The Case Against Facebook Credits

By Chris Morrison Comment

[Editor’s note: This interview with Jambool CEO Vikas Gupta is a companion piece to another published immediately after it, The Case For Facebook Credits.]
Since Facebook first launched Credits, its own in-game virtual currency, for externally developed applications in May of 2009, app developers have been worried about the potential the hefty 30 percent fee Facebook charges for the currency and the potential that it might enforce their use for all apps.

But another group had been watching, and worrying about, Credits for much longer: payment and monetization companies. If Credits are made mandatory across Facebook, a whole swathe of payment companies started on the platform will be at risk.

One of those companies is Jambool, which was founded by two former payment executives. Despite the threat from Credits, Jambool is still hard at work with its Social Gold payment platform on Facebook and elsewhere; this morning, in fact, it’s releasing a significant update to its inventory management, Flash payment, analytics and other features.

However, CEO and co-founder Vikas Gupta has also made no secret of his opposition to Credits. Below, we interview Gupta to get an in-depth look at his arguments against the currency.

Note that some of the arguments below assume specific policies and actions from Facebook that the company has not yet made clear; we covered many of these uncertainties in our own June article.

Inside Social Games: You’ve said that you’re not completely against Credits.

Vikas Gupta: I think there are definitely some advantages to Credits, that we believe in and have always believed in. For example, I believe Credits as a store value system makes sense for certain kinds of purchases. Credits also does well at eliminating the need for a developer to have multiple different currencies around the world.

The third thing they have as an advantage is that more consumers would have trust and loyalty to Facebook with Credits. How much of an additional benefit that will have is the question, but it’s definitely an intangible benefit that we see Credits could bring. And from the user’s point of view there’s an advantage in being able to use their Credits across multiple applications.

ISG: OK, now let’s talk about the downsides. What’s the big picture?

VG: There are definitely cons to Facebook Credits as a universal currency. The first one is the way many of these games work — they’re mini-economies of their own. If you look at games like FarmVille, the currency is an integral part of the game.

Facebook has been saying that Credits will work like the Euro, which works across the European economies, but we believe that’s very wrong. Credits is a stored value system — the only people who participate are those who purchase credits.

Right now there are only 1-2 percent who will spend money to buy goods in a game. That’s a big distinction between this and a true economy. In a true economy it should be in the hands of 50-60 percent of the people. Facebook hasn’t seeded credits through its own platform — it is relying on the applications to help spread their adoption.

They have experimented with Credits on their site but we haven’t seen any of those experiments succeed — for example, they’ve even shut down the gift store. Developers are helping Facebook build the Credits, and it is evolving into a pre-paid stored value system, that as we discussed sits in the hands of a small percentage of the user base.

Facebook Credits doesn’t really work like the Euro — the applications do not contribute to the currency. As an example, problems in Greece’s economy resulted in the entire Euro being affected. However, any one application on the Facebook platform cannot disrupt Credits or any other application. Instead of a universal currency, it works as a stored value system — where users can buy credits from Facebook and spend it in applications.

ISG: What’s the difference between a real currency and what Facebook is doing, then?

VG: One example of a real currency is a [Second Life] Linden Dollar. It has many aspects in which it works like a real currency, there’s a lot more transparency into where people get it and what people can do with it. The Linden Dollar did not need an external ecosystem to build it — it evolved amongst its users and content. The way Credits work is more like prepaid cards. So how many people would buy prepaid cards anywhere?

Pre-paid systems have traditionally had limited success. They’ve had lower conversion and lower adoption because people have to commit to buying more up front, even though they don’t know how much they’ll spend or in what amounts. That leads to breakage. An example is Amazon gift certificates — you couldĀ  buy them but there’s always a large amount of remnant value on the card that isn’t used. In an economy like this platform, that will lead to developers never seeing the value even though they created it.

ISG: Let’s move on to other potential problems with Credits.

VG: The second thing that has come up a lot is the fee. There’s a 30 percent fee, and this is the first time ever on the web that someone has taken such a high a fee for payments. People have taken that fee on closed platforms, but on the web it’s the first time. And when you add in things like breakage, it’s more like 50 percent.

And fraud is a very serious issue with Facebook. It’s not that fraud gets built into the 30 percent, and Facebook won’t issue money back to developers. The assumption is that Facebook is giving the Credits earnings to the game even if they’re generated from fraud. What we’re hearing is that’s not what’s happening. If the money came from fraud it never makes it to the game developer.

ISG: Let’s talk about some of these points in more depth, starting with the last. Isn’t fraud already a problem for developers?

VG: When I am building my game and people are buying my currency, I see the complete process end to end. When I see fraud, it affects me and I can manage and control that. But when people are coming through an intermediate step, it’s very difficult to figure out who perpetrated the fraud and how it affects any game using Credits.

ISG: So transparency is a problem in fraud. Is it also a problem elsewhere?

VG: When a user is playing my game, the user comes in and spends maybe $10. I know the fact that they spent $10, and that’s how much currency I’m giving away. When it comes to using a third party system, I don’t know what they spent overall, there’s just what they spent in my game. I don’t know how much the user could have spent in the game.

When the user spends $10 today I can actually change the game experience to get the gamer to spend all that currency in the game. I can’t do that as effectively when only Facebook knows how much they spent. That’s a bigger issue when, at the end of the month, you get paid and you don’t know anything about the users. It’s more effective when developers can see the end-to-end flow of money.

ISG: You brought up breakage. What are the issues around that?

VG: Right now, when a user knows they have money that can be spent across games, they’ll become very cautious about where they spend the money. There was a promotion in Hello City, in which they gave away 5 Credits. I got them, and never spent them — they’re in my account today. That’s because I know that I can spend it anywhere.

The thing with virtual currency is that it should feel very cheap. Now you have this system of currency that you can spend in other places, so users are perceiving value in it, and they don’t want to spend it as easily in a particular game. Users will be very cautious about where they actually spend the money, because they have the option to spend it on other games, not just the game they’re playing right now.

A less obvious problem is that on Facebook there have been a lot of similar games being built, farming games and so forth. In any genre there are multiple titles. For users there have been high switching costs, because a user who couldn’t switch their currency couldn’t move. Now you can have a game that convinced the user to spend money on virtual currency, but the user can take it elsewhere. The switching costs with currency, especially, have gone down. Can games keep users engaged, or can other developers take the users away along with the money they got them to spend?

ISG: Is Facebook justified in charging 30 percent?

VG: There has never been a precedent where someone took 30 percent on the web purely for payments. If it was done in a way that developers saw value, or if it was really cheap and easy, it would be understandable. But I think that we all know at this point that Facebook is not that straightforward for distribution — we all have to spend money on distribution. So you’re not just paying 30 percent for payments, you have to spend on top of that for advertising. If all I was doing was spending for distribution, it would be a lot easier, you’d have that extra 25 percent margin.

A big difference between Facebook and Apple or Microsoft is that there’s no other distribution channel other than Facebook itself. On the Xbox, if I’m building a game, I’m selling directly to users in the retail channel, and the distribution channel is up to me; the viral channels are not dependent on Microsoft. But here’s a platform that I’m dependent on for distribution as well as monetization — that’s a problem.

I believe we’ll start seeing that there will be a lack of motivation for people to build on Facebook. That’s a big thing we’ve seen in the last few months, that every developer is much more excited about building for off-Facebook distribution.

[Ed. note: To move on to the case for Facebook credits, click here.]