Can Someone Explain Facebook Credits to Me?

By James Kwak

The recent New York Times story on Facebook Credits was just one of a slew of articles that have been coming out recently on this topic. (Hint: When that happens, it’s usually because the company in question is putting on a PR campaign, which means they are pushing stories to the media in an attempt to build buzz.) According to the generally positive reporting, Credits are “a virtual currency system that some day could turn into a multibillion-dollar business.”

As far as I can make out,* Credits are points that you can buy with real money and that are stored with your Facebook account data on the mother ship in Palo Alto (just like your bank keeps track of the Dollars you have on account there). You can use Credits to pay for a variety of stuff in Facebook apps, and Facebook takes a cut (currently thirty percent) of the value of any transaction using Credits. The story is that in the long run, you may be able to use Credits to buy anything, not just stuff on Facebook, positioning Facebook as a potential leader in electronic payments.

To me, this sounds like an ultimately futile attempt to keep marketing spin one step ahead of the real world. Unless I’m missing something basic, Credits should be crushed by another competitor–Dollars. The value of Credits, supposedly, is that you don’t have to enter your credit card number every time you want to by something. This is true because you are logged into Facebook, which keeps track of your balance and deducts from it as necessary. But that has nothing to do with Credits themselves; Facebook could just as easily have used Dollars instead of Credits and gotten the same result (you use your credit card to put money in your Dollars account, and then when you buy things, Dollars come out of your Dollars account).

So why use Credits instead of Dollars? I can think of three reasons: (1) people are more likely to buy things with Credits than with Dollars, even if the real financial impact is the same, because Credits feel more fun, and Dollars remind them of their rent payments; (2) if Facebook tried to take a 30 percent cut out of Dollar payments, no one would go along; and (3) Credits sound much more exciting if you’re trying to build media hype and drive up the value of your company (something I’m very familiar with from the Internet bubble). Note that all of these are actually bad.

Facebook’s key asset is the fact that hundreds of millions of people are logged into it at any moment, so if there were a “Pay with Facebook” button on retailers’ web sites, you could use that instead of reentering your data. There are not many companies that could compete on this level, but there are certainly a few, Google being the first that jumps to mind. If Google were to offer a competing service–and I think it does–but one that uses Dollars instead of Credits, it’s hard to see why any retailer would take Facebook over Google. Facebook may have more logged-in users at any given moment, but it has some serious disadvantages: notably, that huge cut Facebook takes out of every transaction, and the fact that Credits are prepaid, so you can’t use them for large impulse buys unless you keep your Credits account stocked with thousands of dollars . . . which is just crazy, even in today’s low-interest rate environment.

Yes, Facebook might win this battle, if they bring their fees down to credit card levels, because of that huge user base. But that would be a bad thing, and not just for the reasons I mentioned below. Facebook not only has terrible privacy policies, it also just sucks at implementing security. Do we really want Mark Zuckerberg–a smart guy who is in way, way, way over his head–to own all the financial payment data in the universe? I don’t.

So, it seems to me I must be missing some brilliant thing about Credits that will enable them to triumph over Dollars. Can someone tell me what it is?

* I have not used Credits because, well, I basically don’t use Facebook. I also admit to having a general bias against everything Facebook, because I think it’s a technologically incompetent, slightly abusive company.

54 responses to “Can Someone Explain Facebook Credits to Me?

  1. I think there’s a case to be made the FB can make a lot of money with Credits. In fact, it may be the most viable part of their business model. (Note that I said “may be.”) The reason is that they can extract rents from companies like Zynga — if you want to buy virtual tractors etc. as a way to engage in gift exchanges with your friends, FB is going to take a cut, and it comes out of Zynga’s pocket. But you’re right that it seems stupid to think that FB will substitute for cash and credit cards. But they also say that FB will fundamentally change human relationships and the structure of society, so why not also say they will replace the Treasury and Fed?

  2. It’s really all about gaming and frictionless user experience. Game economies such as World of Warcraft dwarf some nations and Facebook games such as those made by Zynga are not far behind.

