As Payments Boom for Facebook, Competition Could Cut into Revenues

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Facebook Inc.’s payment operation is booming, according to the registration statement the giant social network filed on Wednesday ahead of a planned initial public offering. But with Facebook taking a 30% cut on its virtual-currency transactions, competition could take some of the oomph out that boom, according to an industry analyst.

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Menlo Park, Calif.-based Facebook listed $557 million in revenues from payments and a small amount of other fees in 2011 versus $106 million in 2010 and only $13 million in 2009. Facebook, which has 845 million monthly active users worldwide, reported total revenues of $3.71 billion. Some 85%, or $3.15 billion, of those revenues came from advertising.

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Network members generate payment revenues when they purchase Facebook Credits, Facebook’s virtual currency, to in turn buy online games or add digital items to their games and other programs available through Facebook from third-party software developers. Members can use credit or debit cards, PayPal, gift cards or other methods to buy Facebook Credits, which cost 10 cents per credit.

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The filing says Facebook Payments began generating significant revenue in 2010’s fourth quarter and became mandatory for third-party game developers using Facebook’s platform on July 1, 2011. “I think for now they have a good position because of the fact that they mandated acceptance of Facebook Credits across their platform,” says Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin Strategy & Research.

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By far the biggest of Facebook’s third-party developers is Zynga Inc., publisher of some hugely popular games such as FarmVille and CityVille. Facebook says Zynga accounts for 12% of its total revenue through payments and advertising.

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Facebook’s filing acknowledges the company’s reliance on San Francisco-based Zynga, which has its own virtual currency, called zCoins, and itself completed an IPO in December. “Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from payments,” it says. In an apparent effort to stay in Zynga’s good graces, Facebook backed off on its desire to have games within Facebook accept only Facebook Credits, according to Robertson.

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Meanwhile, various forces could lower the steep upward trajectory of Facebook’s payments revenues. Developers might start pushing for a reduction in Facebook’s 30% cut of Facebook Credits transactions. And outside payments companies are buying digital firms that could provide to developers at lower cost the micropayment services valued by social-network game players, Robertson notes.

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Examples include Visa Inc., which owns PlaySpan, and American Express Co., which last year rolled out its Serve platform for digital payments and in September bought a virtual-currency and in-game payments provider, Sometrics, for $30 million. “Ultimately there is going to be pressure for [Facebook] to bring that fee down, and I think it’s from the merchant side and the competitive side,” Robertson says.

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Facebook also said its payments operation could face regulatory scrutiny in the U.S. and abroad. “To increase flexibility in how our use of [Facebook] Payments may evolve and to mitigate regulatory uncertainty, we have applied for certain money-transmitter licenses and expect to apply for additional money-transmitter licenses in the United States, which will generally require us to demonstrate compliance with many domestic laws in these areas,” the filing says.