Exclusive: Microsoft to discontinue its virtual currency system Microsoft Points

Microsoft’s proprietary virtual currency system, Microsoft Points, will be phased out by the end of the year, according to a source with knowledge of the company’s decision. The change will affect developers for Windows Phone, the Zune marketplace and Xbox Live.

By the end of 2012, all transactions will be based on the region set on the purchasing account and real money will be used to purchase all Windows Phone content. The move puts the Windows Phone Marketplace in line with the purchasing practices used in the App Store and the Android Market.

When asked Microsoft declined to provide further information, with a Microsoft spokesperson responding with “we do not comment on rumours or speculation.”

Mobile developers that have publishing agreements with Microsoft are being warned to plan their upcoming downloadable content (DLC) and in-app purchases in accordance with the change. Customers with existing Microsoft Points balances will have them converted into their local currency after the switch.

Microsoft Points are currently used to purchase games and media content on Xbox Live, the Zune Marketplace, the PC and Windows Phone, but the system isn’t used universally. On Xbox Live, the prices for full games are listed in dollars, but downloadable content is purchased with Points. On Windows Phone, apps are priced in dollars, but users can make in-app purchases with Points. Windows Phone users can also use Microsoft Points to buy accessories for their Xbox Live avatars and purchase Points directly from their phones.

While the decision to eliminate Microsoft Points may seem to be a surprising move, Microsoft has been gradually introducing cash purchases to Xbox Live, the most popular platform where Points are used. It makes sense for the company to move to a single cash-based payment system, as it brings it in line with its app market competitors and eliminates a consistent criticism of the system — that the Points to dollar conversion ratio is not only confusing, but it forces consumers to purchase more Points than they actually need. The smallest amount of Points that a consumer can purchase at one time is 400, or $5 worth.