    Gamers are used to the type of experience where all aspects of game play are centralized and you don’t have to worry about mundane things such as taking the time to enter a credit card number, or storing an active credit card number on Facebook’s server. Facebook takes the 30% cut for providing the platform for gameplay and, most importantly, being the host that brought you and your 500 million friends together to play.

    As far as Credits triumphing over Dollars in the real world, the last line of the NYT points out that both Google and Amazon have not cracked this yet and that “the odds against Facebook are steep.”

  3. James, there’s an old saying : “The guy who invented gambling was smart, but the guy who invented casino chips was a genius.”

  4. Are any of these Facebook products/services subject to sales taxes?

    Just wondering.

  5. A couple of things. First, XBox Live uses “points”, which is essentially the same idea. It helps get around *some* regulatory and arbitrage issues, since you’re not dealing with real money, but users complain about it. Next, one major appeal of a “credits” system is that, if your ecosystem is big enough, you can reward people for things like games, encourage certain behaviors, and keep the virtual currency in the system.

    Others have mentioned WoW and Zynga. You can look up lots of scholarly literature on the economics of virtual currencies; it’s quite interesting. FreeRealms is another similar one — you can get membership and buy things by converting cash into their virtual currency, but you can also *earn* virtual currency and pay for membership and other stuff without ever having to spend a penny of real cash.

  6. That’s an interesting point but the answer is going to vary by state. In Pennsylvania, internet purchases are not taxed unless the vendor has a physical presence in the state. Therefore, buying a mug from Oldnavy.com is taxed but buying a mug from Amazon isn’t.

    I imagine that this purchase would fall under the same guidelines.

  7. The other advantage of credits are that they are currently $0.10 each.

    For things like games, it isn’t cost effective to take $0.10 or $0.50 on a credit card.

    So as an effective micro-transaction system, with a built in market, it might be successful. And 30% overhead isn’t bad compared to credit card processing on $1 transactions.

  8. So why use Credits instead of Dollars? I can think of three reasons: (1) people are more likely to buy things with Credits than with Dollars, even if the real financial impact is the same, because Credits feel more fun, and Dollars remind them of their rent payments; (2) if Facebook tried to take a 30 percent cut out of Dollar payments, no one would go along; and (3) Credits sound much more exciting if you’re trying to build media hype and drive up the value of your company (something I’m very familiar with from the Internet bubble). Note that all of these are actually bad.

    (My emphasis.)

    All you have to remember is the time the Simpsons bought thousands in Itchy and Scratchy dollars to use in Itchy and Scratchy Land, because the clerk tells them it’s “fun”, and how well that worked out…

  9. wo — Marx (no not Groucho) said someday we’d outgrow money. I’ve been thinking about that lately since we have been so captured by big finance. But how? Maybe this is how it begins, just playin’ around.

  10. Credit feels like more fun !!!

    Ummm ,,, I guess that’s why AIG FP was on a roll.

  11. Hey James, long time no talk (also ex-ariba).

    Perhaps Facebook is abusive (as someone who cares about privacy, I don’t have an account there), but I don’t think anyone can say they’re technology-incompetent. Watch this talk http://www.infoq.com/presentations/Facebook-Software-Stack

  12. You can’t buy a tractor with dollars. Unless you want a REAL one.

  13. The characterization of facebook as being technologically incompetent just boggles the mind. It indicates either flippancy in judgement or a lack of analytical ability on your part – neither of which bode well for the rest of the content of this blog.

  14. This would be the time to create buzz – the Facebook movie (The Social Network) is opening in just a few days.

    The rest is for Ted K……..

    Your momma’s so stupid, she thinks Tupac Shakur is a Jewish Holiday!

  15. The big win of these online private currencies is convenience. Whether they matter in the larger scheme of things depends, I suppose, on the what Facebook has to trade in it. Historically, private currencies were subject to abuses, and online currencies similarly. See, for instance, Linden Lab’s Second Life banking regulations, for instance.

  16. Yes, but why do you have to have credits? You could simply have a Dollars account at Facebook; fill that account with $50 of your credit card; and then use Dollars inside Facebook (at $0.10 per transaction, say). Facebook can then keep track of your account and settle up with Zyngo on a much larger scale, avoiding the credit card transaction costs. It would be just like, say, a prepaid phone card.

