This evening Facebook announced that they will officially kill the company’s gift shop on August 1st of this year. Currently generating tens of millions of dollars for the company a year, one has to wonder why the company would take such dramatic steps. Facebook regularly touts how few developers run each segment of their business, but even if the company was generating tens of millions on a couple of developers, apparently more can be generated with the small gifts team working on other projects. So what does this really mean?
A $100 Million Business, Gone
We are to assume that Facebook’s gift shop has been growing since they were projected to have a $35 million annual run rate back in 2008, there’s no doubt that the company could easily be selling tens of millions of dollars in gifts each year, at a minimum. However the rise of FarmVille and the social gaming ecosystem on Facebook has driven virtual goods transactions away from Facebook’s core gift shop. The result is that Facebook’s virtual goods business may have been somewhat damaged.
If you had been offered to purchase all the revenue of Facebook’s gift shop going forward in 2008, you may have been willing to pay a pretty penny, if the company was really generating $35 million a year from the shop. While $100 million may be pushing the limits on the value of future virtual goods cash flows, it’s not an unreasonable number. However now the gift shop has become filled with damaged goods that no longer stand out from the numerous other gifts.
A Virtual Goods Ecosystem Rises
As Facebook prepares to wind down the company’s virtual goods store front, the company is also pushing full-force into the Credits business. While the distribution of those goods are currently taking place within games, one has to wonder what future integration points Facebook has planned. The gift shop as it exists today is not a robust platform. While multiple developers had access to the gift shop as a distribution channel, it was still limited in scope.
A Bigger Marketplace
Regardless of the growth or decline of Facebook’s gift-shop, the marketplace for virtual goods is expanding. Projected to reach $10 billion globally, this year, Facebook is aiming to take a big chunk of the marketplace through their Credits service. Additionally, one has to wonder if Facebook is planning on opening up a broader virtual goods marketplace. Given that Facebook believes the future resides off-site, there’s no guarantee that there will be any new distribution points of virtual goods within Facebook aside from the stream and profile tabs.
While we believe Facebook could open up a massive marketplace, there is a greater opportunity in play and Facebook doesn’t want to miss the momentum they are building as the virtual goods market explodes.
HTML5 Presents New Opportunities
One of the largest competitors to Facebook in the Credits space is Apple. Apple is selling applications across their platforms and now offer in-app purchases as well. These in-app purchases account for the majority of virtual goods transactions and while Apple has a monopoly on apps distributed through iTunes, the web will once reign again as the leading Platform. With this in mind, Facebook is ramping up their efforts to provide integration with mobile applications.
We recently saw the beginning of these efforts with the MyTown app promotion, however we would only expect that to continue. Facebook’s acquisition today of nextstop highlights not only Facebook’s interest in location, but also an investment in the future of HTML 5 on mobile devices (as effectively articulated in this interview with Robert Scoble). If all goes well, the $10 billion global virtual goods market, could grow 1,000% and Facebook could be standing as the primary intermediary in the market.
If Facebook can capture only 10 percent of a $100 billion virtual goods market, with the current revenue share of 70/30 with developers (70 percent going to developers, 30 percent to Facebook), Facebook could end up with a cool $3 billion per year. Granted, these are optimistic projections, however Facebook is well positioned to capture a large portion of this marketplace and become the virtual currency standard. Looking at things from this perspective however illustrates why it may make sense to kill the gift shop, even if tens of millions of dollars a year was providing great margins.
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All that stuff in the facebook virtual gift shop was all crap anyway… good riddence and goodbye!!!
Comment by Alexis D. — July 8, 2010 @ 8:29 pm
Holy Moly you mean people really buy that crap? Are you all brain dead? Save the ocean, give a man a job, feed the poor, or send me the real thing.. omg.. I cant believe its really a lucrative business.. unfreakinbelievable!!
Comment by Michelle Hazard — July 8, 2010 @ 8:33 pm
"a $100 billion virtual goods market".. where do they get that number? is a projection? an estimation? another bubble?
this seems a bit speculative. feets on the ground people!
Comment by coco — July 8, 2010 @ 9:04 pm
i am glad to see the back of it.
there can't be that many idiots in the world that would pay £1+ to send a tiny digital image to someones wall. i image revenue dropped significantly as people came to their senses and/or used the free gift apps instead. and so because profit dropped, facebook have closed it to concentrate on other revenue streams.
Comment by Paul — July 9, 2010 @ 12:23 am
About time!
Comment by Gary G. Tong — July 9, 2010 @ 5:37 am
I have a hard time with people actually buying virtual goods, but, if others are satisfying their need to shop and acquire or using "retail therapy" by buying pictures of things as an alternative to actually buying hard tangible goods, then maybe there is hope for the planet. People consume so much of the planet, maybe virtual goods will be as satisfying to consumers and the world's garbage will slow down
Comment by Linda — July 9, 2010 @ 5:37 am
People spend their money buying non-gifts they don't actually give?
