I was fortunate enough to moderate a panel at CommunityNext this weekend on the topic of Monetizing Applications on Facebook; my panelists were Keith Rabois, VP of Business Development at Slide (portfolio company), Scott Rafer of Lookery, and Murtaza Ali of Peanut Labs. Tens of thousands of developers have jumped on the Facebook Application bandwagon, but precious little attention has been paid to how the system will generate any money. Net new money, not recycled VC money.
Slide has enormous reach and has focused on advertising based revenue models so far, mostly selling on a CPM basis. Most social network advertising sells for very low CPMs (10-20cents), but some Facebook applications have been buying expensive impressions or installs at prices an order of magnitude higher than that. Perhaps this makes sense for apps such as travel where there is an effective monetization engine on the back end, but we concurred that buying users doesn't make economic sense if the only way to monetize them is advertising - buy/sell spreads on users are unlikely to persist, and social networking is likely to remain a CPM wasteland, with one caveat: apps and widgets that are embedded in profile pages get fare more user attention than banners or AdSense links on the sidelines, and could well fetch much higher eCPMs.
An interesting twist on advertising is to use Facebook data to target the same users on other sites with better conversion rates. Apps can share anonymized user data with a company like Lookery and, presumably, share in the upside when Lookery monetizes the data elsewhere. Rumor has it that Facebook is exploring such a product themselves.
Peanut Labs and Social Media enable an alternate monetization strategy - in apps which have an internal points system, users earn points by taking market research surveys served up by Peanut Labs or Social Media, which share the hard dollars paid by their customers with the app developer. Murtaza claimed that they earned about $250K in September 2007 on Facebook apps alone, of which half was shared with the app developers. The user was left with, well, peanuts :-) And a fond hope that the peanuts given them by Peanut Labs are actually worth something.
Which brings us to virtual currency and virtual items. Facebook has had virtual gifts for a while, but the multitude of gifting applications, such as Free Gifts, have made the bottom fall out of the market. It's hard to charge money for virtual items in an open system, price being directly proportional to scarcity. But perhaps Slide or RockYou, with their huge reach across social networks and ecosystem of apps and widgets, will be able to create a thriving virtual item economy?