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Facebook’s Monetization Strategy (Part 2)

Posted on Thursday, Jul 26th 2007

I would, personally, like to see them dominate not only Online Jobs, but also Online Photo Sharing. News Corp recently bought Photobucket as one of MySpace’s Monetization efforts. Photo sharing is one of the top segments and in the US the top 10 photo sharing sites draws around 50 million visitors each month. I have reviewed Flickr, KodakGallery, Shutterfly, and Photobucket, using my Web 3.0 Framework. Shutterfly recently went public, and has been doing well.

Monetization happens primarily through hosting fees and printing / merchandising services. Facebook needs one with a good back-end, including printing / merchandising services. Smugmug could be a good one to acquire.

Similarly, Dating and Matchmaking. If there ever was a killer app for Facebook that is also a large segment, this would be it. I would say, the early-explorers on Facebook arrived in search of love. In the process, the service expanded beyond “love” matches to include “Friend” matches, and it has changed American culture dramatically by making it “cool” to “connect”, “communicate”, “socialize”. Generation Y, I foretell, will be a much more “connected” generation than their isolated, workaholic predecessors, and we have MySpace and Facebook to thank for it.

So tell me, why not a vertical search engine for matchmaking on Facebook that requires a small subscription fee?

[Part 1]
[Part 2]
[Part 3]

This segment is part 2 in the series : Facebook's Monetization Strategy
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[…] 1] [Part 2] [Part […]

Facebook’s Monetization Strategy (Part 1) - Sramana Mitra on Strategy Tuesday, July 31, 2007 at 6:02 PM PT

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Facebook’s Monetization Strategy (Part 3) - Sramana Mitra on Strategy Tuesday, July 31, 2007 at 6:04 PM PT

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Facebook’s Monetization Strategy (Part 3) - Sramana Mitra on Strategy Tuesday, July 31, 2007 at 6:04 PM PT

I’ve been pondering how Facebook/Myspace can monetize better.

I’m not sure how matchmaking for subscription would work. Typically the matchmaking sites give you a profile and charge you to contact someone. It is already free to set up and contact people for free on Facebook.

I don’t understand how they make money with this strategy.

Chris L Tuesday, February 5, 2008 at 1:34 PM PT

Matchmaking is not just setting up profiles. If you look at what eHarmony has done, it has algorithms doing the actual matchmaking. If Facebook puts in such algorithms, they can very well charge users for the service.

Sramana Mitra Tuesday, February 5, 2008 at 3:23 PM PT

I really like the way how you draw on your web 3.0 framework (3c+ps+v..) to suggest monetization strategies for Facebook. I also read your Google article on GigaOM. My comment below relates to both.

(i) It will be incredibly hard for Google or Facebook to compete with verticals such as Kayak, Monster etc. – which focus exclusively on travel and jobs respectively. Facebook’s strength lies in connecting people with each other and Google’s in best generic search. That’s what they do best.

(ii) Perhaps a more feasible strategy could be focusing on one or two verticals that make more sense?

(iii) If they try to attack too many verticals (even via acquisition), they might lose their focus on what they do best. Google (and Facebook) are great entry points for users.. but once they know which site gives the best travel results, they will unavoidably go there to do specific searches.

(iv) Having said that, Google does a decent job in certain “verticals”. For example, Google Finance, Google Books etc. What are your thoughts about those?

Saad Fazil Tuesday, May 19, 2009 at 3:20 AM PT

Saad,

Companies would always have to pick which verticals to focus on, yes. But for both of them, given their enormous user bases, taking on a half dozen really lucrative verticals should not be a problem, given how much traffic they have, and how well that traffic would monetize if channeled properly.

Google Finance is okay. Yahoo is #1 in Finance. Google Books – do you know how that monetizes?

Why don’t you look into the revenue distribution across the top verticals at the moment, and see who ranks at what level? It would give you/us some good data to base these discussions / conclusions upon.

Sramana Mitra Tuesday, May 19, 2009 at 8:31 AM PT

If you look at my comments on Google article ( https://sramanamitra.com/2009/04/17/google-4/#comment-425158 ) you will see that I make a counter point to going vertical idea.

In addition, I would love to hear readers’ thoughts about:

(i) Would it make sense for Facebook to start taking a cut from developers revenue (which it currently doesn’t)?

YES – because developers revenue is expected to surpass Facebook revenue of $500m this or next year

NO – because there are only a few developers that are making decent money, and if Facebook starts charging them, they might be tempted to look elsewhere (MySpace, mobile?)

My vote is NO!!

But I do think they need to start cashing in somehow. Going via a uniform virtual goods / payment system might be one way to do it. Hi5 is already doing it btw.

Now some stats and facts:

(1)
Facebook Revenue Sources:
*1 ad spending (US) $230m (from $210m in 2008)
*1 ad spending (outside US) $70m (from $40m in 2007)
virtual gifting, ecommerce, rev share with developers (~ $200-250m)
Total ~ $550m

*1 Ad spending:
Includes all forms of advertising. Excludes other sources of revenue, such as e-commerce.

*2
Facebook is rumored to have done between $30-$40 million in virtual gift sales in 2008

(2)
What are developers doing?
Game developers,
Payment companies
Offer ad companies (offer-based advertising example: buying a virtual pistol by renting more movies on Netflix)
Analytics companies like Kontagent

(3)
How do developers make money?
Primarily from three areas: virtual currency, branded sponsorships and ad-network inventory.

