We last looked at Facebook’s payments business in Q1 2013, where we observed a slight increase in payments revenue. Payments in the second and third quarters remained relatively flat across regions, reflecting seasonality. Facebook’s payments revenue in Q4 appears to be down 6% year-over-year; however, this is due to last year’s deferred revenue recognition. Despite the expected seasonal increase in Q4, payments growth actually saw approximately 27% growth over the year ago quarter.
Facebook’s payments business earned $241 million in the quarter, making up a modest 9.3% of its total $2.58 billion in revenue in the quarter. The lion’s share accrued to North America with $138 million, an approximately 6% increase over Q4 2012. Facebook’s largest year-over-year increase occurred in Europe, where revenue increased by 21%, from $56 million to $69 million. Payments revenue in Asia and rest of world regions remain relatively unchanged year-over-year.1
According to the company, after adjusting for a deferred revenue recognition, payments revenue from games grew 8% over the year ago quarter. Facebook noted that games revenue, which comprises the majority of its payments business, is limited to its desktop user base. And, that the desktop segment of its user base is declining. Facebook’s tacit admission that, despite games revenue growth, its payments business effectively monetizes an increasingly less important segment of its user base is telling.2
Many have speculated about Facebook’s participation in the push to mobile payments, which has ostensibly become an area of interest for many technology companies. Facebook’s platform seems increasingly well positioned to pivot to a more comprehensive payments strategy, with a mobile focus. However, the economic incentives of developer monetization suggests that Facebook’s rise to payments prominence is less than certain.
The challenge for a mobile payments business on the platform is exogenous. Generally, payments are best handled at the operating system level. Except for those goods (virtual or physical) that can be delivered through the app, Facebook is at a competitive disadvantage in developing a mobile payments system that would attract developers. However, Facebook’s opportunity exists at the nexus between the marginal cost of payments transaction fees and developers’ need for user growth.
Zuckerberg explained as much on the conference call in response to a question concerning Facebook’s interest in mobile payments. Facebook has seen an increase in “app install ads”, a type of advertising unit sold on the mobile platform. These ads allow developers to direct users to their apps on the operating system’s store. As Zuckerberg implied, these apps, assuming they used payments, would primarily make use of the operating system’s more robust payments system.
When we look at payments average revenue per user (ARPU), we can see that growth is exclusive to developed regions, where desktop usage persists despite outsized growth in mobile usage. In North America, payments ARPU increased by 6.2% over the year ago quarter, reflecting an increase from $0.65 to $0.69 per user. Europe saw a more substantial 25% increase in payments ARPU, from $0.20 to $0.25 per user. ARPU in Asia and rest of world remain unchanged.
While Facebook may continue to increase ARPU and accrue revenue from its developed regions, growth in its payments business may soon plateau as more of its user base transitions to mobile-first or mobile-only usage. Flatlined ARPU and revenue growth in Asia and rest of world regions, where mobile comprises the primary means of platform usage, would seem to strengthen this supposition. It is therefore unlikely that Facebook will see substantial long run growth in payments revenue under its current strategy.