The Future of Social Media Monetization, Part II

Editor’s Note: This post was written by Ro Choy, Chief Revenue Officer of RockYou. In this series, Choy will address the future of social media monetization, focusing on the potential of platforms such as Facebook and the ability for third parties such as RockYou to create their own platforms and monetize a multi-faceted approach to social media marketing. (See part 1 here)

The Future of Social Media Monetization

While performance and brand marketing have been long-standing online business models, virtual currency has recently captured the most interest of both developers and users alike. But of the three revenue streams, virtual currency may be the hardest to successfully manage.

Virtual Currency

Virtual currency is the most public example of successful social media monetization, with social game developers selling virtual items directly to consumers. Companies like Zynga, Playdom, Playfish, The Broth, Serious Gaming and hundreds of others are completely re-writing the playbook for online gaming success. Freemium is the standard business model, whereby users play freely and only pay to upgrade their experience through virtual items focused on improving game performance or self-expression. Now many of the most recognized names in console and mobile gaming are entering the space as well.

Revenues across social games today are estimated well north of $500M to $800M*** (excluding Asia), making it the largest segment of social media monetization. Success here is “hit” driven and requires managing the balance between user engagement, monetization and viral/social growth. As a result, while there are many attempts at making a “hit” social game, without a lot of investment in engineering and design, getting to meaningful revenue is difficult. In order to generate $100K to $1M a month, a game needs to reach 100K-2M daily active users, which requires a true understanding of game mechanics, social/viral tuning and marketing arbitrage. This has resulted in a high concentration of virtual currency revenue among the top social game developers due to the financial and headcount investment required to succeed.

Complexity aside, the tools available to analyze and monetize the virtual currency space are well developed. There are three main drivers for virtual currency monetization: offers and surveys, mobile payments and direct payments via credit card or paypal. The players in this space include Offerpal, SuperRewards, Zong, Boku, Peanut Labs and many others. By facilitating non-credit card payments via offers and mobile, a much younger generation of users are now able to actively play social games and still upgrade their experience through non-traditional payments. This has been one of the major drivers of the success of the industry.

Another driver of success has been the continued growth of online casual gaming, which has now exploded across social media sites. It’s no surprise that many of the top social games have been in specific genres (farming, restaurants, community chat) that focus on nurturing and growing a product or business through social interaction with friends versus the typical console game which focuses on battling/competing with other gamers.

The entire social gaming industry is just a few years old and has already become a huge component of social media monetization. But is this truly the most attractive business segment of social media? Where should developers and publishers in social media focus their efforts and time? I break down the numbers and make a judgment call below.

Today, without question, the most heavily invested and fastest growing segment of social media monetization is virtual currency. The massive success of Zynga, Playfish, Playdom and others have charted a path for developers of social games and gifting. This market is expected to grow from $1B in the U.S. in 2010 to $1.5B in 2011 to $2.4B by 2013. Meanwhile, the social media ad market in the U.S. is expected to reach $1.3B in 2010 but only grow to $1.4B in 2011. That’s a difference of 50% year-over-year (YoY) growth for virtual currency versus 8% YoY for expected social media advertising.