UPDATE 1-PayPal, Facebook team up on virtual goods payment

* PayPal added on Facebook for virtual goods

* Web payments system can also be used by advertisers

SAN FRANCISCO, Feb 18 (Reuters) - PayPal and Facebook will team up to offer an online payments system for virtual goods on the popular social networking site, hoping to get in on a burgeoning market.

In the nonexclusive deal, advertisers will also be able to use PayPal, a unit of eBay Inc EBAY.O, to purchase ads on Facebook, which derives the bulk of its revenue from such advertising.

Facebook allows users to send virtual gift items -- such as cupcakes, airplanes and Teddy-bears that don’t exist in the real world -- to friends using a virtual currency system, which is essentially fake money. Users currently pay for these items using a credit card but now will be able to use PayPal as well.

Privately held Facebook does not disclose how much revenue it draws from virtual goods, a fast-growing digital add-on that has emerged as much more than just a fad.

BGC Partners analyst Colin Gillis, who called the deal a “nice win” for PayPal, estimates that digital goods on Facebook could be as much as a $100 million business.

“That’s big business. You know what the margin is on that virtual cupcake?” said Gillis.

PayPal’s vice president of platform and emerging technology, Osama Bedier, said the global market for digital goods is worth between $3 billion to $6 billion and growing at least 50 percent annually.

“We’re going to invest behind this (virtual goods) in a pretty big way in 2010. It’s small today but it’s growing extremely fast and we think it will matter in the next two or three years in a big way,” Bedier said.

But Gillis said the partnership appeared odd for Facebook, given widespread speculation that the company was developing its own payments system.

Dan Levy, Facebook’s director of payment operations, said the company’s focus was on building a virtual currency to make it easier for users and developers to build a virtual goods business on the site. (Additional reporting by Ian Sherr; Editing by Steve Orlofsky)