Well fair play to the creator of the app. They realised and gained from people's sheer idiotic need to 'look good' to their Facebook friends.
I suppose a tidal wave of complaints will besiege the net: 'Omg I can't believe you took away part of my life….'
Go buy a gift. Or as Michelle says, if you have so much ready cash to spend on nothing, makes yourself feel really good and donate some to charity which gives a certificate upon receipt. Then you can upload a photo of your 'kind gesture in helping a blind person regain their sight' to all your Internet friends. Get that warm fuzzy feeling by spending your money on something that actually makes a difference. Don't make some person rich who just wants to exploit your need to appear cool.
Comment by Jo — July 9, 2010 @ 5:38 am
Apple showed them the light…create useful apps that help people find the right info on-line to make their lives off-line more comfortable or better.
Internet is just a medium, a tool to help us meet our primitive needs.
Comment by Jeremy Croes — July 9, 2010 @ 7:30 am
Count me among the suprised that anyone really buys that stuff. I honestly didn't think anyone really did (to me, a virtual existance of a purchase option doesn't necessarily mean it's profitable like, say, a real-world store.) "Currently generates tens of millions a year." Really? REALLY???
BTW, I haven't been hearing much about Farmville anymore, either.
Comment by Ally — July 9, 2010 @ 8:02 am
this blog is incoherent… so what is the reason you think they shut it down.. because they want to offer it to mobile ?
Comment by cease — July 9, 2010 @ 10:16 am
Do you have a link that can better describe this credit system I keep hearing so much about?
Comment by zach — July 9, 2010 @ 2:56 pm
Haha never used facebook gifts a single time!
Comment by virtualfaqs — July 9, 2010 @ 7:46 pm
First time I sent a gift was in '06, for free. Never knew they changed it to pay until a year ago when I wanted to send another one. Looked it up in help and it said they "occasionally" have free gift sessions, just to promote the app. Guess it didn't work, caus I was never gonna pay.
Comment by guest — July 9, 2010 @ 9:53 pm
I am one of the stupid people who enjoyed giving virtual gifts from the FB gift shop. It was fun. Most of the images were a little weak, but hey. Giving — even chimpanzees do it — is fun. Your friend in Thailand has a birthday and you are in NYC? Send some "tulips" or "party animal". There are other options for virtual gifts available at FB — apps that require access to all your FB information and are even weaker than the gifts available in the gift shop. I'm glad so many people are happy to see the end of this harmless but fun for others practice.
Comment by Jackie — July 10, 2010 @ 4:24 am
When I was a kid having a picture of something was almost like having the thing itself. I grew out of it.
Comment by ehswan — July 10, 2010 @ 12:34 pm
Well the $100 million number was exactly correct and people really buy virtual gifts to send their friends and family members. Anyway, if facebook shutting down their gift center than there is a big opportunity for third party developers who can again make good gifting applications and make good amount of money.
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Comment by Aris — July 12, 2010 @ 3:45 am
People will miss these gifts on facebook for sure.
Comment by iPhone Developers — July 20, 2010 @ 3:18 am
I never gave one of the 'fake gifts', but I gave the charitble gifts for every birthday to my facebook friends. It was a wonderful way to acknowledge their birthday, and a few bucks went to fight aids, or to animal rescue, to Haiti –good stuff. That I will miss
Comment by terri — August 17, 2010 @ 9:17 am
Facebook is the one of the nice social networking site.
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Comment by Facebook Service — July 26, 2011 @ 1:34 am
on nous signale que Facebook vas être payant a la fin de l'été es ce vrai ? je pense pas aussi non y perdront bcq de dollars parce que tout le monde se retirera mais quand même on n'aimerai bien savoir si y pourrai être payant dans l'avenir
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Comment by hoyaux Corine — September 4, 2011 @ 1:40 pm
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Comment by jones123peter — September 17, 2011 @ 1:51 am
I am one of the stupid people who enjoyed giving virtual gifts from the FB gift shop. It was fun. Most of the images were a little weak, but hey. Giving — even chimpanzees do it — is fun. Your friend in Thailand has a birthday and you are in NYC? Send some "tulips" or "party animal". There are other options for virtual gifts available at FB — apps that require access to all your FB information and are even weaker than the gifts available in the gift shop. Well, i always wished i could gift some Motivational Posters to some of my friends.
Comment by @FunnyMotivation — September 24, 2011 @ 1:30 pm
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Comment by jones123peter — October 7, 2011 @ 1:49 am
As Facebook prepares to wind down the company’s virtual goods store front, the company is also pushing full-force into the Credits business
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whay people really buy that crap? Are you all brain dead? Save the ocean, give a man a job, feed the poor, or send me the real thing.. omg.. I cant believe its really a lucrative business.. They really need one Drudge. unfreakinbelievable!!
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Comment by stem cell treatment — December 27, 2011 @ 1:26 pm
Everything in the facebook gift shop was stupid anyway, they could better improve it then stop it.
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