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?
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Nick, if you're interested in diving deeper on this subject I'm happy to offer you a press pass to the upcoming Virtual Goods Summit in San Francisco in October – just let me know. More details available at http://www.vgsummit2008.com – we have a panel dedicated to social networks.
Comment by chudson — September 2, 2008 @ 7:22 pm
I adore FB and am on it daily, but I would NEVER pay even one dollar for a virtual gift. So so lame.
Comment by sandra — September 3, 2008 @ 1:39 am
I totally agree with Sandra on this one. Virtual gifts have got to be one of the dumbest things I have ever heard of. That said, you don't own your character in World of Warcraft and people buy songs from iTunes. But at least you can do something with them. Props to the businesses that finally found a way to get something for nothing. Now if only I could make money from recording everyday life and playing it on TV…wait, what? I guess somebody's done that too.
Comment by David — September 3, 2008 @ 5:14 am
VGs may seem a bit silly, but, honestly, I'd me more touched that someone sent me a VG than if they bit me as a vampire, or werewolf, or gangstar, or jedi, or sith or… Creating a monetary tie the 'real world' gives the VGs a legitimacy not found in other FB applications.
Comment by Erik — September 3, 2008 @ 9:01 am
[...] 3) does not share in virtual goods revenues – which is a significant global market and one that we covered as a major potential source of revenue for [...]
Pingback by All Facebook » “Facing There” - A Virtual World Threat to Facebook? — September 5, 2008 @ 4:27 pm
I agree, these little characters, which are not real – should not cost anything! What's up with that? You can't do anything with them except look at them! This is a big ripoff!! Only my opinion!! Do what you will.
hav a gd one!
Comment by T. Baker — February 20, 2010 @ 8:09 am