Inside Facebook's virtual economy - TechCentral

Inside Facebook’s virtual economy

[By Alistair Fairweather]

“Where’s the business model?” echoes the cry of that most thick-skinned of beasts, the greater suited market analyst (Homo economicus). Part war cry, part mating call, we’ve grown accustomed to hearing this phrase every time a website with no obvious revenue stream starts to attract attention. For years, each mention of Facebook brought out a squawking chorus of them. But Homo economicus is now deathly silent.

The reason for their silence is summed up by yesterday’s announcement that you can now buy prepaid Facebook gift cards from Walmart and Best Buy stores (joining Target, which has sold the cards since September). Why on earth would someone spend real money on such a card? To buy one of the world’s fastest-growing class of products — virtual goods.

“Virtual goods” may sounds like some kind of scam, but to the people who buy them they are very real. Hundreds of millions of people use Facebook to play games like Farmville and Mafia Wars. Most of those games offer two ways to succeed: play for hours and earn your stripes through hard work, or buy your way to victory (or at least the chance of victory) with real money. Why spend two weeks toiling away on Farmville when you can buy that new barn now for just US$2,50?

Before you dismiss the idea as ludicrous, have a look at the hard numbers. The US market for virtual goods will reach $1,5bn this year and $2bn in 2011. The world market is harder to track, but most estimates put it above $5bn already. That’s an awful lot of cash for virtual cows and virtual machine guns.

But why are the prepaid cards so significant? Apart from the fact that they are putting the Facebook brand at point of sale in the world’s biggest retailer, they also open up a whole new market for Facebook — children.

Imagine you’re at the till with your 11-year-old — the cute one with the pigtails that loves playing Petville on the weekends. Are you really going to deny her the R60 voucher that will buy her that virtual puppy she has fallen madly in love with? Really? You’re a braver parent than most of us.

And it’s not just kids they’re appealing to. Anyone without a credit card, or the willingness to use one online, can now participate in the Facebook economy. And no, “economy” is not an overstatement. All that’s missing is the ability to transfer credits between users and you have, effectively, a global payment transfer system.

It sounds unbelievable, but tens (if not hundreds) of thousands of people already make a living exploiting transfer systems for virtual currencies around the planet. Big online games like World of Warcraft have entire shadow economies on their fringes — people in developing country sweatshops play for 18 hours a day to earn virtual gold which is then sold for real cash.

Facebook has over half a billion customers — only a tiny fraction are currently paying anything. If it could succeed in activating just 10% of those users, it could rake in billions per year. It is already profitable from advertising alone. A booming virtual goods market could catapult it into the big leagues alongside the likes of Google, Microsoft and Apple (all of whom are either experimenting with or already selling virtual goods).

And there’s nothing like prepaid cards to fuel a boom — at least if mobile phone networks are anything to go by. Plenty of Nigerians, Indonesians and Ecuadorians would be keen to buy virtual goods but are loathe to spend online. Prepaid cards may be the key to those untapped hordes of willing customers, particularly when they start at $10 a throw.

To be truly revolutionary, though, Facebook’s market would need to expand from virtual goods into real goods. Since it makes 30% on each transaction, Facebook would theoretically be game for anything that drives highers transaction volumes. But as giants like eBay and Amazon can attest, real goods are a lot more challenging that virtual ones.

For now, Facebook will be happy to vacuum up profits from its primary markets. The tanatalising possibility of a worldwide, prepaid, universal currency will remain just that. One thing is certain though — the company has found its business model.

Visit the Mail & Guardian Online, the smart news source

1 Comment

  1. This is a good article, makes one think “why did I not think of this”. I stand to be corrected though, but it seems that in less than 36 months, Facebook will be as big a Google. Most websites are already incorporation Facebook as the visitors means of logging in. Google on the other hand should not be taken for granted, with Google TV launched and Android flooding the mobile market, it will take some very creative strategies for Facebook to catch up.

    Sticking to the topic though, I think Virtual goods are the future. Been part of Second Life for sometime now and I must say, the only way to get “street cred” is to be on top and to do it fast. Spending hours is a drag, all you have to do is pay the price.

© 2009 – 2019 NewsCentral Media