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Why Facebook won’t charge 30% for payments and leave billions of dollars on the table

By on January 26, 2010
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“Pay with Facebook” is coming.

It’s already live on Happy Aquarium from Crowdstar. Later this week, it’s coming to Farmville, the most popular application on Facebook with over 70 million monthly players.

It’s big news. And most commentators and industry insiders are expecting Facebook to charge 30% commission to companies using “Pay with Facebook”.

And I think they’re wrong. Facebook would be leaving billions of pounds on the table. I don’t believe that Facebook would be so short-sighted when there is a far bigger prize at stake.

I have no doubt that Facebook could charge 30%. Hell, it could probably charge 50% and few people would complain. Developers would get a trusted payment system on a distribution platform that is second to none. I’d expect the lower payment friction to lead to significant growth in virtual goods sales, more than enough to offset Facebook’s costs.

Anyone who thinks that Facebook is going to do this is small-minded. Think bigger, guys!

Do you really think that Facebook’s future is predicated on taking a 30% slice of a limited pool of virtual goods revenues. Can you defend a $15 billion valuation on the basis of 30% of a market estimated to be $1.6 billion in 2010 (that’s the US only, but still).

I don’t think so.

But how about if they were shooting to become the de facto payment system on the web. A business that would be simpler than Paypal and more effective than Western Union. A business that would compete with Visa and Mastercard.

Now that’s worth doing.

So I think that Facebook will price its service cheaply. I think it will be under 5% and probably 4%. And we will very quickly see Facebook trying to tie up retailers with “Facebook” money” so it is as widely dispersed as Facebook Connect, perhaps even more so. Companies like Amazon, Walmart and then a long tail of smaller partners.

That would make it more valuable than Paypal (acquired by ebay for $1.5 billion in 2002). It could even make it more valuable than VISA, a listed company with a market capitalisation of $69 billion.

That would make it bigger than Google.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • seriousgamer

    Hi All,
    these are grave news, if Facebook will carry on it's somewhat puzzling 30% of payment plans the group which will suffer the most is Us the players.
    somehow i just cant picture Zynga just forgoing this lucrative 25% of they're business to facebook. they'll do the only thing they can do; roll the the loss on the the costumer, they will raise prices.
    when you look at the price per year of playing any social casual games you see they are already quite pricey and i don't know if my budget will allow me to to keep playing all they games I play now. I might have to give up on some of them 🙁
    http://seriusgaming.blogspot.com/

  • Nicholas,

    I just posted a blog post of my own on this very topic:

    http://www.charleshudson.net/what-can-facebook-

    I think Facebook will stick with something around 30% for on-platform payments; that will mostly impact games developers. I'm not sure why most mainstream merchants will care or be super aggressive in deploying FB payments – what's the unmet need?

  • Thanks for commenting, Daniel (and thanks for reading, I like your posts).

    It's a shame if Facebook have gone down this route 🙁

    In an attempt to regain my dignity, I might argue this: Facebook is a classic web business, with a history of launch, iterate, analyse, repeat. Launching making 30% on Facebook, then build the learnings into an off-Facebook payment system at a much lower price.

    After all, it's easy to come down from 30% than up from 5%.

    Plausible? Or just trying to rescue my reputation for prescience?

  • I think it's already announced and operating at 30%.

    Whilst I agree that there's a big play to made as a merchant service for the web, I think FB may have dug deep into the paypal competitor plan a year or so ago and found it to be fraught with non-core-business issues (fraud, etc.) At the same they were looking at hundreds of millions in super-high margin virtual goods going past their noses.

    I think they went for the big slice of the virtual pie vs. the small and much harder to get slice of the real pie.