Amazon Advances in Virtual Money Battle While Facebook Retreats

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While Facebook is moving to phase out its Facebook Credits, Amazon.com Inc. announced the launch of Amazon Coins, a virtual currency for spending on its Kindle Fire tablet.

The two currencies look a lot alike. Both are intended for buying digital items online, and both can be purchased in exchange for real-world currencies. Facebook said last year that it would eliminate Credits to instead allow developers of Facebook apps to price virtual items in real currencies. So why would Amazon.com move ahead with such a product when one of its rivals has just thrown in the towel?

"The reason it makes sense for Amazon is that they have a marketplace," says Adil Moussa, principal at Adil Consulting, in an email. "They have merchants and consumers already. Facebook didn't have merchants and was not set up with them in mind."

Amazon.com also has a lot more experience in e-commerce. Facebook generated almost 16% of its revenue last year through payments, but it still makes most of its money from advertising. Amazon.com, by contrast, may have less experience cultivating an app ecosystem but is a pro at online commerce.

"Amazon is certainly a lot better at payments than Facebook has ever been," says Andy Schmidt, research director at CEB TowerGroup.

Amazon.com's virtual currency will allow users to buy apps, in-app items and games on the Kindle Fire. When its currency launches in May, Amazon.com plans to distribute tens of millions of dollars' worth of Amazon Coins to users and allow them to purchase more with their existing Amazon.com accounts.

"Amazon Coins gives customers an easy way to spend money on apps on Kindle Fire and that's a great thing for developers who want to make more money," says Sally Fouts, an Amazon.com spokeswoman, in an email.

Facebook Credits were initially meant as a tool to make payments easier for developers that design games and other apps for its social networking site. Facebook handled currency conversion when it sold Credits, allowing developers to set a single Credits price for all regions. Last June, Facebook started phasing out its Credits to instead allow developers to set regional pricing on their own.

With its digital currency, Facebook forced itself into the payment process with little value to either the merchant or the consumer, Schmidt says. Facebook wanted to own the transaction, but "had a lack of understanding about how payments are supposed to work," he says.

A representative for Facebook provided a link to a June 2012 blog post explaining why the company chose to switch to local currency pricing.

"Since we introduced Credits in 2009, most games on Facebook have implemented their own virtual currencies, reducing the need for a platform-wide virtual currency," Facebook's Prashant Fuloria wrote in the blog post.

Amazon.com right now is in the same position as Facebook of having to prove the value of its digital currency, Schmidt says.

"Since [Amazon Coins] are denominated in dollars and developers get the same take as before … why wouldn't they just use dollars?" he says. "And if [consumers] have to go through extra steps to convert dollars into Amazon Coins … why wouldn't they just use their credit card?"

There's still a lot for Amazon.com to explain before the May launch of the Coins, says Schmidt. Without an incentive for consumers to use Amazon Coins, "there's really limited value outside the novelty," he says.

Fouts says the Coins will be available in the U.S. only and Amazon.com will release details in May about the Coins' value proposition.

Digital currencies have had a rough road. Beenz and Flooz are commonly named as prominent failures from the early days of e-commerce, but even more widely known currencies like Bitcoin have had trouble hitting the mainstream. A recent promotional Bitcoin event tied to Black Friday succeeded mainly in attracting Bitcoin devotees instead of new users.

By contrast, "closed-loop virtual currencies, outside of a vertically-integrated firm like Microsoft, don't work because there are too many points of friction for the developers and too little value for the consumer," Schmidt says.

Microsoft Corp.'s Microsoft Points, used for purchasing games and other media on its Xbox 360 video game console, is one of the few digital currencies that works, he says. Microsoft's system is comparable to a stored-value account, allowing consumers to purchase Microsoft Points on cards in stores the same way they would purchase a prepaid card. In recent years, Microsoft has expanded Xbox users' payment options, such as by adding PayPal acceptance.

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