Social networking site seeking major new revenue source
Tis the season of gift cards, and Facebook is in the midst of rolling out its own piece of plastic for the first time as it tries to turn its online Credits currency into a major source of revenue for the social networking site.
Facebook is the latest entrant into the growing digital currency card biz, which Apple has dominated since introducing an exclusive iTunes card through Target in 2002.
As opposed to more traditional gift cards from retailers, digital currency cards are used to purchase downloadable songs, movies, TV shows, cell phone apps and virtual goods for games, for example.
The sale of virtual goods is expected to rack up $1.6 billion this year, with social games alone earning $835 million, according to research firm Inside Network. Overseas, most notably in South Korea and China, virtual goods collected nearly $4 billion in coin in 2009.
“It’s a much bigger business in Asia, where it started, and is now migrating West,” said Rob Goldberg, chief exec of GMG Entertainment, which is handling Facebook’s gift card business. The Los Angeles-based venture helped establish the digital currency card market in the U.S. since the company was formed in 2002.
Facebook’s move into the gift card arena should have Hollywood taking notice, considering its cards are expected to boost the amount of money spent to play the site’s more than 150 games — some of which are created by Playdom and other publishers now owned by studios like Disney.
As an increasing number of consumers turn to the Internet for their entertainment, gift cards are seen as ways to get them used to buying virtual goods, just as iTunes cards helped Apple increase digital music sales.
“The digital world and the physical worlds live separate lives,” Goldberg said. “The gift card is that great connection point. It creates an opportunity to unlock digital dollars.”
GMG has helped generate hundreds of millions of dollars in revenue for its roster of about 50 clients. Those clients are mostly gamemakers like THQ or the creators of online virtual worlds like Zwinky, WeeWorld, Stardoll, Meez, GamersFirst and RedBana that have turned to gift cards sold in stores like Best Buy, Toys R Us and GameStop as a way to put more coin in their coffers. They start by hooking consumers on games that are free to play but then require paid subscriptions or the sale of virtual items to keep going.
“We have partners that no one has ever heard of outside of hardcore fans that sell millions of dollars a year,” Goldberg said.
GMG has also arranged for NBC to sell a digital currency card to members of the network’s subscription-based weight-loss website for “The Biggest Loser.”
Over the years GMG had worked informally with Facebook in developing a gift card, “but they wanted to figure out the currency business first.” Facebook has been trying to launch its Credits currency for more than a year but has recently gained more traction from gamemakers like “FarmVille” and “Mafia Wars” creator Zynga, which has been using Credits as its official payment system since September.
“This is a very important ecosystem for Facebook,” Goldberg said. It’s a means of capturing long-sought after dollars to increase profits beyond online advertising.
While Credits is currently being used for games, Facebook eventually plans to expand its use to other forms of purchases.
Although Facebook doesn’t broker exclusive partnerships, the company allowed Target to introduce the Facebook card first, with multiple placements throughout its stores, given its previous success launching the iTunes card.
Walmart will also get first dibs on testing a $5 Facebook card for its customers; the cards are typically purchased by parents as gifts or allowances for their kids. Target’s cards come in $15, $25 and $50 denominations. Best Buy, Radio Shack and grocery stores are carrying the cards, while they’re also being introduced at stores overseas.
“There’s actually a lot of strategy that goes into this business,” Goldberg said, adding that flooding all retailers with cards doesn’t necessarily work for most companies and actually dilutes the potential for revenue. “You have to focus on the key ones.”
Analysts say stores like Target, Best Buy and Walmart can generate 80% of the revenue for most gift cards.
GMG is now considering expanding its biz into creating cards for record labels that want to create digital-only records or ones for charities.
“We know that in 10 years’ time, (gift cards) will be the only software product on the shelves at physical retailers because everything will be digital,” Goldberg said. “The business will continue to evolve as consumers spend more of their time and lives online, and these cards will help people engage in commerce and consumption.”