• by Sean Gelles , May 19, 2010

Facebook, in its continuing quest for a solid business model, launched a virtual currency program called "Facebook Credits" last year and is currently in the process of expanding it through a partnership with PayPal. With the Facebook Credits, which can now be purchased without a credit card via PayPal, users can buy virtual goods on the site. Virtual goods now fund the majority of the top applications on Facebook which are almost all social games. The largest game developers on Facebook (e.g. Crowdstar, Playdom, Playfish, RockYou, 6waves and Zynga) already accept Facebook Credits.

However, as a Zynga exec told the New York Times, less than 3 percent of users in the U.S. pay cash for virtual goods, which explains why almost all social game developers allow users to earn credits through in-game achievements or by participating in advertiser-sponsored offers and surveys. Oddly, the expansion of the company's virtual currency play comes on the heels of its announcement in September that it had turned a profit for the first time in the third quarter of last year thanks to its Facebook Ads program, which had been struggling since its launch in 2007 (note that the company did not release a similar announcement at the end of the fourth quarter). The company's advertising program allows only site-served ads in a strictly limited range of formats. Facebook believes that, by limiting the formats, it can maintain the clutter-free experience users have come to expect while still generating ad revenue. In addition the company thinks that, by leveraging user profile data, it can make the ads more relevant to users.

Targeting ads by relevancy can make ads more effective and even enhance the user experience -- but not if the ads are boring due to limitations on creativity. Relevant does not necessarily equal engaging. People share content because it's entertaining. Conversely, people will often fail to notice dull content, even if it's 'relevant.' Moreover, as a recent report in the New York Times commented, Facebook's algorithm for targeting ads is far from perfect. Thus, in many cases, the ads on Facebook end up being both uninteresting and irrelevant.

The main point is that Facebook is more than just a marketplace for virtual goods or a space for targeted ads. Both of these monetization strategies fall short of capitalizing on the core value that Facebook has successfully been providing since 2004 - facilitating dynamic social interactions online. Facebook enables a myriad of activities on the site, such as updating one's status message, sharing content with friends, playing social games, etc. Facebook should look carefully at these interactions and experiment with different ways to actively monetize them.

I'm not suggesting that Facebook should discontinue its current strategies. Instead, the strategies should be modified in a way that configures them in a broader business model that seeks to monetize as much activity on Facebook as possible, without disrupting the user experience. First, the advertising program should be refigured to enable third-party ad serving. Anyone flinching at this suggestion should remember that the three most successful online media companies in the U.S. (Google, Microsoft and Yahoo!) all allow third-party advertising. If Facebook is going to have advertising on the site then it makes sense to allow for engaging ads that encourage interaction from the users. Second, when users login to the site, Facebook should offer consumers the option of having their sessions on the site be sponsored by an advertiser of their choice. The sponsored sessions will provide advertisers with a platform for serving larger ad formats (e.g. home-page-takeovers, site screens, etc.). In return, users would get sponsored Facebook Credits from the advertiser. Third, users should be able to easily share Facebook ads with their friends if they so desire and advertised brands should be permitted to sponsor Facebook Credits of users who do so. Already, users on Facebook commonly share video ads from third-party video sites like YouTube. They share these ads because they're entertaining and they think their friends will like them. In essence this activity represents successful advertising that combines engaging video content with social interaction powered by Facebook. But so far, Facebook isn't earning a red cent from it.