Facebook pops up in Target with gift cards for virtual goods

September 2, 2010: 12:29 PM ET

Facebook, which neither makes nor sells anything physical, takes a big step towards creating a unified online currency by selling gift cards in Target that work for Zynga, PopCap and other 3rd party games.

By Chadwick Matlin, contributor

Let's be honest. Come December 24th, there is always one person on your list -- a coworker, a mother-in-law -- for whom you always drummed up something else to do besides thinking about buying them a gift. So, desperate for something, anything, to save face, you rush to Target (TGT), but you don't even have enough time to roam the aisles. You go straight to the check-out line where, dangling in front of you, is your plastic salvation: the gift card.

Soon that gift card is going to come with Facebook's logo on it. Target is going to start selling gift cards pre-loaded with Facebook credits. Once somebody redeems the card, they can use the credits to buy goods on more than 150 of Facebook's social games, including the most popular ones from Zynga and PopCap.

It's the first time Facebook has entered the world of retail. And it's a way for Facebook to continue its most sure-fire monetization strategy. This gift card thing is going to work, and it's going to help transform how we think about Facebook.

To understand why, let's examine how the cards operate: You buy the card at Target, wrap it up real quick, and put it under the tree. Now it's December 25; Little Johnny gets his gift card and you get your hug. Then he runs over to the computer, logs into Facebook, and redeems his credits. Soon he's on FarmVille buying a luxury item; just as quickly all of his friends are jealous of his golden calf. And like that, Johnny has participated in the $1.6 billion economy of virtual goods.

Now, let's say Johnny bought that calf for the equivalent of $1. (One Facebook credit is worth 10 cents, so the cow would have cost 10 credits.) 30 percent of that money goes to Facebook, and 70 percent goes to Zynga, maker of Farmville and the golden calf. (In this example, I'm glossing over Target's cut of the proceeds. Facebook declined to disclose what that was.) So for every $50 gift card you buy, you're essentially donating $15 to Mark Zuckerberg and his investors.

There is, of course, a small chance Little Johnny won't spend the full $50. The TowerGroup, a firm that keeps track of these things, found 6.8 percent of gift card money wasn't redeemed last year, and expects that number to be significantly lower this year because of the economy. But because of the way Facebook cards work, the unclaimed money won't go toward Facebook's profit margin. If Johnny only uses, say $30 of the $50, the government can seize the extra $20 via a common law known as escheatment.

All of this will sound similar to the way Apple (AAPL) does its business. It has more or less the same arrangement with its developers: a 30-70 split that, according to estimates, has developed into 1 percent of Apple's profit. It's no coincidence you'll see the Facebook gift cards right next to the iTunes ones in the checkout aisle.

Apple, of course, is selling other, actual products. Facebook is not. Virtual goods are, and are poised to be, one of Facebook's major revenue streams. Outside of advertising, there simply isn't that much else for Facebook to sell.

Which is why it's so intriguing that Facebook is bringing a key monetization strategy into actual retail stores. Right now we think of Facebook as a social hub—the place we go to remember a blurry night out or spy on our child's new girlfriend. But with Credits and its network of social games, Facebook has been quietly turning itself into a commercial center—an arcade that's more social than the boarded up place downtown. The company has been signing contracts with developers as a way to unify the games under one Facebook currency. It's in the interest of the developers to sign on because Facebook Credits legitimizes the purchase of virtual goods for users. Sort of like what happens when you put your gift cards in checkout aisles nationwide.

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Paul Smalera
Paul Smalera

Paul Smalera is a senior editor for Fortune.com, guiding the website's coverage of tech, finance, investing and the economy. He has written about a wide variety of topics -- from the inner workings of the Google search engine, to the biodiversity protecting Svalbard Global Seed Vault, to the economics behind online dating websites and the impact of the Fed's policies on the national and global economy. A true generalist, Smalera believes every story is a business story if you follow the money.

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