    But if that was all there was to it, then you wouldn’t get any of the marketing spin you get with Credits.

  17. Incompetent is perhaps the wrong word. I didn’t primarily mean that their architects and developers are bad (although the security breaches are worrying). I meant it more at the product management and product strategy level. I don’t think they are good at figuring out what the long-term user experience should be and then implementing it. Instead they lurch from one clever and half-baked idea to monetize their platform (remember Beacon) to another. As you know, but most people on this blog don’t, I know a lot about software companies, and I firmly believe that great developers are worthless unless you have good product managers. And I don’t think Facebook has good product managers, at least on the high level. (Or the low level–why does their UI change unpredictably all the time? Are they really just experimenting on hundreds of millions of people?)

  18. I still don’t see how you could have the same results by denominating your currency in dollars. One benefit to the currency provider is that points are always less liquid than money, which provides certain obvious advantages. (I believe XBox and Nintendo sell you points in awkward chunks, so you can never fully exhaust your account–which also creates stickiness.) But why this is good for the customer escapes me.

  19. Cynthia Lichtenstein

    James, the reason Facebook doesnt use dollars is simple. It is illegal (a criminal offense) — see 12 USC Section 3 something—no time to look up—part of Glass-Steagall that was not repealed by GLBA–to take “deposits” w/o being licensed as a bank (and examined)by a federal or state authority. So you call the deposit in Palo Alto a “credit”.

  20. Yes, Cynthia describes one of the more important regulatory considerations. If you’re dealing with cash, you have to think about things like refunds, exchange rates, and so on. Facebook operates internationally, so it’s smart to put off those problems for the time being.

    There is also the issue that these transactions will normally be tiny, so the transaction fees on credit cards would eat too much if you bill per-transaction. Thus, post-pay is very inefficient unless you batch transactions, and this gets complicated. Furthermore, lots of places around the world don’t like post-pay anyway — post-pay (or immediate credit card debit) is an American thing. In Korea or China, consumers will demand prepay anyway. In Facebook’s geographically diverse demographic, preference of payment instrument will vary widely. Some places bill to their cellphones (Kenya is way ahead of the world on this), others buy cards, others use the post office… Once you’ve done pre-pay, it’s way easier to just convert everything to credits.

    Even in America, it depends on the demographic. For example, a big chunk of the hardcore gamer market for Xbox is young college students whose top priority is “beer money”. If the “new ferrari for the racing game” is competing with “beer money”, drawing from the same pocket, beer money wins. But if the “points” for the ferrari are in a different bucket, it doesn’t compete with beer money. Yeah, I know… But that’s just how it works.

    Even more important is the kids’ market in America. I see this firsthand with mine. Most kids don’t have ready cash, and can’t easily get to the store to buy prepaid cards for their online games. They need to beg their parents to use credit cards. So, imagine that you’re a kid, and you’ve *finally* convinced your mom to let you buy that new shield for the game. Do you really want to go back to her for every 50 cents purchase you want to make? Hell no! You’re going to prepay as many credits as you can get away with, so you can postpone another begging session. And this is where credits start to make sense — because kids whose parents refuse to give them extra cash can still *earn* credits by completing in-game challenges, helping other kids do things (and getting the credits gifted to them), and so on. Just imagine if that was denominated in real dollars.

    Now, I’ll grant you that it is *possible* to use currency. That’s what PayPal does, and PayPal needs to operate as a bank, which is quite expensive. If this catches on, Facebook may be forced to become more like a bank and deal with local currency. Additionally, at least 4 companies want to own this space — Google (checkout), Amazon (FPS), Apple, and PayPal. AliPay in China is massive as well, processing more money than anyone other than PayPal, IIRC. So Facebook will see incredibly fierce competition as they move closer to real currency transactions.

    But overall, the fact is that gamers all over the world have already become comfortable with virtual currencies. The world is different now than it was even 5 years ago, so this is the right time for Facebook to be doing this.

