Is Facebook Currency a Ripoff?

The virtual economy is exploding on Facebook as more and more consumers play social games like Farmville and Mafia Wars. Game developers make money largely by selling things that help people play the game like a bullet proof vest or a hand grenade for Mafia Wars which is published by social game behemoth Zynga. Facebook is looking for a cut of the action and it has gotten some developers upset.

Here’s how it works. Facebook has introduced a currency for its social network. People coming into the Facebook country can buy “Credits” for 10 cents each and then use those to purchase stuff for games. Of course the developers—who have mouths to feed and investors to keep happy—want to turn the “Credits” back into money that can be used in the physical world. When they go to the Facebook exchange office they take a 30 percent haircut.

If you think of Facebook “Credits” as a currency that’s pretty astonishing. It’s a lot worse than you’d do at the airport when you turn in your Euros for Dollars. And if you think of “Credits” as simply a payment card, the merchant, here the game developer, is paying more than 10 times the sort of fees they would pay their processor including interchange fees and everything else. That sure sounds like a rip off.

It isn’t really though. To see way you have to put those analogies out of your mind and think about this from a different perspective. Facebook has developed this massively successful and highly useful platform for people to get together and interact—more than 500 million users worldwide. They have a right to make money from providing this service. Those who use Facebook should want the company to make money because if Facebook doesn’t they will stop investing in and maintaining this valuable property. That has been a struggle for them. They probably thought they could make a killing on online advertising but ran into two problems. Salespeople—advertisers—aren’t really welcome when friends are getting together online, so unlike a newspaper or television show it isn’t a friendly environment for pitches. The other is that the deluge of inventory online has depressed ad prices. Meanwhile, though, the virtual economy on Facebook took hold ranging from people buying virtual gifts for their friends to ponying up for a tractor on Farmville (the most popular game these days).

Facebook has made its community available to developers who write applications. Social games have become the most successful application so far. Game platform developers like Microsoft Xbox and Sony Playstation charge developers a royalty for using their platforms—a percentage of the price of the game. But game developers don’t sell users games on social networks, so Facebook couldn’t charge that way. Instead the game developers make money by selling virtual goods. Facebook could have imposed a charge per game user and banned anyone who didn’t pay or it could have figured out a way to collect a piece of collected revenues from game developers. Charging per user though doesn’t necessarily track revenue and could discourage new games from getting adopted. Collecting money after the fact from game developers would probably require enlisting lots of lawyers and bill collectors. “Credits” is a clever way to keep track of the revenue that game developers are collecting and an efficient way to collect a share of it.

If you think of “Credits” from this perspective, it doesn’t sound like a rip off at all. Apple charges 30% of revenue for applications in the iPhone store. That charge has neither rankled developers nor has it obviously discourage thousands of entrepreneurs from writing paid apps. Of course, one can still question whether Facebook has the right price. That’s going to depend on the economics of the social game business and the alternatives that these businesses have off of Facebook. That’s for the market to decide.

Facebook does have a perception problem though. By taking its vig from the currency, it invites comparisons to shady currency exchange businesses and to the much lower priced payment card systems. Facebook would be better off establishing a clear policy on the share of revenue that application providers will have to fork over to Facebook and then presenting “Credits” and other mechanisms as a mere collection device. As it has done with privacy, Facebook seems to have invited more controversy than necessary.

David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.