Facebook is making money on apps

By now, everyone seems to have become pretty comfortable with the idea that Facebook is a revenue-generating enterprise. Although originally there was a lot of skepticism about whether the social network would be able to produce much revenue, advertising deals with companies like Microsoft (which invested $240-million for 1.6 per cent of the company in 2007) have established that Facebook is definitely producing plenty — as much as $500-million in revenue this year.

What’s even more fascinating, however, is the amount of money that is being generated by the Facebook “ecosystem” — that is, the considerable number of applications, tools and games that are built using Facebook’s F8 platform. According to some estimates (and they are just estimates), app developers as a whole could bring in almost as much or possibly even more revenue this year than Facebook itself.

As Eric Eldon points out, coming up with an overall estimate of what Facebook app developers are making is difficult — if not impossible. Many developers don’t want to say publicly what they bring in, for competitive reasons. But some of the estimates that have appeared, particularly about the largest app developers, are accepted by most observers as being fairly accurate. Zynga, for example, which makes the Texas Hold ‘Em app, is believed to have a “run rate” that would produce revenue this year of about $100-million.

That’s a single developer (although it has multiple apps in its stable). About half of its revenue is estimated to come from its Facebook apps, and the other half from its MySpace businesses. Playfish is expected to make about $30-million this year. In all, Eldon estimates that the top handful of developers make about $150-million, followed by several other tiers of smaller developers who collectively make another $150-million or so. By the end of this year, several sources said that could hit $500-million.

Online gaming industry players told Advertising Age magazine the same thing, with many of them estimating developer revenue could hit $500-million or more. “It wouldn’t surprise me if apps on Facebook generate more revenue this year than Facebook,” LivingSocial CEO Tim O’Shaughnessy told the magazine. LivingSocial currently has the number one most popular Facebook app, “Pick Your Five.” Mark Pincus of Zynga recently wrote up some of his tips on how to make money through Facebook apps for the Facebook developers blog.

One interesting thing to note is that Zynga and several other developers make money in a variety of ways — not just through banner advertising, as many online media outlets do, but also through CPA (cost per action) payments, as well as the sale of virtual goods. In Zynga’s case, the company makes about a third of its revenue from the sale of poker chips for its Texas Hold ‘Em games. The virtual goods market is one that is already well established in other countries: in China, for example, gaming company Tencent made $1-billion in revenue from the sale of goods and services in its virtual world, including clothing for avatars.

Is there a lesson here for other companies such as Twitter, which is searching for revenue-generating opportunities for its fast-growing service? Clearly, there is. If you can build a social network that attracts the kind of devoted users that Facebook has, and in large enough numbers, you can generate substantial amounts of revenue both for yourself and your partners. And if Facebook is developing an integrated payment system (as it is rumoured to be), the revenue potential could be set to explode.

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