Facebook Credits – 5 things you should know

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Whether you’re playing FarmVille, FishVille, or PetVille, you probably use Facebook Credits – the virtual currency launched June 2010 (but the program as a whole is still in beta).  Facebook last Thursday announced it is expanding this program to include more payment options and access for more developers. And as the number of services offered on the Facebook platform grows, this means growth for the Credits business also.

There is more to Facebook Credits than meets the eye, and here are 5 things you should know to help explain their importance:

  1. The objective is to build a Universal Virtual Currency System;
  2. The objective is to build a Universal Virtual Currency System;
  3. The objective is to build a Universal Virtual Currency System;
  4. The objective is to build a Universal Virtual Currency System;
  5. The objective is to build a Universal Virtual Currency System.

Just kidding! But only just, that’s an amazing ambition which I’ll write about in another post. Here are five things:

  1. The objective is to build a Universal Virtual Currency System;
  2. Users can now buy premium items and virtual goods in within apps and games via Facebook Credits paid for with prepaid store cards and gift cards;
  3. The PlaySpan deal, using it’s UltimatePay global payment processing service, allows Facebook Credits to use popular regional methods like prepaid cards.
  4. This is a move which will take the whole micropayment movement mainstream, and global. 
  5. Facebook will rapidly dominate the virtual economy, potentially ramping up to 500-times Second Life’s virtual economy in a very short time.

It’s a transitional moment for the virtual economy and also micropayment systems.



Facebook-Deborah-LiuUniversal Virtual Currency System

The OBJECTIVE is to build a Universal Virtual Currency System, which is more portable than any game or publisher-specific system, and acccording to a report from Venturebeat, Facebook Credits’ product marketing manager Deborah Liu used the Euro as the physical analogy!

That’s an astounding ambition, since so far all other efforts – like those built around micropayment systems – have fizzled out or remained totally regional or not achieved any significant economic penetration. Since 70% of Facebook’s members are outside of the US then the Facebook Credits system was born global and for that and other reasons this objective is feasible. It’s now a matter of how it can be achieved and sustained.

Kiss goodbye to the Big Mac Index and welcome in the Facebook Index – how much Facebook Credits cost in each currency.

Buy with pre-paid store and gift cards

Up to now Credits could only be bought via popular credit cards, PayPal and mobile phone and many game developers had already set up virtual currency alternatives before Credits were available to them. Users can now buy premium items and virtual goods in within apps and games via Facebook Credits paid for with prepaid store cards and gift cards.

That’s very mainstream for a virtual economy, as mainstream as a Visa gift card. Facebook will also benefit from people failing to redeem their purchased cards or leaving unredeemed value on the cards, which can run as high as 15% of cards and/or value. Look out for the FaceCard as a stored value card.

Our goal with Facebook Credits is to give people that use Facebook an easy, convenient, and trusted way to buy premium items in games and applications, while creating unique opportunities for developers to build successful, sustainable business,” George Lee, a product manager for Facebook Credits, wrote in a blog post.

Playspan

The PlaySpan deal, using it’s UltimatePay global payment processing service, allows Facebook Credits to use popular regional methods like prepaid cards (e.g. Europe’s Wallie-card, Taiwan’s Gash card) and other options (e.g. bank transfers in Germany, Brazil’s Boleto Bancario), along with traditional systems like PayPal and credit cards.

PlaySpan is possibly more important than first meets the eye. It’s not just a simple extension of reach. It is a crucial part of meeting Facebook’s global ambitions for Credit as a currency. PlaySpan’s offer is a “Monetization as a Service” (MaaS) offer which brings cost-savings, scale, and flexibility to game developers in which they would otherwise have to invest (as they have up to now for their customized credit systems, see above). PlaySpan’s MaaS platform cuts developers costs, and provides better control which at least acts as a partial offset to the 30% fee on Credits which Facebook takes. (PlaySpan was founded in May 1, 2006 and has had funding of $46.3m to now.)

Micropayment movement mainstream

I think that Facebook Credit signals the transition of the chaos of the micropayment movement into a mainstream, global force. The start of a significant shift. (And part of this is due to the “Cloud Shift“, which I won’t go into here but is where the real cloud comes into play in business transformation.)

It’s fair to note that previous brave forecasts about the impending success of micropayment systems have all had to have been erased from their author’s Linkedin Profiles.

For example, Jakob Nielsen, in an essay The Case for Micropayments wrote: “I predict that most sites that are not financed through traditional product sales will move to micropayments in less than two years,” and Nicholas Negroponte made an even shorter-term prediction: ”You’re going to see within the next year an extraordinary movement on the Web of systems for micropayment … .” He went on to predict micropayment revenues in the tens or hundreds of billions of dollars.

Alas for micropayments, both of those predictions were made in 1998!

None-the-less I say look out now for rapid and significant new innovation, and a whole raft of legal and tax issues which will make the law run to catch up with reality, yet again. Imagine when Facebook members can transfer funds to each and cash them out! The impact on banks and credit cards is likely to be significant. Look out for FaceBank !!

Issue: if Facebook is in control of the funds float, are they a deposit-taking institution and therefore should they be subject to all the banking regulations and controls that govern traditional financial institutions?

Facebook will dominate the virtual economies and micropayments

There are other virtual economies, such as Second Life which reports that it’s doing a booming business and its virtual economy is currently the largest in the world. But it and all others will pale rapidly compared to Facebook (Second Life has about 1/500th the membership of Facebook).

In the game community Credits will dominate almost immediately. For example Zynga and Facebook engaged in a five-year-long commitment in May, agreeing that Facebook Credits would be the exclusive form of currency used for all Zynga games hosted on Facebook. Zynga has the largest marketshare of the three major U.S. competitors with 221 million users.

