog Venturebeat estimated that Facebook developers make a combined $500 million on the platform. Ad Age estimates the collective revenue from Facebook of developers to be between $300 million and $500 million. All in all, numbers big enough that Facebook is looking to cash in.

Not all the developer revenue is from advertising. San Francisco-based Zynga, the top developer on Facebook with more than 41 million users, according to AllFacebook.com, makes much of its revenue from the sale of chips for its Texas HoldEm Poker or weapons in Mafia Wars. Zynga is expected to break the $100-million-sales mark in 2009, split between Facebook and MySpace. In addition to Zynga, there are at least a half dozen other companies in the $10 million to $50 million range, as well as many smaller players.

"It wouldn't surprise me if apps on Facebook generate more revenue this year than Facebook," said LivingSocial CEO Tim O'Shaughnessy, whose app is Facebook's most popular at the moment, thanks to its "Pick Your Five" feature. "The overall platform is in the hundreds of millions of dollars."

Lisa Marino, who runs West Coast business development for RockYou, estimates developers will earn $300 million from Facebook this year primarily from three streams: virtual currency, branded sponsorships and ad-network inventory. "These are three strong revenue models that Facebook isn't participating in but that might overall be bigger than what Facebook brings in revenue," she said.

No charge for developers
Unlike News Corp. unit MySpace, which took a hard turn toward commerce in 2008, Facebook has stressed ubiquity of its platform over revenue. Its strategy is to become a conduit for as much of the world's communication as possible and part of that has been to not charge developers to use the platform, no matter how much revenue they generate from it.

That's about to change. Facebook is testing a payments system with some of its developers that would enable one-click buying of virtual goods and services on the Facebook platform, with Facebook taking either a percentage of the transaction or a flat fee. In addition, Facebook is testing a service to allow users or advertisers to buy and trade "credits" or a virtual currency to facilitate commerce. Spokesman Brandon McCormick said three tests of the system will commence in the coming weeks.

That the developer community will soon overshadow the platform in revenue is a sign that Facebook is growing up as a platform, but it also presents a conundrum as it attempts to develop its own advertising business. Facebook profile pages, and the stream of social connections and information they contain, have proven a tough environment for advertising. Display ads in social networks are some of the cheapest inventory in the business. Facebook is pushing "engagement ads" -- surveys, quizzes or games that encourage interaction, but a big chunk of its revenue comes from a pre-existing ad deal with Microsoft.

Applications, on the other hand, have proved fertile ground for commerce. "Once the user goes from their profile into the app platform, whether to play a game, send a virtual gift or check stocks, then its not about connecting with people; it's about having fun or saving time and money," said Buddy Media CEO Michael Lazerow. "There are a lot of different ways to monetize that."

Pennies add up
While there are plenty of ad networks and companies making branded applications and games, the biggest source of revenue in the applications come from small payments people make, say in games like Mafia War to restore health more quickly. Unlike advertising, the payments business has grown internationally along with Facebook's audience. Players in Singapore are plunking down pennies along with users in the U.S. As a game gets big, it starts to add up. The top five "megahit" games make between $1 million and $3 million a month.

Adding a payments system would allow Facebook to dip a toe in the developers' strongest source of revenue, and for the first time create a business relationship between Facebook and its developers. "In the past they've made it hard to give them money even if we wanted to," Mr. Lazerow said.

Max Levchin, founder and CEO of Slide, creator of SuperPoke, Top Friends and Funspace, believes there probably should be a commercial relationship between Facebook and the developers that rely on its platform for their business. "As long as they add to the bottom line, developers will pay the price."

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