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http://www.forbes.com/sites/georgeanders/2012/01/20/is-facebook-a-central-bank-too/
George Anders, Contributor
Is Facebook a Central Bank, Too?
Facebook’s 27-year-old founder, Mark Zuckerberg, isn’t usually mentioned in the same breath as Ben Bernanke,
the 58-year-old head of the Federal Reserve. But Facebook’s early
adventures in the money-creating business are going well enough that the
central-bank comparison gets tempting.
Everything started quietly, in 2009, with the experimental launch of Facebook Credits, billed as “the safe and easy way to buy things on Facebook.” Anyone who chipped in $5 from a Paypal account, Visa card or the like, could do the equivalent of changing money on an overseas trip. Voila! — $5 turned into 50 Facebook Credits.Initially, the Credits-based economy was confined to the virtual world’s trifles. Credits could be spent to buy imaginary gold bars for aficionados of Mafia Wars, or bouquets of virtual flowers for birthday postings on friends’ Facebook accounts. This new form of digital money was cute but essentially useless for mainstream activities.
Lately Credits have become more intriguing. Warner Brothers this summer offered movie-goers a chance to watch “Harry Potter” and “The Dark Knight” for 30 Credits apiece. Miramax and Paramount countered with film-viewing offers, too. In a provocative post this week on Inside Facebook, guest blogger Peter Vogel argues that Credits in the next few years will become more of a true currency. Facebook’s 800 million worldwide users represent a lot of buying power. He figures Credits could evolve into commercial mainstays for digital movies and music.
Vogel has a personal interest in seeing Credits take off. He is co-founder of Plink, a customer-loyalty program in which people earn Facebook Credits by eating at participating restaurants. Plink is just getting started, and no one knows yet how much traction his company ultimately will enjoy. But such uncertainties can’t stifle Vogel’s ebullience. He predicts that the Facebook Credits economy could double every year for the next five years.
Already, Credits looks very rewarding for Facebook, thanks to built-in commissions or transactions fees. Merchants participating in the Credits economy receive 70 cents of every dollar spent on their wares; the other 30% goes to Facebook. That’s in line with the way that Apple Inc. runs its iTunes store. It’s far more lucrative than the 2% to 5% fees associated with credit cards or currency-exchange counters in the traditional economy.
Facebook won’t say how much it’s making from Credits, but the research firm of eMarketer offered up a widely quoted estimate in September. Its tally: $470 million of revenue in 2011, or about 11% of Facebook’s total business. Costs associated with the Credits program are likely to be trivial. So while advertising remains Facebook’s dominant source of revenue, banking looks like an alluring second way of making money — literally.
Edward Castronova, a telecommunications professor at Indiana University, is fascinated by the rise of what he calls “wildcat currencies,” such as Facebook Credits. He has been studying the economics of online games and virtual worlds for the better part of a decade. Right now, he calculates, the Facebook Credits ecosystem can’t be any bigger than Barbados’s economy and might be significantly smaller. If the definition of digital goods keeps widening, though, he says, “this could be the start of something big.”
In the short term, Facebook may choose to move cautiously with its Credits-based economy. Company executives are likely to have their hands full the next few months, trying to manage a successful initial public offering of stock. Moving too aggressively into banking could invite more government regulation than Facebook wants.
Still, Facebook’s buildup of Credits suggests more than just a minor dalliance. Facebook already takes payment for Credits in more than 40 currencies — ranging from the euro to the Vietnamese dong. Exchange rates are adjusted daily. It probably won’t be long until some economist tries to calculate the inflation rate, money-supply velocity or other traditional dimensions of the Facebook economy.
If Facebook at some point is willing to reduce its cut of each Credits transaction, this new form of online liquidity may catch the eye of many more merchants and customers. As Castronova observes: “there’s a dynamic here that the Federal Reserve ought to look at.”
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Predictions for Facebook Credits in 2012
http://www.insidefacebook.com/2012/01/18/predictions-for-facebook-credits-in-2012/[Editor's note: This is a guest post by Peter Vogel, co-founder of Plink, which lets consumers earn Facebook Credits for dining out and shopping online. He argues the rise of Open Graph applications will push Facebook Credits beyond social games and one-off experiments to become a major source of revenue for Facebook and developers.]
Although Facebook Credits is still primarily an in-game currency, in 2011 we began to see a glimmer of what Credits will look like when it grows up.