It’s in the non-game – the other virtual and micropayment segments – where the astounding potential lies. In this case Facebook becomes the aggregator of purchases and settles with its suppliers, and of course it will have to drop its fees from 30% to let’s say 3% + $0.10 for these non-game type micropayment transactions.



Facebook Credit could feasibly take control of small person-to-person transactions with a firm hand. It won’t wipe out the many successful mobile micropayment systems like those which operate in the Philippines, Bangladesh and parts of Africa. But it will open up new regions and complement those systems in areas/geographies/demographics where smart-phones have a critical mass of penetration.

It comes down to this. What Facebook and PaySpan now have is a collaborative micropayment system – a hybrid micropayment system that can interface all existing micropayment systems.

And the fabulous thing is that it does not belong to the banks or the telephone carriers.

Facebook will become the dominant point at which payments are coupled with content delivery and it already has a relationship with 500m members. That’s kind of a revolution, because almost universally it was predicted that micropayments would not take off without the cooperation (read control) of the banks, or telcos, or ISPs for example. 

That’s no small market. VISA estimates that up to 25% of total consumer transactions are for $25 or less. That figure of $25 is bigger than the Wikipedia definition of a micropayment up to $10 but Facebook is not restricted to micropayments – solving micropayments is just the first step.

A potential Facebook e-card would rapidly dwarf the 15million or so Octopus ecards currently issued, which is often used as the benchmark for the “most widely used stored value product”. (That’s not correct of course, mobile phones with built-in contactless stored value cards far exceed that number in each of Japan and Korea.)

Is Facebook being too greedy?

Let’s look at two aspects of “greed” in relation to Facebook Credits. Firstly, the global ambition to become the universal virtual currency. From my point of view, no it’s not being too greedy its simply being ambitious and it is what others like the credit card issuers and banks would do if they could.

In general the banks would never be able to do it, for one reason because as has famously been said “no one wants to be friends with their bank on Facebook“. That says everything about the view of the relationship people have with banks.

On the other hand it’s inherent that if you are on Facebook then you want to be there, and the stats show that you spend a lot of time there. There’s also another reason – 99% of the world’s banks don’t understand cloud computing. They understand so-called “private cloud”, which is essentially a delusion, and that delusion keeps them from understanding how Facebook and PaySpan have hung them out to dry – because Facebook and PaySpan do understand the real cloud.

So while the banks have all been busy awarding themselves innovation prizes and swanning about in self-admiration of the complexity of their IT operations silly little Facebook has jumped the hurdles that need to be jumped on the road to a universal virtual currency. These aren’t small things – security, privacy, logistics and the Cloud Shift.

That said, we could guarantee that a company like Visa has repeatedly examined the feasibility of how to massively expand their own virtual currency and micropayment efforts and ambitions, but hasn’t yet found the platform to achieve and sustain it.

The other “greed” question is with regard to fees. Facebook takes a 30% cut of all Credit transactions. Contrast this to Second Life who say that they charge an “exchange rate” on the virtual currency that is used for in-game commerce but they do not charge a commission on in-game commerce.

However the 30% fee is the same as Apple charges for their App Store, the same as Nokia’s Ovi store, and less than the 40% or more that the telcos rip from developers for their app stores. So it’s in-line with the industry for apps/games.

Although some game publishers reacted negatively to the size of the fee it is reported that those who have implemented Credits have seen a big lift in game revenues. Deborah Liu has said that at the moment only about 1% to 3% of users spend money on free-to-play games and is expecting that Facebook Credits will increase that range up to 8% to 20%. Which means plenty of new income for game companies, even after the 30% fee.

Conclusion

Combined with the new Bing search deal, it’s clear that Facebook has designs on specific “Cloud Shift” business-transformational strategies for the future. Think of their Social Graph, how that has spread the Like button like wildfire, and the other widgets. Then add in a “Facebook Payment” button with access the to same networks and Social Graph – it’s huge! Just think more, of the millions of people who use Facebook as an online photo repository, Facebook Credits is a huge hint that Facebook has some very expansionist plans for its future.

Perspective

Alvin Toffler, of Future Shock fame, in his 1990 book entitled Power Shift, wrote:



“..increasingly detached from material embodiments, capital and money alike change through history, moving by stages from totally tangible to symbolic and ultimately today to its ‘supersymbolic’ form. This vast sequence of transformations is accompanied by a deep shift of belief, almost a religious conversion – from a trust in permanent, tangible things like gold and paper to a belief that even the most intangible, ephemeral electronic blips can be swapped for goods or services.”

Speaking about the change from using animal skins, salt, land and goods as “currency” to the beginning of the use paper money, Toffler notes that “unless a person believed that others would accept paper, and deliver goods for it, it had no value at all”. Think of diamonds, which are intrinsically worthless stones whose popularity and value are a recent creation, the result of a concerted marketing efffort by a monopolist cartel which created a belief that diamonds “are a girl’s best friend”.

In many ways, the advent of micropayment and virtual currency systems clearly reflect this progression in the belief system, which will underwrite the potential shift in commerce heralded by Facebook Credits. Facebook could hardly be as evil and artificial as the diamond trade, and they no doubt have the same intellect, vision, drive and propensity to act as De Beers, and therefore I think that they have a very good chance of shifting the belief system further, in line with Toffler’s model.

Do you think that Facebook Credits has this same kind of significance?

Will it become “the” Universal Virtual Currency, if not why not?

How can micropayment systems best benefit from working with Facebook Credits?

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