Consumer Watchdog: Facebook Credits Stifle Competition

The new terms for Facebook Credits, effective Friday, may have to ward off an attack by Consumer Watchdog, as the public-interest group filed a 28-page complaint with the Federal Trade Commission, claiming that the social network's virtual currency stifles competition.

The new terms for Facebook Credits, effective this Friday, may have to ward off an attack by Consumer Watchdog, as the public-interest group filed a 28-page complaint with the Federal Trade Commission, claiming that the social network’s virtual currency stifles competition.

Consumer Watchdog protested the fact that game developers must exclusively use Credits, and agree not to undercut the social network on pricing outside of Facebook.

The group also complained that game developer Zynga enjoys a “most favored nation” status due to a joint venture with Facebook.

Consumer Watchdog said that Facebook enjoys monopoly power in the social gaming market due to its user base of “over 500 million” (the actual number is around 700 million), adding that the new Facebook Credits terms will strengthen its hold on the sector, and that the agreement between Facebook and Zynga makes it almost impossible for others to compete.

The social network’s four most popular games were created by Zynga. Thus, the agreement between the two companies violates a law called the Sherman Act. Like Consumer Watchdog wrote:

Facebook’s and Zynga’s agreement, reported in May 2010, could be considered a conspiracy between competitors. Zynga’s widespread popularity and established, loyal player base currently exists primarily on Facebook. But unlike its competitors, Zynga is potentially the only social game developer powerful enough to draw its followers away from Facebook to a different social network, or to create its own platform for social games. Facebook’s and Zynga’s agreement is confidential, but it calls for a five-year partnership and is said to include concessions on Facebook’s part regarding Facebook Credits. If published reports are accurate, the arrangement seems likely to reduce competition and exclude competitors.

Such an arrangement is an unreasonable joint-venture agreement between competitors that violates the Sherman Act and its spirit.

On the virtual goods market in general, Consumer Watchdog wrote:

Developer revenue from virtual goods purchased in social games in the United States totaled $865 million in 2010, and is expected to hit $1.25 billion in 2011. Virtual goods are the largest source of revenue for developers of social games. For example, of the $865 million revenue in 2010, $510 million was attributable to virtual goods sales, $225 million to “lead-generation offers,” and $120 million to advertising.

The U.S. virtual goods market has grown exponentially over the past few years. In 2010, the U.S. virtual goods market produced almost $1.6 billion in revenue, and in 2011, the U.S. virtual goods market is expected to produce $2.1 billion in revenue.

In closing, Consumer Watchdog requested that the FTC:

• Investigate the marketplace for virtual gaming and the use of virtual currency within social gaming platforms;
• Investigate the development of Facebook Credits and its imposition upon developers;
• Investigate alternative arrangements that Facebook has offered to developers, specifically whether the May 2010 agreement between Facebook and Zynga and/or other developers contains anti-competitive terms;
• Enjoin Facebook from requiring social game developers to exclusively utilize Facebook Credits for the purchase of virtual goods within their games;
• Enjoin Facebook from prohibiting any developer or application provider from offering lower prices on their products outside the Facebook platform in the terms of Facebook Credits; and
• Enjoin Facebook from requiring any developer or application provider to exclusively utilize Facebook Credits for goods or services sold within the Facebook platform in the future.

Readers, do you think Facebook Credits and the agreement with Zynga stifles competition?