With nearly $7 billion in advertising revenue last year, and expectations for continued top line growth, Facebook (NASDAQ: FB ) has become a serious force in the world of digital marketing. The recent news that video ads have moved out of the beta phase and are now available across all its 1.23 billion monthly average users, or MAUs, should make 2014 another banner year for Facebook shareholders.
But as CEO Mark Zuckerberg and team have demonstrated time and again in the past year, Facebook knows that sitting back and enjoying its recent successes is a recipe for long-term disaster. The push for continued growth will certainly come from improving advertising results, thereby justifying higher costs to Facebook clients to market on its site, but Facebook doesn't plan to stop there. As demonstrated at the recent Game Developers Conference, Facebook recognizes it has a significant opportunity to improve revenues from an often overlooked source: games.
How big is big?
It wasn't long ago that Zynga (NASDAQ: ZNGA ) dominated both Facebook gamers' time and handily led the way in generating game-related revenue. A few years ago Zynga games, including the wildly popular CityVille and FarmVille, held the top four spots on Facebook and generated 12% of its revenues.
The driver of Facebook's gaming revenue has changed, but the results continue to quietly impress. Since the summer of last year, King, the maker of seemingly everyone's favorite game, Candy Crush, dethroned Zynga as Facebook's top gaming dog. In fact, King owns three of the top four spots in Facebook's gaming popularity contest, and that's translating to revenues for both.
Like many others, Facebook doesn't specifically break out the revenues it generates from games. However, investors can get a fairly good indication of how Facebook is faring in the gaming department by reviewing its "payments and other fees" results. And those results are impressive, as is the potential for continuing to grow Facebook's non-advertising revenue.
In Q4 of last year, Facebook reported other revenues of $241 million. For all of 2013, Facebook generated a total of $7.87 billion in revenue, of which $6.99 billion came from advertising. That means in 2013, Facebook generated nearly $900 million in payments and other fees, most of which came from gaming. It's clear there are substantial opportunities to grow non-ad revenues, and a Facebook engineer speaking at GDC outlined a plan to do just that.
Cross-platform, the Facebook way
With 945 million of its 1.23 billion MAUs going mobile, Zuckerberg's push to make Facebook readily accessible to users on the go is clearly working. But when it comes to gaming, Facebook said it's game-related revenue is "limited to our desktop users." But Facebook engineer Andy Brady's appeal to game developers at the GDC, providing they act on his plan, could help to drive revenue growth despite its PC limitations.
Brady's request to developers was a simple one: Make games cross-platform, which for Facebook means accessible to both mobile and PC users, and he offered some compelling data to support the value of cross-platform games to the developers themselves. According to Facebook, revenues were 3.3 times higher from cross-platform games than those developed for PCs only. Just as important, user engagement was 40% higher for games played on mobile devices and PCs. Those stats are tantalizing in a couple of ways.
If mobile gamers are able to simultaneously play games with PC users, chances are more will elect to pay up using their desktops than they are today. That in and of itself will boost Facebook game revenues beyond $1 billion a year and improving its revenue diversification, which is always a good thing. Also, higher user engagement -- be it games or Facebook's traditional News Feed -- should translate to improved advertising revenues. Marketers love engaged users, and they're willing to pay for them.
Final Foolish thoughts
It's not likely that game sales will ever supplant Facebook's advertising revenue, nor is it necessary to make a significant impact. But just as with your investment portfolio, diversification is a sound strategy, and that applies to Facebook's revenue streams, too. Facebook's revenue diversification will continue to come from gamers, be it King with its Candy Crush or Zynga's gaming suite. And based on recent growth, games are quickly becoming a key component of Facebook's future.
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