What Zynga’s Switch to Credits Means for the Facebook Ecosystem

Last week, Facebook and Zynga announced that Zynga is now using Credits as the exclusive direct payment method for its premium virtual currencies in its games running on Facebook. While you can still get “Farm Cash” and other premium currencies in Zynga games through some alternative payment methods, like Zynga’s prepaid cards or a variety of offers and other methods provided by Offerpal, the only way to buy premium currency directly any more is through Facebook Credits. In other words, while Zynga used to process these direct credit card payments using its own merchant infrastructure, Facebook is now the merchant of record for all Zynga direct in-game purchases inside Facebook.com.

Given how long the Facebook Credits rollout has taken over the last year, the migration of Zynga, the largest developer on Facebook, to Credits is a significant moment in the evolution of the Platform. Facebook CEO Mark Zuckerberg spoke to us earlier this year about wanting to create a “level playing field” for new social game developers on the Facebook Platform through a platform-level universal virtual currency: “If Zynga or any one player can allow cross payments within their games, but that doesn’t extend to other games, then that ends up being a big barrier to entry for other startups. Making it so that there is one currency that people can take everywhere levels the playing field a bit, which is good,” Zuckerberg said. In a world with universal Credits, small developers will no longer partner with payment service aggregators – Facebook is now the aggregator itself.

By pushing developers to adopt Credits, Facebook has shifted the dynamics of the virtual goods value chain, thereby lessening some of the barriers to entry that the largest developers on the Facebook Platform – including Zynga, who is by far the largest by any public traffic measure – have built. Of course, that hasn’t come without some drama around the natural power struggle between the platform operator and the largest developers building on it: developers must now adjust to different dynamics on the Platform given some of the intrinsic limitations of switching to a universal currency and the fees associated with Credits.

In the short term, Zynga’s switch, along with other large developers making the switch this fall, will dramatically increase the liquidity of Facebook Credits. Few other events could accelerate the spread of Credits like Zynga’s migration. Soon, millions more Facebook users will have Credits balances in their account, making it much more frictionless for them to spend money in any game or application on the Facebook Platform. That means developers that have integrated Credits should see higher paying player conversion rates over the coming weeks and months.

In the long term, switching to Credits is obviously a major event in the course of Zynga’s history and future. Starting now, Zynga will no longer be able to leverage some of the efficiencies it had built through establishing millions of direct customer billing relationships with Facebook users in the same ways that it has been doing over the last few years. However, it can still communicate with those users directly through email, and drive them to other distribution channels, like FarmVille.com, in order to accept credit card payments directly if it wants to.

Although large developers still enjoy many advantages of scale, not the least of which is their ability to drive significant cross promotions and optimize revenues more powerfully across a broader portfolio of games, building custom innovations in the payments layer will soon no longer be one of them in the same way it has been – though much of the operational infrastructure around customer support and security will still continue to be vital.

To dig deeper on social gaming ecosystem dynamics on the Facebook Platform, see our Inside Virtual Goods: The Future of Social Gaming 2010 report.