  21. Naveen Prasanna

    James
    Other reasons for virtual credits:
    1. You can throw a big number of credits at your users and make them happy: “you have a gazillion credits” which sounds much better than “you have a dollar left in your account”
    2. Facebook controls the exchange rate: They can decide what a credit is worth And arbitrate as they wish between a Zynga And the user.
    3. Hand out free credits. They would go out of business if these were free dollars. Now why does that remind me of the fed?:)

  22. . . i mean, for me that’s the appeal. I’m sick to death of dollars and their owners which ain’t us folks.

  23. If they really knew what they were doing they would start with ultra low charges.
    The word would be spread and maybe they would potentially have (after some development) a real success with it.
    They have done the exact opposite and that could mean:

    1) They are in a need of ideas for making some quick cash. And they do not have enough patience for a new big market to form around their product before they can profit from it (once again).
    2) They are not very smart, or already suffer from a god complex thanks to their size and huge PR machine. Which is a big fail for making a good business in long term.

    My impression (since they do not comment on their financials as they are privately owned) is that what they already have is a relatively big thing. But with a much smaller or much more volatile profit margin one could hope for from a tech or any bigger company.
    And they do not have the courage to rebuild their technology. Instead they lure very smart people to upgrade the existing one with lots of advanced stuff. It can even be seen on how their user interface works, have you ever played with FB messages in depth a bit like a software tester would play with it? It is pretty poorly written and just not finished. And the real big thing is their back-end, which in my impression failed to account for all changes they try or would like to try today.
    The way their management thinks can be easily seen from all those privacy problems they have and the way they communicate it and supposedly work on it. Well, users do have a real problem, not them.
    All in all, my best guess is that someone will lose his money in Facebook company and they will have team up with someone bigger and established. And more competent.

  24. tupac is caput

  25. Mr. Kwak wrote:

    “So, it seems to me I must be missing some brilliant thing about Credits that will enable them to triumph over Dollars. Can someone tell me what it is?

    * I have not used Credits because, well, I basically don’t use Facebook. I also admit to having a general bias against everything Facebook, because I think it’s a technologically incompetent, slightly abusive company.”

    http://en.wikipedia.org/wiki/Facebook_features

  26. diesel mcfadden

    I think the part you’re missing is where there already exists a captive market for virtual goods used by tens of millions of people for which Facebook has shifted payments exclusively to credits.

    Zynga is on a $600m/$800m/$1b/depends on who you ask/a lot of money whichever the case/ run rate this year. These were originally paid for in dollars. Now Zynga and the other top 4 out of the top 5 “social games” on Facebook now only accept Facebook credits. Let’s call it $1.5b in revenue for sporting sake. Facebook’s 30% off the top shifts $450m in profit from the game makers straight to Facebook.

    With this base to start from, Facebook has 100+ games using credits now. The carrot is that with both ease of use and currency trapped in the system and more goods to buy, absolute usage and revenue go up. The stick is that without Facebook, Zynga, for one, would lose their users and with Facebook support, one of their competitors could be built up to replace them in short order. The power Facebook has is that while parts of their system is “open”, the key part – communicating with the end user – is completely closed. This is what drives google absolutely nuts.

    Anyone who doesn’t think Facebook can monetize 500m active users with (mostly) real identities and a credit card has a complete lack of imagination. Keep in mind that the profit transfer off Zynga alone, one company is on the order of hundreds of millions of dollars. It’s a lot of money. If Zynga had an alternative, they wouldn’t pay up. They don’t and so they pay.

    Credits on the platform are only one revenue stream. As another example, take a look at a Facebook page for an artist, say Lady Gaga. 8m+ followers. This is arguably a far more important communication channel for her than her web site. She HAS to have control over her Facebook page. What’s it worth to turn off the ads on her page? What’s it worth to have a proper customized landing page? What would it worth in the future to be able to communicate with these 8m+ people in the future when Facebook could limit the # of communications, the length of the communications, or the style/type of communications, or the ads shown against the communications? 100k? 50k? 200k? 10 cents per user per year? One post office stamp’s worth per year, 44 cents, that’d be $3m? 4 cents? 300k? That’s one Facebook page.

    Credits are just a way to monetize the monopoly on the communication channel. With an active user base that exceeds the population of nearly every country on earth, creating a controllable, “taxable”, currency makes all the sense in the world.

