With the Facebook IPO looming, thoughts are returning to how social websites will actually generate money. Sure, Facebook is used globally, has an extraordinary number of users and is the top social network in a growing number of countries – but how is it likely to make revenue? Advertising revenue has always been the principle answer here, whether it’s Twitter, MySpace or any other social network. It worked for Google and it could work here too, couldn’t it?

I think it’s interesting that the revenue model for LinkedIn is quite different. There is advertising there, but the main focus is around recruiting people and getting recruited. Those people who want to find the best talent pay a little extra to access features that make it easier to do just that – find the best talent.

For Facebook however, people use the site for lots of different purposes so it’s harder to hold back such targeted functionality. Actually I think Facebook could learn from Apple and Blizzard – the games company behind World of Warcraft. Blizzard made $1 million in 1 hour by selling a flying horse in their game. The horse was actually no better than ones you could find in the game, and you already had to be able to ride one (so probably had something similar already) in order to buy. It was kind of pretty and just a few dollars so, despite offering no value or advantage in the game, millions of players bought it for real world dollars. Zynga and a number of other social game developers have taken this further with the possibility of playing games for free, but paying a little cash to be able to play the game faster or have that one extra thing that looks quite pretty. Virtual goods available at a low price are now a huge market.

What does this mean for Facebook? There’s a scam going around on Facebook at the moment promising to be able to turn your Facebook page pink rather than the usual blue. People are clicking on it because they want it – I have little doubt that if Facebook charged $0.10 to change the color of Facebook profiles we would see them make $1 million in less than an hour. Although, that’s not even the sweet spot here. If Facebook were able to control the payment method as Apple does in the App store, then they could take a little revenue from everyone using their platform, from all the virtual purchases (again, as Apple does on all those little purchases through apps and in the app store). Facebook is starting to do this already – this is what Facebook credits are about.

In my view it’s not in Facebook’s interest to offer Facebook-branded products (save except for caps or t-shirts possibly), but rather to corner social commerce, to create a platform where it’s easier and more convenient to purchase items in Facebook credits – all the while seamlessly sharing the purchases and implicitly recommending products to their friends.

What does this mean for insurers?

One is do the virtual goods need insurance? Personally I’m not sure about digital equine & aviation insurance in World of Warcraft or virtual farm insurance in Farmville, but Eve Online did have space ship insurance built in. Does anyone remember Second Life and the virtual businesses operating in it?

The second and more important one is that Facebook will become a platform for doing business. The infrastructure is already in place, the opportunity is too great and the current client base too large for this to be ignored. Today Facebook credits are just for games, tomorrow why wouldn’t young drivers top-up their pay-as-you-go car insurance on Facebook? All the while sharing the product and provider with their friends as they do it.

Facebook isn’t going to be the next virtual shop on the high street, it will be a new high street on which established brands and new brands build their shops