Facebook primarily makes money through online advertising, both
display and search advertising, in which it competes with Google (
GOOG
), Yahoo (
YHOO
), Microsoft (
MSFT
) and AOL (
AOL
). However, it has started to tap other business lines as well,
like distribution of virtual goods in games and applications.
Time Warner Offering Movies on Facebook Fan Page
Time Warner (
TWX
) recently announced that it will start offering movies for
purchase or rental through Warner Brothers Entertainment's Facebook
fan page, making it the first studio to do so. The users will make
the purchase with Facebook Credits, a virtual currency. This is no
doubt a good move by Time Warner as it gives the company a platform
to tap the increasing base of users looking to consume traditional
media entertainment online.
It benefits Facebook as well, since Facebook takes a cut of 30%
on any purchase made on its platform with Facebook Credits. The
move strengthens Facebook's games and applications platform as the
prospects for its virtual currency business improve. This business
currently accounts for roughly 17% of
our $45 billion estimate for Facebook's equity
value
.
Facebook Credits Outlook
Users make purchases of Facebook Credits with real money and use
the currency to buy virtual goods in a variety of games and
applications, including some of the more popular games from Zynga
like FarmVille and Mafia Wars. Facebook has even started
to sell these credits at Target stores to expand their consumer
penetration.
See our full analysis and $45 billion valuation
estimate for Facebook
By selling movies through Facebook, Time Warner has opened a new
revenue opportunity for both companies. Users will be able to make
use of their credits to buy or rent movies from Time Warner, with
Facebook taking a 30% cut. The move should increase the total user
spend on Facebook games and applications, which has already
established some growth momentum. We estimate that this spend will
continue to increase from around $0.8 per register user in 2010 to
$2.6 by the end of our forecast period. You can drag the trend line
in the modifiable chart above to see the affect of various
application spend scenarios on Facebook's equity value.