While businesses and investors strain themselves predicting how precisely money is going to be made from software and applications distributed on mobile platforms and through social networks, a pattern is starting to emerge: it isn’t the app or game itself that you sell, it’s what you sell inside of it.
A recent study published by app analysis company and developer Flurry showed that, at least on Apple Inc.‘s (NASDAQ: AAPL) iOS platforms, in-app content purchases are generating 9 times more revenue on mobile platforms than advertising. Meanwhile on social network Facebook, game makers like Zynga Game Network are making millions through micro transactions, charging users for virtual goods inside free to play games like FarmVille. The question as to how apps, mobile, and social games are going to earn for investors has been answered. Now the question is how do retailers make money when people stop buying software on discs?
Looking to capitalize on the success of micro transactions, Wal-Mart (NYSE: WMT) and Best Buy (NYSE: BBY) have begun selling Facebook Credit gift cards at their stores. The two big box retailers join Target (NYSE: TGT) who began selling Facebook Credit gift cards in September. Wal-Mart sells credits in $5, $10, and $25 packages while Best Buy distributes them in $10, $25, $50. The credits are run through a partnership with Facebook and virtual currency service PlaySpan, who provides a general Monetization as a Service (MaaS) platform for a variety of publishers and social networks. The Facebook Credits themselves only partially go to the game publisher accepting them; Facebook takes 30% of the revenue generated by each credit. 250 Facebook games and apps currently support the credit system, including Zygna’s FarmVille which already supports its own paid virtual currency.
Target has yet to comment on whether or not the Facebook Credit gift cards have been successful since going on sale last month. Gift cards for downloadable good have been successful in the past; game console holders Microsoft (NASDAQ: MSFT), Sony (NYSE: SNE), and Nintendo (PINK: NTDOY) have all had great success with gift cards for downloadable games and content purchased in-game, as has Apple with iTunes and App Store gift cards. It’s difficult to predict, though, whether Facebook-specific gift cards will perform well at retailers given how in-app and in-game purchases are largely impulse buys. The relatively low cost of in-game purchases on Facebook titles compared to other digital platforms also makes the larger denomination cards seem like unlikely purchases even during the holiday season.
More successful than these cards is likely to be eBay Inc.‘s (NASDAQ: EBAY) new micro transaction solution through subsidiary PayPal. The new service will allow users to use existing PayPal accounts to process in-app and in-game purchases, giving Paypal a take of 5% in addition to 5 cents for digital goods purchases under $12, lower fees than Facebook’s for use of Facebook credits. Facebook themselves are among PayPal’s partners for the new micro transaction service. Others include Pearson PLC‘s (NYSE: PSO) Financial Times, social network Tagged, and other Web-based business. Investors looking for ways to exploit the growing microtransaction market should look away from retail partnerships like those with Wal-Mart and Best Buy, and wait for a dip in eBay Inc. share price to buy in.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
