There was a little gem that we almost missed yesterday in Facebook’s amended IPO filing. But it looks like Facebook acknowledged that it may have to move away from a 30 percent revenue share with app developers if it expands Credits, its virtual currency, and payments beyond gaming.
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This is what it said in the filing yesterday:
We receive a fee of up to 30% when users make such purchases from our Platform developers using our Payments infrastructure. In the future, if we extend Payments outside of games, the percentage fee we receive from developers may vary.
That line has not appeared in any of the company’s four previous IPO amendments and filings. Plus, I’ve covered the Facebook platform for the last three years and the company has always been vocally steadfast about the 30 percent revenue share with me. It also says right here in this Facebook policy agreement that for every 10-cent Credit they redeem, there is a service fee of 3 cents or 30 percent.
If Facebook cuts its 30 percent revenue share for music or media apps, the choice will set it apart from other platforms. Right now, Facebook, Apple, Amazon and Google are all warring with each other to become predominant vendors of digital content on the web and on mobile.
So here’s a reminder of what everyone is doing: Apple does a flat 30 percent revenue share for iOS. Google does a 30 percent revenue share for Android, but a 5 percent revenue share for games on Google+. Amazon has an unusual arrangement where it controls app pricing and it either keeps 30 percent of what it sells the app for or 80 percent of what the developer intended to sell it for (whichever is lower).
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The important point is that all of these schemes are indifferent to whether the apps are games, fart apps, encyclopedias or whatever. If Facebook introduces variable rates, then it’s changing pricing based on the type of app. That’s new.
Compare that to Apple, which has not deviated from its 30 percent share for any partner, even ones that might have lower natural profit margins like newspapers or music apps that have to pay expensive royalties. Apple’s choice has famously rankled brands like The Financial Times, which circumvented the iTunes app store and Apple’s revenue share by building an HTML5-based web app for tablet readers.
In fact, Apple doesn’t have much wiggle room right now. The across-the-board 30 percent revenue share is what is protecting Apple in the face of a Justice Department antitrust case around price setting for e-books. In a Wall Street Journal column worth reading from two days ago, Apple senior executive Eddy Cue told L. Gordon Crovitz, a former publisher of the Journal, “I don’t think you understand. We can’t treat newspapers or magazines any differently than we treat FarmVille.”
Apparently, Facebook might be thinking that newspapers and magazines are worth treating differently compared to Zynga games. Facebook board members like Netflix CEO Reed Hastings and Washington Post CEO Don Graham will probably be happy about this, especially if they one day intend to sell subscriptions through the social network.
Lowering revenue share will help Facebook get more content partners on board. If Facebook has a more diverse offering of paid digital content outside of games, that will help the company convert more of its users into paying for things. Right now, only 15 million users paid for virtual goods with Credits out of the 845 million monthly active users the company had in 2011, according to Facebook’s filing.
There have been a few early experiments with using Credits outside of games. Some musicians like Widespread Panic and David Gray have let fans pay with Credits for video streams of concerts while David Guetta has offered tracks for Credits. But it’s still early days.
Needless to say, this is a total can of worms. What is a “fair” revenue share for the music industry? What is a “fair” revenue share for selling digital subscriptions to The Washington Post? What if you have a game that sells music tracks inside of it?
If Facebook does move away from an across-the-board pricing, the precedent it sets for digital content sales will have ripple effects across the entire web.
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