After Facebook updated their S-1 filing recently, it came out that Zuckerberg et al. are on track to earn $1 billion in revenue from payments alone in 2012. Their payments revenue is growing faster than their advertising revenue, and this has rekindled excited speculation about Facebook Credits, the mandated medium of exchange on Facebook: Is it the currency of the future? When we shop online will we do so only using our Facebook Credits? Will nothing ever be the same again?

Johannes Fuchs - GOIABA / Flickr source

Updated at end with Zynga Q1 2012 earnings.

Back in January, David Evans, on, wrote: “It’s a wallet, it’s a currency, and it leaps tall buildings in a single bound, it’s: Facebook Credits. And, yes, unless you have green kryptonite, if you’re in the payments business you need to worry.” He goes on to list Credits’ apparent advantages over other methods of payments: it’s a wallet and a currency, it can collect data, and it can potentially marginalize traditional payments processors.

This is an optimistic outlook on the “currency,” which, it warrants mentioning, Facebook keeps 30 percent of in all transactions. You effectively enter a virtual Schengen of spending power when you put your dollars on Facebook in Credit form, because merchants keep only 70 percent of their sales. However, all these sales are in virtual goods, for the time being. Virtual goods, because they have no marginal cost and no intrinsic value, probably don’t have their price inflated due to this arrangement. But you really never know. Maybe Zynga prices this in, when putting a pixelated pony up for sale on FarmVille, maybe they don’t.

James Kwak, blogging at Baseline Scenario, pointed out that Credits will likely get crushed by the dollar, should the latter ever be an acceptable medium of exchange on Facebook. But, he writes, that wouldn’t work so well for Facebook. To wit:

So why use Credits instead of Dollars? I can think of three reasons: (1) people are more likely to buy things with Credits than with Dollars…because Credits feel more fun, and Dollars remind them of their rent payments; (2) if Facebook tried to take a 30 percent cut out of Dollar payments, no one would go along; and (3) Credits sound much more exciting if you’re trying to build media hype and drive up the value of your company…Note that all of these are actually bad.

This is important to spell out: every single advantage that Evans points out could be accomplished using dollars, in every difference Credits and dollars have, Credits look worse. The Silicon Valley impulses to a) reinvent the wheel, b) aggressively monetize services that had been free and c) make consumers and developers captive to their distribution system (think iTunes) have all coalesced with Facebook Credits.

Kwak’s piece was written nearly a year and a half ago, of course, long before Facebook started its attempt to go public — a process that has given any interested party a good look into how the company actually makes money. One thing that stood out in Facebook’s S-1, especially as it relates to Credits, is how dependent they are on Zynga, the maker of silly web-based time-wasters like FarmVille, to make money. In 2011, fully 19% of Facebook’s revenue came from payments to Zynga. More specifically, 12 percent of total revenue came from Facebook Credits through Zynga (the other 7 percent came from advertising on Zynga). According to the filing, Facebook had $3.7 billion in revenue in 2011 and $557 million came from payments — about 15 percent — meaning that just 3% of their payments revenue came from sources other than Zynga.

Not only that, but only a small percentage of Facebook users even pay for anything, ever, on the site. From the SEC filing:

Apps built by developers of social games, particularly Zynga, are currently responsible for substantially all of our revenue derived from Payments. In addition, a relatively small percentage of our users have transacted with Facebook Payments. For example, in 2011, approximately 15 million users purchased virtual goods using Facebook Payments.

Facebook has 900 million users, so just 1.6% ever spend any money using Credits — a tiny minority. Not coincidentally, Zynga, source of all of Facebook’s payments revenue, relies on a small minority of users: Zynga calls them “whales.” They’re the lonely, strange people who actually spend lots of money on virtual goods. Like a casino offers perks to its big spenders, so too does Zynga, reports Bloomberg, in a fascinating story on “whale management.” Zynga has a Platinum club according to Bloomberg, which allows whales to “wire sums of $500 or more directly from their bank accounts to Zynga.” At least the casinos give you a lobster tail and an opportunity to win money.

Fewer than 1 in 10 Zynga players even buy virtual goods, reports Bloomberg. More astonishingly, “less than 1 percent are responsible for between a quarter and a half of the company’s revenue.” The whales! According to a Bloomberg source, some poor soul spent $75,000 on one game over the course of one year. $75,000! People who are either addicted to these games, or perhaps insane, account for as much as half of Zynga’s revenue, which in turn accounts for nearly all of Facebook’s payments revenue. This is not a system built to last.

So when you hear the news that Facebook’s “currency” will be important in the future simply because its usage has grown, take it with a grain of salt. It’s only gaining in popularity because Zynga has fooled compulsive types into parting ways with astonishing sums of money for “goods” that cost nothing to make, and because Facebook takes an extortionate percentage off the top. As it stands now, Facebook Credits do nothing but destroy wealth for everyone except Zynga and Facebook. That’s hardly a currency to be excited about.

But the whales haven’t stopped spending. And maybe they won’t. Zynga’s Q1 2012 earnings came out as the market closed on Thursday, and they’ve done quite well. From Bloomberg:

Sales rose 32 percent to $321 million, the San Francisco- based company said today in a statement. That topped the average $315.9 million analyst estimate, according to data compiled by Bloomberg… Bookings, or the total value of virtual goods sold, were $329.2 million, up 15 percent from the first quarter of 2011. Zynga’s reported revenue includes virtual items sold prior to the quarter and amortized over their expected life. The company raised its full-year 2012 bookings forecast to $1.43 billion to $1.5 billion, up from a February projection of $1.35 billion to $1.45 billion.

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