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As it ramps up for its initial public stock offering, there’s been a lot of attention focused on Facebook’s lack of performance as an advertising platform, despite its enormous size and reach. It’s an important issue for investors thinking about areas of future growth for the giant social network, as they try to justify what is likely to be a market value of at least $100 billion. But Facebook has other ways of monetizing its vast user base that could have even more growth potential — although they also come with more risk. One of those is Facebook Credits as a payment method for both virtual goods and real-world goods. Could Facebook become a networked version of PayPal?
Anyone who has played Facebook-based games such as Cityville or Texas Hold ‘Em Poker is likely familiar with Credits, since they are the default method of payment for Facebook games and virtual gifts. The social network launched its virtual payment system in 2010 as a beta test, and then rolled it out early last year and announced that all developers would be required to use Credits as their default payment method. This news caused a considerable backlash in the virtual gaming industry, since Facebook takes 30 percent of the revenue processed through Credits (just as Apple takes a 30-percent cut of all transactions handled through its iOS apps).
Use of Credits quadrupled in 2011, Facebook says
Last year, Facebook’s non-advertising revenue — the bulk of which comes from virtual payments using Credits (an estimated 12 percent of which came from game developer Zynga) — was $557 million, or about 15 percent of the total, according to the company’s S-1 securities filing. That was more than four times what the company pulled in from payments in 2010. And since that figure represents Facebook’s 30-percent take of the total, that means users spent close to $2 billion in Credits last year:
In April of last year, Facebook announced that users would be able to use Credits to purchase vouchers or coupons for goods and services that could be redeemed via the social network’s Deals service — which is similar to Groupon’s social-buying platform. Gift cards with Credits stored on them are also available in a number of stores across the U.S. and in Asia, including Target, Walmart and Best Buy, and there are a number of services that have tried to leverage Credits as a platform for payments, such as TrialPay (which gives users Credits when they sign up for new services) and ShopKick. Facebook has also applied for and been granted crucial “money transmitter licences” in a number of states, which it would need in order to become a large payment-handling entity.
As the CEO of another Credits-based service noted in a blog post earlier this year, the use of Facebook’s virtual currency outside the virtual-game business has been gradually accelerating: for example, several movie studios such as Universal Studios and MGM have promoted their films on Facebook by allowing users to view them by paying with Facebook Credits. And Peter Vogel said he expects Credits will soon be integrated into a variety of services such as Spotify, which use the Facebook “open graph” platform:
Look for Spotify to add Facebook Credits as a payment option for these new users, potentially even offering special introductory rates to entice users to commit to a year-long membership.
The Plink CEO also notes that one of the things holding Credits back from being a broader payment system is the lack of a repeat-billing function, which would allow users to make regular weekly or monthly payments. For now, Credits can only be used as a one-time payment service, which makes it difficult for anyone who sells their services on a monthly subscription basis (newspapers and magazines, for example, or video-streaming services like Netflix) to use Credits effectively. That could be one reason why only 15 million of Facebook’s 900 million members used the virtual payment system last year.
Forcing use of Credits could be a red flag for regulators
Even as it tries to build Credits into a payment platform with more to it than just casual games, however, Facebook’s dominant market share in the social space has led to accusations that it is being anticompetitive by forcing developers to use Credits as a payment system — and the more it tries to tie Credits to other things, the more ammunition it will provide for those critics. Another potential fly in the ointment is that some developers say Credits don’t convert casual users into paying subscribers as well as they had hoped. Kevin Chou of social-gaming company Kabam told Inside Social Games:
We thought that conversions would go up and be around 15 or 20 percent. But it turned out to be around 5 to 10 percent, meaning that we’re taking a 20 percent net tax.
If the social network is going to get more developers and services to implement Credits, it will have to show that the conversion rate is better than that, or no one is going to want to pay the network its 30-percent commission. Just as Apple has seen some prominent publishers and others leave the iOS app store for the open web to avoid payments, Facebook could see a similar exodus if it doesn’t show the value of Credits. And if it tries to force payments rather than creating incentives, that’s a red flag for antitrust regulators.
Ironically, one of the reasons that Facebook itself is pushing HTML-powered, web-native versions of mobile apps is so that it too can avoid the 30-percent penalty that Apple imposes for playing in its ecosystem. Having web-based apps with Credits as a payment system would allow Facebook to implement all kinds of potential subscription and payment options without having to pay Apple 30 percent of its own 30-percent cut.
In the end, the most likely scenario for Credits is that Facebook will implement them as a payment system for open-graph apps like Spotify: after all, these providers are already connected into the Facebook ecosystem, and users are accustomed to using the social network as an authentication service. Adding payments would seem to be a relative no-brainer. And if less than 2 percent of users can generate $500 million in revenue, how much could Facebook generate if 10 or 20 percent of its user base started using Credits regularly? The only question is whether enough users will want to give even more of their online lives to Facebook, including control over their digital wallets.