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?