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MySpace may be the top social network when it comes to monetization, but with revenues apparently falling short of expectations, it's looking for new ways to make money.

At the Web 2.0 Summit last week, COO Amit Kapur announced that MySpace will be launching a virtual payment and gift system that enables it to earn real cash by selling virtual goods to its users.

As reported by VentureBeat, MySpace will extend this ability to the developers who produce applications that are distributed on MySpace, something that Facebook curiously hasn't done with its existing virtual gift system:

"MySpace developers will be able to use the new payment and virtual gift systems within applications that run on top of MySpace. Facebook has its own virtual gift system, but it hasn’t yet opened that up to developers."

While I still believe that social networks like MySpace and Facebook are not ideally equipped for the sale of virtual goods, I am fan of the virtual goods business model, as I explained in an interview at the beginning of the year:

"When it comes to the type of things that can drive revenue for consumer Internet startups, I'm actually a fan of virtual goods. Over $2 billion/year is now spent on these items and while it seems silly on the surface, once you recognize that, for better or worse, an increasing number of people find that their online identities are just as important as their offline identities, you'll realize that the same psychology that drives the purchase of $1,000 hand bags and $700 jeans can drive the virtual goods market pretty far."

The Inside Facebook blog suggests that Facebook might generate 9-figures of revenue in 2009 on the back of virtual gifts and while that certainly isn't enough to turn Facebook into the type of business it needs to become to pay its hefty (and growing) bills, taking advantage of the virtual goods market - and opening it up to their developers - is a no-brainer for both MySpace and Facebook.

Execution, however, is everything.

MySpace and Facebook must:

  • Focus on the user experience. The payment process must be quick and easy and must also be designed around the fact that the sale of virtual goods falls into the tricky "micropayments" niche.

    Facebook's move to a "credits" system is probably the best way to deal with this.

  • Figure out how to add value. As I noted in my post, "Are virtual goods the solution to the social network monetization conundrum?," "these social networks already allow users to 'customize' their profiles quite significantly at no cost."

    While there is money to be made by targeting the low-hanging fruit (those who will pay for virtual goods without much habituation), to fully maximize the opportunity, MySpace and Facebook need to figure out how their virtual goods "platforms" can add value above and beyond what users are already receiving at no cost.

  • Not go overboard. For certain services (like Stardoll), virtual goods that cost money are part and parcel of the user experience. MySpace and Facebook, on the other hand, have always been "free." If both try to push paid virtual goods too far into the "free" user experience, it could alienate some users.

    Facebook offers some of its virtual gifts for free to users. This is a good way to introduce the concept to users without asking them to hand over their cash.

I'm looking forward to seeing how MySpace and Facebook execute their virtual goods strategies. It will, in my opinion, reveal a lot about the breadth of their  monetization potential.

At the same time, I'm looking forward to seeing how well the virtual goods market as a whole withstands the economic downturn.

Entertainment-oriented products and services tend to do well in economic downturns as people look for temporary escapes from economic reality. In the Great Depression, sin was incredibly profitable.

Flash forward to the technology age and many expect video game sales to do extremely well in tough economic times.

Yet given the severity of this economic downturn, others are questioning whether video games are really "recession proof," especially on the heels of EA's layoffs.

So will virtual goods fall into the "entertainment" category that has historically been resistant to recessionary forces or will we learn that its recent success was fueled by unchecked and indulgent consumer spending?

Time will tell. Few things are as interesting in business as watching new business models face off against economic forces they haven’t yet seen.

Drama 2.0

Published 12 November, 2008 by Drama 2.0

237 more posts from this author

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