Facebook hopes virtual credits make real dollars

By Miguel Helft, The New York Times | Updated: 5 June 2012 02:23 IST

Highlights

Already on the path to becoming an advertising powerhouse, the social networking company, Facebook, is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion-dollar business.

For all its success, Google is often criticized for being a one-trick pony. After 12 years, the Internet search company is still struggling to find a significant new revenue source to supplement its lucrative text advertising business.

Facebook, which more than any other company aspires to usurp Google's dominant place on the Internet, hopes to avoid that problem. Already on the path to becoming an advertising powerhouse, the social networking company is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion-dollar business.

Facebook began testing its virtual currency, called Credits, more than a year ago with some popular games on Facebook. This month, Credits passed a milestone when it became the exclusive payment method for most of the games created by Zynga, the No. 1 developer of Facebook applications.

Zynga is expected to have $500 million in revenue this year, according to the Inside Network, which tracks Facebook applications, as millions of users pay real money to buy virtual goods on games like FarmVille and Mafia Wars. Through Credits, Facebook will take a 30 percent cut.

By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network. To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month.

For now, Facebook says that it simply wants Credits to help foster the growth of virtual goods transactions. But Mark Zuckerberg, the chief executive, has recently said that the company may choose to do "a lot more" with Credits in the future.

Indeed, over time, the company plans to turn Credits into a system for micropayments that could be open to any application on Facebook, be it a game, or perhaps a media company, according to people with direct knowledge of Facebook's plans.

In addition to games, which account for the vast majority of money spent on Facebook, already more than one million other applications run on the site. In the future, many of those may choose to charge for access to certain features or to things like music, videos or news articles.

Some analysts and industry insiders say that expanding Credits makes sense and could eventually put Facebook in competition with PayPal, Google, Amazon and others for a slice of the growing pie of online transactions. "If they can get 50 million registered credit cards, why wouldn't they use them to pay for your newspaper subscription," said Alex Rampell, the chief executive of TrialPay, an advertising company that offers free Facebook Credits to people who buy certain products.

Others say the potential for using Credits could well extend beyond the Facebook site, through Facebook Connect, a service that allows users to log in to sites across the Web using their Facebook identities. "There is a huge opportunity for Facebook to use Facebook Connect to offer seamless checkout on other sites," said Ron Hirson, a senior vice president at Boku, a start-up company that enables online payments using a cellphone. "They are focusing on games and apps now, but it would make sense for them to go into other" product categories.

For now, Facebook prefers to play down talk of its broader ambitions for Credits. Dan Rose, Facebook's vice president for partnerships and platform marketing, talks about the usefulness of Credits while playing Facebook games. Users will have a single currency they can spend on any game, sparing them the trouble of entering the credit card or PayPal credentials multiple times, he says.

It works much like Apple's App Store, which allows users to enter their credit cards or PayPal accounts once and buy applications from any developer. Apple also takes a 30 percent cut of sales on iTunes and its app store.

Mr. Rose said that while some developers may initially see a decline in revenue because of Facebook's commission, the plan is for Credits to more than offset that loss over time, because Credits will make it easier to spend more in a game. "We need to be able to grow the total level of money spent," Mr. Rose said. Facebook is also helping lubricate the system by giving its developers credits that they can give away to users.

Some developers say they already have made gains. "We are seeing the number of paying users increase and the revenue per user increase, and FB deserves a lot of the credit for it," said Mark Hull, vice president for marketing at CrowdStar, whose Happy Aquarium game is among the most popular on Facebook. Mr. Rose said that if Facebook succeeds, Credits "could grow it to a size where over time it will become a material revenue generator." For now, he said, Facebook plans to reinvest revenue from Credits into improving its software for developers.

But Facebook's ambitions are unmistakable. Credits is backed by a sizable engineering and product team that is full of PayPal veterans. "It is a lot like PayPal in the early days," said Deb Liu, a former director of corporate strategy at PayPal who is now product marketing manager for Credit. "We are moving fast and changing the industry."

For now, Credits is not a rival to PayPal or other payment systems. In February, Facebook signed an agreement with PayPal, a unit of eBay, making PayPal one of the preferred ways to finance Credits accounts. Facebook users can buy Credits using their credit cards and some mobile payments services.

Since Zynga was one of PayPal's largest customers, Facebook is now a significant customer as well. "Facebook has been a great partner," Osama Bedier, PayPal's vice president for platform, said. But as Credits expands beyond Facebook games, it could collide with a number of others competing for a piece of the growing commerce in digital goods. They include Apple, the leading seller of music and apps; Google, whose Checkout system is used in e-commerce and on the company's app store for mobile phones; and even Amazon, which is seeking to expand its payment system across the Web.

Analysts said Facebook's ambitions might well run into the same obstacles that have thwarted Google and Amazon as they have sought to expand across the Web. "Facebook is a very innovative company, but we have had two large innovative companies, Google and Amazon, that have spent a fair amount of effort on payments," said Mark Mahaney, an analyst at Citigroup. Those companies have yet to gain much traction, he said. "I have to think that the odds against Facebook are steep."

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