September 20, 2010

The Facebook model succeeds. Next steps: copying, responding, losing.

Along the lines of previous reporting, it seems that Facebook has won its spurs. Eliot van Buskirk reports from Wired:

Facebook is making a play to become the dominant player in virtual currency — the funny money you use to everything from digital magazines to Farmville turnips. It’s already a billion-dollar business in which Facebook, the world’s largest social network, will face stiff competition from other behemoths like Apple, Google and PayPal.

Facebook already has a big advantage over those companies: a virtual currency, Facebook Credits, that works across different apps rather than being tied to one specific app or another.
Sales of virtual goods are projected to reach $1.6 billion this year in the United States alone, according to an Inside Network report. About half of that will be spent on social games, and the majority of that in Facebook games such as Farmville.

Facebook claims 30 percent of revenue when people buy these credits — the same cut Apple and Google slice off when users buy virtual goods within their apps — but is already the number one app across all smartphone platforms according to Nielsen.

This means that Facebook will earn its investors the return demanded. Because it has an active market place of many thousands of suppliers, it has gained control of the monetisation within its world, and it takes significant margin of that activity, this means that Facebook has cracked the revenue model in a way that few others have.

However, other big Internet players will notice the success, will revisit their flawed models, and will move to adopt the one that Facebook has worked out for them.

Apple has yet to create a cross-app virtual currency, but offers other virtual goods — iTunes songs, for instance — through pre-paid gift cards. Users may start wondering why they can’t use iTunes credits to purchase goods within iPhone apps like Farmville — and vice versa. And because so much money will be spent in this way, this problem could become a source of annoyance for users and app developers alike.

This is of interest to financial cryptography players as it establishes the basic business rules to play in this market. It's also of interest to regulators and incumbents (read: banks) who want to squash the market:

The U.S. has strict laws against creating new forms of currency, but there’s enough wiggle room for Apple (iTunes), Google (Checkout, Android), Paypal, individual developers, and others to join Facebook in creating virtual currencies that work in apps across their respective platforms, even those beyond games — music, movies, productivity apps, and so on. And that’s when things could get tricky, in the huge and expanding market for virtual goods.

Unfortunately the signs auger badly for them. As frequently commented here in this blog, the European Union tried to beat this one back in the 1990s and succeeded so well it lost. Meanwhile, the USA supported, and partly won with Paypal, but then reversed course and is now set to lose. And, unless the banks wave the get-out-of-jail-free card, they won't be getting as much attention as before. Curiously, their favourite "save me" card might be more justified this time (you know your banking, right?) but it's already been spent, and the results weren't good. Patience should be thin.

Perhaps it is time to roll out Goodhart's law as this blog's aphorism ad nauseum? Meanwhile, bringing the two battles together, this means that while the B-list is moving to copying, the A-list now starts its regulatory response phase.

Good luck on that immense strategic battle! Interesting times ahead.

Posted by iang at September 20, 2010 09:00 PM | TrackBack

@ Iang,

The real problem with "digital currency" is the various Governments around the world.

Government democratic or otherwise is parisitic in nature and it treads a fine line between alowing it's host to survive and even thrive or slowly sucking the life out of it.

The host is obviously a respective nations economy and the life blood a government leaches is the efforts of the respective nations citizens in the form of taxation.

Money is said to have came into being as a way to tokenise effort in a predictable and usually readily portable way, thus make trading possible.

If that was the sole reason then there would only be one currency used throughout the world.

It's not there is "taxation" to consider, this used to be directly by effort, where a "citizen" would be required to expend labour directly for their "Lord and Master". However there is only so much direct effort a Lord can profitably put to use, thus they resorted to taking a share of the product a citizens efforts produced as tithes. This had it's own problems so as merchants developed trade tokens the respective Lords started taking that instead.

This created all sorts of problems that we still see today one of which is denying the Lord of what he considers is his share by right (divine or otherwise). The failure to "render unto Ceaser..." or "cheating on taxes" comes about in a number of ways one of which is "services" that is effort that does not produce direct physical goods but some other non tangable value cannot be taxed by tithes.

The original "service" was that of a merchant thus various methods where tried one of which is "import" duties. originaly as a percentage of goods at the point of entry into a Lords domain. Laterly as an assessed value expressed in trade tokens.

Now traditionaly most trade tokens are of little interest beyond their national borders and thus each sufficiently large domain ended up with it's own tokens. Having many different token systems had the same problems that the tokens themselves where supposed to solve. And an odd thing happened it became clear that providing trade tokens was a service in it's own right and brought to the issuer of such tokens some significant advantages. One of which is the right to set the rate of exchange.

Thus as a Lord you can demand off of a trader tokens you have issued and thus force them to buy them at a rate you set. A prime example of this on a very local scale was the mining industry and the "company store" where a worker had to buy their tools and equipment, but only in a token system issued and controled by the mining company...

Thus for a Government having your own currancy brings many many hidden advantages they covert jealously

So anybody setting up their own currancy (E-Gold for instance) is going to run bang into not just the Government of the nation they reside in but other Governments as well all of whom assume (correctly) that it is a system to deny them taxation on "effort" that is their rightfull dues...

And nearly all Governments have set the bar so high one way or another to prevent their being compeating currencies in their domain that it is going to be close to impossible to do in a settled and stable nation.

Thus a new currency will probably come about in places like Africa and the Middle East where there is either conflict or significant turmoil, where the Governments concerned will not be able to stop a new currency arising and gaining sufficient traction to be beyond their control.

However there is the question of settlement etc which requires as a minimum way of transfering tokens at a distance in an accountable and low cost fashion.

Step forward the telecoms companies whose billing systems are based on systems where transactions are very small (pennies) but the cost of a transaction remains considerably less by comparison. Like Bank's Telco's usually have sufficient "fixation clout" with a Government to be able to "fix" any problems a Government would inflict on other less influential organisations.

Thus I suspect that the likes of Facebook will not succeed where as "Third world" organisations using Telco's will.

Posted by: Clive Robinson at September 21, 2010 12:52 AM
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