For some, payments promise to be Facebook's (Nasdaq: FB ) next big moneymaker. The segment still sits well behind the core advertising business, pitching in 16% of sales over the past four quarters, amounting to roughly $650 million. The social-networking kingpin has just announced some changes to its payments platform in an effort to help developers (and subsequently, itself) boost monetization.
Is there an in-app for that?
The first major addition is support for in-app subscriptions, charging users monthly fees for various services or virtual items. Subscriptions start at a buck and are currently being tested by developers such as KIXEYE and Zynga (Nasdaq: ZNGA ) .
KIXEYE's Backyard Monsters will start testing an offer of exclusive items for $9.95 per month. Source: Facebook.
Despite having fewer active users than Zynga, KIXEYE is already making a name for itself among game companies as having far better monetization among its players, who tend to be more willing to pay up. The company's games also are longer-lived than those from its peers because they're more immersive, which also plays into the higher monetization rates, so it may see some success with in-app subscriptions.
In-app subscriptions have helped boost mobile platforms, including Apple (Nasdaq: AAPL ) iOS and Google (Nasdaq: GOOG ) Android. Apple was the first to bring subscription services to its App Store in February 2011, primarily geared toward magazines and newspapers on the iPad. Google's similar follow-up was just last month, when the search giant launched in-app subscriptions in Google Play.
Facebook hopes to replicate that mobile success on its desktop-browser platform.
Farewell, Facebook Credits
The second and perhaps even more interesting move is that Facebook is ditching its Credits virtual currency that it launched in 2009. Facebook says most games and apps on its platform use their own virtual currencies, "reducing the need for a platformwide virtual currency." From a developer's perspective, that keeps users locked in because they've already converted to the app's currency, plus it just makes everything easier to manage.
Instead, Facebook is migrating to local currency pricing instead of Facebook Credits. It hopes to "simplify the purchase experience," removing a now-needless step of converting real dollars to pretend ones. Now instead of exchanging real money for Facebook Credits and then subsequently to app-specific virtual currency, users will simply use local currency to buy virtual currency directly.
This will also allow developers to charge market-specific prices for the same items, "optimizing for individual market factors."
To hedge or not to hedge
International sales continue to trend higher as a percentage of total sales, comprising 33%, 38%, and 44% in 2009, 2010, and 2011, respectively. In the first quarter of 2012, that figure was 49%, so only about half of Facebook's revenue is from domestic dollars.
Up until now, Facebook has never hedged its foreign currency exposure with derivatives, but it might in the future. As more and more sales are being generated abroad, I think Facebook should soon start hedging exchange rate fluctuations because it could get hit by a strengthening dollar. Although it did recognize $10 million in gains in the first quarter, that only partially compensates for the $29 million lost in 2011.
In the grand scheme of things, those fluctuations are fairly insignificant compared with its top-line revenue of $3.7 billion in 2011 and $1.06 billion in the first quarter, but exchange-rate fluctuations aren't something Facebook should be concerning itself with, so it might as well hedge eventually as that risk exposure rises along with international sales.
As far as developers are concerned, their U.S. dollar payouts are determined by the exchange rate on the transaction date.
What about Zynga?
Both of these changes are smart moves to help bolster Facebook's payments platform, but there's a potentially huge negative consequence in that Zynga's own platform that it just launched is built on Facebook Credits.
So as Facebook Credits fall by the wayside, this might even accelerate Zynga's timeline for eventual migration to Facebook independence. That's very much a threat to Facebook's burgeoning payments platform, which as of right now is mostly Zynga anyway.
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