Facebook Pushes Its Credits as an Online Currency
Two online payments companies have developed applications to facilitate purchases on Facebook Inc.'s popular social networking Web site.February 23
Facebook Inc. wants more people to "like" its virtual currency system as it bids to become a more serious player in payments.
The social networking company is pushing its Facebook Credits as a currency for online games; without the hassle of exchange rates, players worldwide have shown they will use virtual forms of money.
And, in a sign that Facebook wants its Credits to have more credibility with consumers, Target Corp. began selling Facebook Credit gift cards at its stores on Sept. 5, — a real object loaded with virtual money for buying intangible goods.
"The physical representation of a brand … adds more validity," said Rob Goldberg, the founder and chief executive of GMG Lifestyle Entertainment Inc., which makes the Facebook Credits gift cards.
When the gift card is purchased at a retailer that consumers have come to trust, he said, "some of that trust is passed on" to the brand on the card.
Facebook has long sold, for real money, Facebook Credits that can be used to purchase digital knickknacks, a model that most experts agree was proven obsolete years ago during the dot-com bust.
But from a practical standpoint, gift cards address a real shortcoming of digital currency systems, he said. "The digital world doesn't play in Christmas," he said. "Nobody says, 'Merry Christmas! I logged on to your account and put $25 onto your account.' "
Goldberg said he could not discuss Facebook's strategy. Facebook would not provide an executive for an interview, but the company said by e-mail that its current focus with credits is "to provide users the ability to purchase Credits with their preferred payment option."
Facebook has even created a fan page dedicated to Credits, and nearly a million people have opted to "like" it — the Facebook term for showing approval for something on the site by clicking a "like" button.
Observers say that the gift card is just one of several recent moves by Facebook to raise its profile in payments.
Facebook Credits were initially a way for users of the social media website to buy pixel art — think digital birthday cakes they could post on friends' Facebook pages. But this year the company is pushing Credits as a currency for online games.
Though most online shoppers prefer to make purchases in plain dollars, gamers on Microsoft Corp.'s Xbox 360 and Nintendo Co. Ltd.'s Wii happily convert their cash into "points" that can be used to download digital goods.
Facebook has matured as a gaming platform, particularly in its role as host to Zynga Game Network Inc.'s smash-hit gardening simulator Farmville, and Facebook's digital wallet system has matured along with it. Though Farmville initially did not incorporate Facebook Credits, that changed in May. A few months earlier, Facebook added PayPal Inc.'s system as a funding mechanism for Facebook Credits. The gift cards are another way the Palo Alto, Calif., company is making it easier for users to fund their Credit accounts.
Users pay 10 cents for each Credit, and then can "spend" the Credits online. This model is reminiscent of earlier virtual currencies such as Beenz and Flooz that, back in the dot-com heyday, tried to establish themselves as the monetary system of the Internet. Both eventually failed as consumers realized that purchasing these faux currencies was largely unnecessary, since they could use credit cards for most online purchases.
Aaron McPherson, a research manager for payments at IDC Financial Insights, said Facebook Credits have an important advantage over these earlier virtual currencies. "The difference is that Facebook is a real platform with a lot of activity on it," he said. "Beenz and Flooz never had an ecosystem."
McPherson said that selling digital products that people can use within gaming worlds can be lucrative for game developers.
One standout example is Activision Blizzard Inc.'s online sword-and-sorcery game World of Warcraft, which began in April selling in-game items for real cash. Blizzard reportedly took in $3.5 million for digital horses and digital pets in the first week.
McPherson said that the most likely way Facebook profits from Credits is by taking a cut of each purchase. If it is basing its model off the one mobile phone carriers use when they let third parties sell digital content, that cut could be as much as half as what the merchant charges the consumer.
However, it's possible that Facebook is taking little or no cut, and is instead relying on the Credits system to indirectly boost advertising rates, McPherson said — in making its website more appealing, it attracts more consumer eyeballs to the site.
Facebook's payment system is competing with other payment systems to handle the purchase of these gaming items. The addition of a plastic card as a funding mechanism is not so much a response to demand as much as it is "an attempt to generate some demand through having some point of sale advertising," McPherson said.
Gwenn Bezard, a research director at Aite Group LLC in Boston, said Facebook should pursue opportunities for people to spend Credits besides games by taking advantage of its enormously popular social networking system, "very much like PayPal's success originally largely depended on the success of eBay."
One way to do this is to make Facebook Credits appealing to end users by adding new funding methods, as it is doing with gift cards.
"If they are really pushing it and they are committed to it, regardless of whether it is successful today … they need to have that functionality, because" point of sale reloads are "an important channel," he said.
Zil Bareisis, a senior analyst with Celent, said that because Facebook serves small game developers, it serves the social networking company's interests to help game developers generate revenue.
A great way Facebook can do this is by eliminating any headaches around currency conversion for developers that serve an international audience.
"Whatever your home currency is, your game currency can still be the same," Bareisis said. That way, a developer can charge 10 Credits across the board for an in-game item, and it is up to Facebook to determine a fair price for those credits in each currency.