(4)
How much do they make?

Zynga expected to make $100m in revenue this year – 50% from Facebook, 50% from MySpace (Facebok has 200m users, MySpace has 130m users
More than 50% of the reveue comes from sale of poker chips

Slide making around $20m but through advertising
Social Media making $15m

Top few developers = $150m
About 50+ smaller developer teams making $1/2-1m a year = ~ $50m
~100+ small developers making $1/4-1/2m = ~$50m
==================================================
Total developer expected revenue this year = $250m (however some sources say revenue from apps might exceed Facebook’s revenue of $500m soon)

(5)
Top apps:
1. LivingSocial LivingSocial 31m (MAU)
2. Super Wall RockYou! 20m
3. MyCalendar MyCalender 14m
4. Causes Causes 14m
5. Movies Flixster 14m
6. We’re Related Familylink.com 13m
7. Top Friends Slide, Inc. 13m
8. MyCalendar MyCalender 12m
9. Texas HoldEm Poker Zynga 12m
10. Pet Society Playfish

The top five “megahit” games make between $1 million and $3 million a month.

(6)
Challenges faced by developers:
Facebook constantly redesigning interface
No consistent payment platform
No consistent virtual good splatform

(7)
Other:
Facebook soon launching its own virtual currency and payment platforms. That would hurt payment companies, but would benefit Facebook as it would take share of the revenue. It could also benefit users and 3rd party developers as they would have a uniform way of buying virtual goods/making payments

Saad Fazil Wednesday, May 20, 2009 at 7:46 PM PT

This is excellent data, Saad. Facebook’s developer and application strategy has clearly paid off rather well. In fact, if the payment strategy becomes a key monetizing mechanism, they can get away with not charging developers. On the other hand, it seems to me that as developers start becoming successful on the shoulder of Facebook, it would be quite okay for them to start charging beyond a certain threshold. $1-$3 million a month seems like a stage where developers should be paying Facebook some rental charges.

Now the question that also interests me and others is, what does it take for a developer to get to $1-$3 million in revenues a month?

And I agree with you that while verticalization is an idea that Google needs to look into, Facebook has (since July 26, 2007) charted a different and successful monetization strategy, and does not necessarily need to go vertical at this point.

Of course, there is substantial revenue in the world of search, and a Kayak, for example, could bring them an immediate $100 million+ in revenue, and given their traffic, it would grow fast. So, if they’re looking at accelerating revenue fast, vertical search is a very easy next place to go.

Sramana Mitra Thursday, May 21, 2009 at 11:03 AM PT

Social gaming seems to be gaining a lot of traction. According to some studies, users are still spending on casual gaming and virtual goods despite slowing economy. There are certain things that are win-win: for example, if a user gets points by getting Netflix service (while s/he might already be thinking of getting DVD service anyway), it keeps the money flowing!

There are several ways small/individual developers can potentially make money.

(i) Integrate the application/game with payment / virtual money platform (there are several: PayPal, Amazon, Google, SocialGold, TwoFish, and PlaySpan, Zong, Paymo, and MobillCash
Spare Change, Offerpal Media, Super Rewards, AdParlor, Peanut Labs, Sometrics, and Gambit
Global Collect, CC Bill, and Zuora)

(ii) Think about developing multi platform apps (facebook and iPhone are a must in my view) – can take advantage of Facebook connect and iPhone monetization platform soon coming in OS 3.0.

(iii) Big players such as SGN and Zynga will buy successful games.. so evn as a small developer, one could be a good acquisition target.

(iv) A typical video game value chain (separation of publishers and game studios for example) might take shape in casual gaming as well. Playfirst is becoming EA of casual gaming. This could bode well for small developers as they can concentrate more on developing goof games, while leaving marketing/distribution to other players in the ecosystem.

Agreed. Facebook has more options to monetize now than before.

(i) Facebook payment system can be a huge hit – since it will allow 3rd party developers to use a uniform virtual currency system with potentially better integration with the underlying platform.

(ii) Taking a revenue cut will be an option once these 3rd party developers start making tons of money. For now, it makes sense for Facebook to let the ecosystem grow and flourish, even if it means not taking revenue cut.

Saad Fazil Saturday, May 23, 2009 at 5:55 AM PT

Wanted to make a few additional points.

(i) On Facebook, users don’t pay to buy apps/games. However several users are into buying points using virtual currency (and occasionally real currency), which can turn into money for the developers. However, Facebook is great way to generate network effects, which can then be leveraged in a couple of ways:

(a) By enabling users to play the same game/app on mobile (iPhone/iPod Touch/Android, Blackberry). Facebook connect is a great way to leverage network effects, which were created on facebook, on iPhone/mobile.

(b) Creating a “stand-alone” website for the game.

(ii) While Facebook apps are free, several users buy apps over iPhone. This further emphasizes need for creating the apps on iPhone/iPod Touch. There are 21 million iPhones + 16 million iPods sold so far that can be potential customers. Furthermore, these users are mostly in developed countries where purchasing power is higher.

(iii) Always create a free and a paid version for mobile platforms.

Saad Fazil Saturday, May 23, 2009 at 7:06 AM PT

Recent Instagram acquisition proves you were right on this one 😉
Just adding mobile photo sharing (was a 2007 post, iPhone launch, wow)

Kevin Friday, April 13, 2012 at 1:07 AM PT