Credit Facebook for New Time Warner Content Offering

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Symbols: AOL , GOOG , MSFT , TWX , YHOO

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