Over the past month Facebook has been testing out an upgraded version of the Facebook gift shop and as of last night the company announced the roll out of the upgraded service to all users. The new gift shop will include music gifts from Lala (as we wrote yesterday) and branded sports gifts. If AdNectar research which suggests branded gifts are 1,000 percent more effective is accurate, the sport gifts could turn into a big business.
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Have you ever wondered where all those digital goods that weren’t of high enough quality to make the final cut go? I think we’ve found it. Arend deGruyter-Helfer developed the following image of a pile of Facebook gifts. Obviously there isn’t a real place you can go to find the Facebook Gifts wasteland, but if there was, I’d imagine that this is how that world would look. It’s a piece of digital art that I think would do extremely well as a poster.
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Facebook has been slowly rolling out tests to select developers that want to integrate with the Facebook gift shop. As of today there are approximately 5 companies that have been participating in tests: American Greetings, RealGifts, JibJab, GreetBeatz, and someecards. The latter three only recently began showing up in the gift shop. However Facebook has been testing out the gift shop as a platform for developers to sell virtual gifts over the past few months.
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Want to send a branded Terminator gift to your friends? Maybe not but what if you knew that the gift would also generate money for your friends, would you do that? I would guess that there’s a much better chance you’d send the gift. In a campaign for the new Terminator movie, Facebook is incentivizing users to send out gifts to their friends by also including 10 gift credits for free. The promotion also includes a custom gifts tab within the Terminator Salvation page.
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There’s a good deal of potential in Facebook gifting applications, both native apps offered by Facebook and third party applications that take advantage of Facebook’s developer platform. But few have figured out the sweet spot for monetizing many gifting applications on Facebook. A new application called Personal Picture Gifts is hoping to find a niche way in which to monetize and create value for gifting applications that’s extended to users.
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Facebook is clearly focused on their gifting business. Recently the company made a small modification which increased birthday gift promotions on your friends’ profiles. Tonight Facebook rolled out a new Valentine’s day promotion. When you visit any of your friends’ profiles you are instantly prompted with the option of sending a Valentine’s day gift to that friend.
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Just earlier this week we reviewed fbFund competitor Real Gifts, which combines virtual gifting with giving someone a gift in the real world. I thought that combining some of Real Gifts’ elements would be a good idea, for other apps or native Facebook apps. But this Thanksgiving, Facebook is taking advantage of the holiday’s notorious shopping reputation to earn a little revenue for itself. A number of participating retailers are sponsoring virtual gifts that Facebook users can share with each other.

The point? The items represented by virtual gifts, which will be available tonight, are supposed to get users talking about all the shopping they’ll be doing on Black Friday and Cyber Monday. For instance, Dell is sponsoring a festive red laptop that can be gifted to friends.
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While most people focus on Facebook’s advertising business when discussing monetization, Facebook has been selling millions of gifts annually to users via the Facebook payment system. Previously, gifts cost $1 per gift but over the weekend Facebook announced that the system would change to a credit based system. Now gifts will cost 100 credits.

In the short-term this isn’t really that significant of a change but in the long-term this could have some big implications. First, it means that Facebook can now accept payments on an international basis. While there may have been credit card information previously, there would have been a conversion fee for Facebook. Now the company can manage accounts in different currencies.

The second implication of this announcement is that the company may very well be one step closer to launching the highly anticipated payment platform. Last week I revealed that Xiaonei, the Chinese Facebook copycat, had launched a payment platform for their applications. Their system works in a similar fashion to Facebook’s announced platform.

Instead of purchasing virtual goods directly, users are given credits that they can use to purchase anything on the site. Such a system will ensure that Facebook directly controls the conversion between currencies and Facebook credits. While the Facebook payment platform may not have progressed significantly, Xiaonei’s announcement last week may definitely be a catalyst for Facebook to push forward.

In Facebook’s quest for global domination rests on the company’s ability to continue to attract developers. When RockYou announced a $17 million round this morning, part of their announcement was that they would continue to expand on the Xiaonei platform. As one of Facebook’s top 5 application companies, it emphasizes the growth challenges that Facebook has abroad.

It will be interesting to see if the whole dynamic created by Xiaonei launching a payment platform will force Facebook to expedite the launch of their own payment system. For now we will have to wait and see but this weekend’s announcement by Facebook could easily be the first steps toward and early launch.

It’s no secret that virtual goods are a big business but how big exactly, nobody has really been totally clear. Yesterday Jeremy Liew of Lightspeed Venture Partners released an analysis done by the company which suggested that Facebook could generate up to $43 million this year alone from virtual goods. How does Facebook generate so much money from their virtual goods?

Well as Eric Eldon points out Facebook generates a lot of demand for their goods through scarcity. Apparently this model works because Facebook is selling a lot of gifts. If Jeremy’s high-end estimates are accurate, they are selling close to 43 million gifts. Gifting is a straight forward model and when the platform launched last year, Free Gifts became one of the most popular applications.

When Facebook temporarily removed gifts a few months back, I expected the Free Gifts application to get a significant boost. Instead, the application had a decrease in gifting activity because there was no longer a competing product which charged for gifts. Since the gifts came back, Free Gifts has continued to succeed. Virtual goods are a massive economy especially in Asia where virtual goods generate the majority of social network revenue.

That’s because advertising dollars in Asia are pretty low. So what’s the prime reason for gift growth on Facebook? The company’s rapid growth in their user base. The company has more than doubled since Jeremy Liew published the company’s findings back in January. This means that the rate of gifting appears to be staying pretty consistent.

The real question I have is: can the virtual gift economy could become a billion dollar economy on its own? If Facebook can reach $100 million eventually the global gift economy will be able to push $1 billion. What do you think?