Facebook's new virtual currency

Facebook, which more than any other company aspires to usurp Google’s dominant place on the internet, hopes to avoid that problem. Already on the path to becoming an advertising powerhouse, the social networking company is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion-dollar business.

Facebook began testing its virtual currency, called Credits, more than a year ago with some popular games on Facebook. This month, Credits passed a milestone when it became the exclusive payment method for most of the games created by Zynga. Zynga is expected to have $500 million in revenue this year, according to the Inside Network, which tracks Facebook applications, as millions of users pay real money to buy virtual goods on games like FarmVille and Mafia Wars. Through Credits, Facebook will take a 30 per cent cut.

By the end of the year, Facebook expects that Credits will be used to buy the vast majority of virtual goods sold on Facebook. The fast-growing market is expected to reach $835 million on Facebook this year, according to the Inside Network. To bolster that market, Facebook began selling Credits gift cards at Target stores across the country this month. For now, Facebook says it simply wants Credits to help foster the growth of virtual goods transactions. But Facebook Chief Executive Mark Zuckerberg, said the company may choose to do “a lot more” with Credits in the future. Over time, the company plans to turn Credits into a system for micropayments that could be open to any application on Facebook, be it a game or perhaps a media company, people with direct knowledge of Facebook’s plans said. In addition to games, which account for the vast majority of money spent on Facebook, more than a million other applications run on the site. In the future, many of those may choose to charge for access to certain features or to things like music, videos or news articles.

Some analysts and industry insiders say that expanding Credits makes sense and could eventually put Facebook in competition with PayPal, Google, Amazon and others. “If they can get 50 million registered credit cards, why wouldn’t they use them to pay for your newspaper subscription?” said  Chief Executive Alex Rampell. TrialPay is a company which  offers free Facebook Credits to people who buy certain products.

Others say the potential for using Credits could extend beyond the Facebook site, through Facebook Connect, a service that allows users to log in to sites across the Web using their Facebook identities. For now, Facebook prefers to play down talk of its broader ambitions for Credits. Facebook Vice-President for partnerships and platform marketing Dan Rose, talks about the usefulness of Credits while playing Facebook games. Users will have a single currency they can spend on any game, sparing them the trouble of entering the credit card or PayPal credentials multiple times, he says. Currently users can buy Credits with 15 currencies, including the US dollars, the euro, the British pound, the Venezuelan bolivar and the Danish krone

It works much like Apple’s App Store, which allows users to enter their credit cards or PayPal accounts once and buy applications from any developer. Apple also takes a 30 per cent cut of sales on iTunes and its app store. “While some developers might initially see a decline in revenue because of Facebook’s commission, the plan is for Credits to more than offset that loss over time, because Credits will make it easier to spend more in a game,” said Rose. Facebook is also helping lubricate the system by giving its developers credits that they can give away to users. Some developers say they already have made gains.

“We are seeing the number of paying users increase and the revenue per user increase, and FB deserves a lot of the credit for it,” said CrowdStar Vice-President for marketing  Mark Hull. Further Rose said, “If Facebook succeeded, Credits could grow it to a size where over time it will become a material revenue generator.” For now, he said, Facebook plans to reinvest revenue from Credits into improving its software for developers. But Facebook’s ambitions are unmistakable. Credits is backed by a sizable engineering and product team that is full of PayPal veterans.

For now, Credits is not a rival to PayPal or other payment systems. In February, Facebook signed an agreement with PayPal, a unit of eBay, making PayPal one of the preferred ways to finance Credits accounts. Facebook users can buy Credits using their credit cards and some mobile payments services.

Since Zynga was one of PayPal’s largest customers, Facebook is now a significant customer as well. “Facebook has been a great partner,” PayPal Vice-President for platform Osama Bedier said. But as Credits expands beyond Facebook games, it could collide with a number of others competing for a piece of the growing commerce in digital goods. They include Apple, the leading seller of music and apps; Google, whose Checkout system is used in e-commerce and on the company’s app store for mobile phones; and even Amazon, which is seeking to expand its payment system across the Web.