  27. diesel mcfadden

    To reiterate, the thing you’re missing is the $1-$2bil in existing transactions which tens of millions of users want to do which (for the next five years anyway) can only be paid for in Credits, not dollars. There’s no way to “crush” this with dollars because the commerce is predicated on having exclusive products which in turn are predicated on having a ubiquitous social network for communications. And in this case, email/web/open standards are insufficient to develop substitute goods.

    It is, in this respect, like its own country, complete with borders. If you want to buy exclusive Japanese goods, you’ll have to pay in Yen. A nice effect is that Facebook also gets a currency printing press where they can “give away” the products of any of companies producing goods downstream.

  28. diesel mcfadden

    I think you greatly misunderstand the nature of the product.

    It’s “lurchy” because it’s on the edge of design understanding.
    No one knows how to design social experiences for audiences like this.

    Facebook understands social experiences and virility arguably better than another other company on earth. Really. Who’s better? What other company knows how to design long-term user experiences for this sized audience or even 1/10 the size audience.

    And still they have to try things, see what the users do and adapt. Arguably, the real-time News Feed was one of the most innovative things in user experience and information distribution design that’s come up and

    But they have been very very clear about their strategy. Turn what was a private closed system with closed communication to (small) fixed personal sized audiences to a public open system where everyone shares everything with everyone and privacy is an old notion and they own the ability to resell the users and their communication. Be the validated login / payment information / social graph for everything, make it all public and be able to resell everything. At every step, Beacon, News Feed, defaults, instant personalization, they move the default to sharing everything with everyone. At this point, you can’t opt out of sharing your basic info, your friend graph, and your interests and the news feed and pictures default to fully open. Instant personalization gives sites user data on users that never even identify themselves and no one complains. That’s the base now and that’s all a huge change. One that only they can really take advantage of.

    They’ve also been exceptionally good at getting partners to build their installed base and then shoving them aside when they no longer suit their purposes.

    Their base was in the low tens of millions before the Facebook “platform” was announced. Slide / Rock You and hundreds of others built that to he mid-tens of millions before Facebook cleaned up the UI by moving the apps off the main profile page.

    Then Zynga built that to the hundreds of millions with their games before Facebook demanded 30% off the top (and got it). See below.

    This is because in the end, Facebook knows that that the partners don’t own the user and the network, they do. The most important thing is to grow this as fast as possible to be the login and social information bus for the internet and mobile devices. Getting a few dollars here and there is good so they know how to do it, but that’s not primary. And arguably they’ve been far from incompetent while doing it. Ruthless yes, but no one else is even close. Twitter a far far second and a completely different beast. A broadcast system with no payment system and non-real identities.

  29. This is why events unnerve me
    They find it all, a different story
    Notice whom for wheels are turning
    Turn again and turn towards this time
    All she ask’s the strength to hold me
    Then again the same old story
    World will travel, oh so quickly
    Travel first and lean towards this time.

    Oh, I’ll break them down, no mercy shown
    Heaven knows, it’s got to be this time
    Watching her, these things she said
    The times she cried, too frail to wake this time.

    Oh I’ll break them down, no mercy shown
    Heaven knows, it’s got to be this time
    Avenues all lined with trees
    Picture me and then you start watching
    Watching forever, forever

    New Order – Ceremony

  30. much, much bigger than kids and games – an absolute gold mine of enormous amount of data, massively supplemented by images it is able to extract from users simply by documenting their extractions from each other – and coming up with new ways to encourage more submissions and they are just beginning to monetize that…

    “…about two-thirds of its 134 million American members are older than 26. Outside the United States, Facebook’s fastest growth has been among middle-age women. In country after country, it has become so central to social life that if you are not on it — regardless of your age — you are probably not in very close contact with your friends… Facebook messaging is beginning to replace e-mail among the Italian educated elite and among businesspeople in Colombia. And in Indonesia, Facebook’s third-largest country, if you use the Internet you are almost certainly a member: Of the 30 million people online there, 27.8 million of them use Facebook… becoming someone’s “friend” on Facebook typically means giving that person access to personal information. In an experiment, security firm Sophos invited Facebook users to befriend someone named Freddi Staur, whose profile contained almost no information but showed a photo of a small green plastic frog. The request was accepted by 41 percent of users… it has become the world’s largest repository of photos; its users would be loathe to abandon all those pictures, since many don’t keep copies elsewhere…” http://www.washingtonpost.com/wp-dyn/content/article/2010/09/23/AR2010092304440.html

