Facebook’s Increasing Focus on Credits Prompts Developer Speculation

Facebook has been busy working on its Credits virtual currency plans lately — but what exactly is it doing? Developers have told us conflicting answers. Some say that the company is going to force every application to use Credits as the sole virtual currency, while others say that Facebook has not made any such decision. We’re also hearing conflicting reports on how profitable Credits are turning out to be so far. Note: Most developers we spoke with asked to remain anonymous in order to preserve their relationship with Facebook.

Meanwhile, Facebook itself sees Credits as being in the very early stages, and it has not made long-term decisions about how the virtual currency will be implemented.

The company has been testing Credits in its gift store since 2008, and with third-party applications in May of last year. But Credits have only been showing up widely since last fall, around when we were hearing that the company was talking to big developers about implemention.

Now, clearly, Credits is on the move. Facebook began hiring for a “brand-new” payments operation team in the last few months. The latest home page redesign includes a new left-hand navigation showing dashboards for applications and games, and both the Apps and Games pages show users their total Credits balance. A link to users’ Credits balance now also appears in the top right-hand “Account” dropdown menu.

More and more big developers have begun offering Credits as a payment option partly, it appears, as a result of encouragement from Facebook. Zynga is now running the currency in some of its smaller games, including Pirates: Rule the Caribbean. Playdom has it live in Tiki Farm and (lil)Green Patch. SGN does with (fluff)friends. Playfish has one of the biggest implementations, with Credits live in Restaurant City. Slide has most recently introduced the payments option, to SPP Ranch, Top Fish and Superpocus.

CrowdStar, which saw game-changing growth last fall, has gone the greatest lengths to integrate Credits. The latest game, Happy Island, launched using it exclusively last December — the first big one to, that we know of — and the company has since replaced other payment services with Credits on all of its applications, including its biggest hit, Happy Aquarium.

Do Credits Bring in More Money?

For anyone with a Facebook app that relies on virtual goods, Credits is a big deal. First, Facebook is taking a 30% cut of the revenue, something that we’ve understood to be the case since last May. This is the percentage that Apple takes from developers on its iTunes App Store, but more than the few percentage points that some third-party payment providers, like PayPal, usually charge (though fees with some payment methods, like mobile payments, can actually be higher). Credits is essentially a new virtual currency layered on top of payment services, as the partnership today between Facebook and PayPal illustrates. So the cost to developers is clear. But what about the benefits?

The idea behind Credits – that a platform-level currency backed by the trusted Facebook name should decrease payment friction and increase spending – is very sound. For CrowdStar, Credits is already as profitable as other currencies the company has used, the company tells us. While many developers, especially big social game developers, have made big investments in their own virtual currency systems over the last couple of years, CrowdStar introduced Credits as it has grown in the last months. Executive chairman Peter Relan tells us that his company has had to figure out how to best implement Credits, “but once you get over the hump, it’s great, and just as profitable” as other options — meaning even with Facebook taking a cut.

However, some developers have told us that Credits are bringing in 5% to 10% more revenue than third-party payment options, not enough to offset the 30% cut. When Facebook’s cut is included, one developer said it was seeing revenue decreases of around 20%.

Implementing Credits comes with many considerations for developers. Demand for currencies, for many games, is generated in part through the currency being specific to the app. Users will need to start thinking about game-specific currencies equaling Credits within the game experience. This can create an additional layer of complexity for them to navigate when they’re deciding to make a purchase, as Ngmoco’s Jason Oberfest explains. This means developers active on multiple platforms may have to customize Facebook applications for Credits while using other currencies for the same games elsewhere — a big deal for companies like Ngmoco, which builds games on Facebook and uses Facebook Connect in some games on mobile devices.

It’s Still Early

CrowdStar’s experience is promising, but developers are still wrestling with the long-term results.

As a product, Credits is still under development. A payments resolution feature only went live in January, and many other components of the system are still being worked on, developers say. Facebook’s goal, for now, appears to be to gather more data on how well Credits work, and figure what needs to be improved before it makes bigger decisions.

That’s why Slide’s involvement is especially notable. The company’s executives were PayPal founders. They have experience building a payments service from the ground up. We asked the company why it added Credits, after we saw its implementations. “We wanted to help Facebook build a Credits product that is first-rate,” executive Keith Rabois tells us.

Is “Mandatory” Even an Issue?

If Credits doesn’t end up matching the performance of existing payment options (or at least come close to doing so) for most developers, then we obviously expect the service to roll out much more slowly over the coming year. Let’s look at the other possibilities.

If Facebook somehow makes Credits mandatory as the only virtual currency on the platform, and it doesn’t work as well as third party services currently do for many developers, that would obviously have negative effects on the Platform. Smaller developers would struggle, and maybe sell to larger rivals for lower prices than they’d otherwise be able to command, or look even harder at alternative social platforms, from MySpace to Twitter, Yahoo, Google Buzz, Android, iPhone (if those last two count) and any others that emerge. Still, no developers we spoke to expect other platforms to approach the value of Facebook for their businesses.

Facebook may not have to make Credits mandatory in order to accomplish its goals. If CrowdStar’s results are a good indicator of what is to come, developers will just move to using Credits as their sole currency system by their own will.

Since Facebook first mentioned it was thinking about offering a virtual currency, back in 2007, developers have speculated about the company’s ultimate plans. Last year, Facebook’s efforts to monetize the platform kicked in, with the steady development of Credits as well as developer use of its performance advertising system. But the ongoing speculation is just that, says Dan Levy, the director of the new Facebook payments operations team. Credits is in its very early stages, he tells us, results are looking good so far, and the company is as focused as it’s ever been on improving the developer platform.

For more on the evolving Facebook Platform monetization landscape, check out Inside Virtual Goods: The Future of Social Gaming 2010.