Movie studios like Miramax, Warner Bros. and Paramount Pictures, not to mention BBC Worldwide began offerings movies and TV shows for rent on Facebook. As an example, in promotion of “Mission: Impossible, Ghost Protocol,” the series’ first three movies were made available for rent on Facebook for 30 Credits per rental. In addition, to promote the launch of “Tower Heist,” Universal Pictures gave away 1 million Facebook Credits ($100,000 value) in an online scavenger hunt. DJ David Guetta began selling MP3s on his Facebook Page (19 Credits per track) and U.K.’s “Big Brother” and “The X Factor” began allowing fans to vote for contestants using Facebook Credits.
These examples, however, were few and far between in 2011 and it’s fair to say that even most Facebook users don’t know what Credits are for. 2012 is the year this will change.
Prediction 1: Facebook adds subscription billing as an option for Facebook Credits
Currently companies who sell virtual goods or products on Facebook can only accept one-time payments via Facebook Credits. For example, a player can use a small amount of virtual currency to buy a new cow in Zynga’s FarmVille. But media companies such as Netflix and Spotify would need a monthly billing plan. Consumers could agree to pay 100 Facebook Credits for monthly access to movies or music and would agree to be billed monthly. Until Facebook adds a monthly billing feature, it will be difficult or nearly impossible for many of the largest media providers to accept Credits.
Facebook will continue to improve the Credits platform in other ways as well to make it more functional and profitable for developers to use. Credits is the primary way, if not sole way, most developers generate revenue, so you can be sure that Facebook is truly committed to making Credits as flexible and effective a currency as possible.
Prediction 2: Open Graph Partners, including Spotify and Netflix, start to accept Credits
During its F8 conference, Facebook announced 17 music partners who would integrate Open Graph, allowing users to share their listening and other behaviors with friends. Spotify initially gave users a six-month free trial. Now, though, the nearly five million new members who’ve been getting unlimited free music will be limited to 10 hours a month and only five plays per song — not that much for a real music fan. Look for Spotify to add Facebook Credits as a payment option for these new users, potentially even offering special introductory rates to entice users to commit to a year-long membership.
In addition, a few notable facts lead me to believe something big is coming from a Netflix/Facebook partnership.
- Netflix’s CEO Reed Hastings joined the Facebook Board of Directors in June of 2011.
- Netflix recently signed deals with BBC, DreamWorks and Disney to increase the quality of available streaming content.
- A piece of legislation cleared the House and is on its way the Senate that would reverse a law enacted in 1998 that forbids public disclosure of video rental records. This would prevent the sharing of movies being watched between Facebook users. Much as users now have “Like” or “Listening to …” labels, it’s widely anticipated there would be a “Watching” tag as well.
Prediction 3: The size of the Facebook Credits economy will double every year for the next five years
Similar to Moore’s Law, which famously predicted that the number of transistors than could be placed inexpensively on an integrated circuit doubles every two years and Mark Zuckerberg’s Law that (scarily to some) states that people will be willing to “share” twice as much each year, I believe the Facebook Credits economy will double every year for the next five years.
This is based on the staggering amount of new ways that people will be earning and spending Facebook Credits over the coming years and the international growth, which will follow innovation in the U.S. This is conservative based on reports we’ve already seen that global revenue from Facebook Credits more than tripled in size from 2010, $140 Million, to $470 million in 2011. By 2016, Facebook Credits could be a $15 billion business.
What’s driving this? One example is the efforts by Milyoni, one of Facebook’s leading commerce and video streaming platforms. This year, Milyoni was responsible for hosting the first ever movie available for rent on Facebook, Warner Bros.’ “The Dark Knight,” at a cost of 30 Facebook Credits. Milyoni also hosted the first ever live pay-per-view concert on Facebook, “Widespread Panic” live from Austin, Texas, at a cost of 50 Credits. This year, according to Dean Alms, VP of strategy and marketing at Milyoni, they have deals in place with 13 movie studios and expect to offer 3,000 movies for rent on Facebook. That’s compared to less than 100 films offered in 2010. In addition, the company has plans to stream 40-50 live concert and events available on a live pay-per-view basis, compared to just two in 2010. Multiply this by other innovative companies and you get an idea of what’s to come this year and beyond.
Facebook has proven that the Credits model can work in social gaming, which represents between 25-30 percent of Facebook users, and will now utilize the same model to first enter the business of music, movies, TV and any other shareable media, before entering larger industries like financial services and health care in the coming years.
While still relatively unknown, Facebook Credits will emerge and begin to mean very real cash to a quickly expanding group of first-mover entrepreneurs and innovators who are just starting to get a whiff of the opportunities presented by the Facebook Credits economy.
It’s for real and it’s here.
Peter Vogel is co-founder of Plink, a Facebook Credits-based loyalty program that rewards Facebook members for dining and making purchases at their favorite restaurants and stores. Reach him via email at peter@plink.com or follow him on Twitter @pvogel.