  31. sounds like the lure is the price and perceived benefits of ‘membership’ – something that google and amazon doesn’t capture

    so rather focusing on the games, perhaps looking at those as market research for the production and monetization of many, many more products and services which could be, for the most part, facebook products – custom created through facebook platform facilitated collaborations – on offer to facebook credit bearing facebook ‘members’ – greatly leveraging the sorts of motivations that lure buyers into paying huge premiums associated with specific brands and products such as ‘exclusive’:

    “…Luxury goods… used as calling cards to unnamed secret ‘clubs’…” http://www.cpp-luxury.com/en/bags-a-bitch_878.html

    or expensive t-shirts: http://www.nytimes.com/2010/09/11/nyregion/11fashion.html?_r=1&hp

    or events hosted by organizations which accept registration payments made by American Express cards only…

    and like NYC and London, facebook also provides the ambiance and market space that attracts and facilitates transactions between willing participants: http://www.cpp-luxury.com/en/despite-economic-growth–india-s-luxury-market-remains-underdeveloped_861.html

    …it’s the product and credit check system as well – want to list or rent a residence through http://airbnb.com/ ? – you’ve have to provide your facebook profile. don’t deliver – members will talk – don’t pay – members will boycott – why not require that members do all transactions using facebook credits?

    or let’s say sometime in the not too distant future a person in africa or indonesia wants to gain entry to a u.s. school but needs to buy certain courses and tests which can only – or best – be purchased using local currency converted to and using facebook credits which enable them to participate in a facebook class….

    “…The $100 million for Newark is the initial gift to start a foundation for education financed by Mr. Zuckerberg. This would be by far the largest publicly known gift by Mr. Zuckerberg… The gift is many times larger than any the system has received, officials said — an extraordinary sum not only for a district with an $800 million annual operating budget, but also for any publicly financed government agency. It is not yet clear how the money would be used, or over what period…” http://www.nytimes.com/2010/09/23/education/23newark.html?ref=technology

  32. he reason you’re going to use credits and not dollars is that Facebook is forcing companies that use its platform to use credits for transactions. Social games make their revenues from the sales of virtual items and this is a HUGE business that Facebook was not profiting from. When Facebook saw that the games were making more profit from virtual items than facebook was on the site that decided they deserved a cut and foriced the game companies to use credits.

    No dollars are allowed, just credits.

  33. what’s to stop it from being a virtual walmart (bank): http://www.businessweek.com/magazine/content/05_06/b3919046_mz011.htm

    http://smr.newswire.ca/en/walmart-canada-bank/walmart-canada-bank-launches-walmart-rewards-mastercard

    http://www.financialpost.com/news/Mart+moves+into+retail+banking+Canada/3114620/story.html

    …which, instead of facilitating cheaper transactions of cheaper stuff, facilitates both the manufacture and transaction of custom collaborated virtual goods, services and experiences?

  34. great post and comments

  35. I was so glad to learn that an intelligent modern person couldn’t understand Facebook Credits any more than I could, but then I have a hard time with the Virtual over the Palpable world!

  36. One very obvious reason to use a fake currency that I haven’t seen anyone else mention (I’m guessing because all of you are Americans) is the fact that Facebook is an international operation, and there are hundreds of different currencies users can conceivably use. Using credits in this environment makes it much much easier for third parties to develop pricing models and do things like psychological pricing.

    Lets say I want to sell something in a game on Facebook. In the US, it will be $3.99, but what will it be in all the other countries? Either you have to set different prices manually, or you have to use some sort of conversion engine that produces weird numbers (“that’ll be 2.962 euros, please”). It’s much easier to just dump all the hassle of dealing with international currencies onto Facebook and just price it in credits. I’m almost certain that’s why they did it.

  37. that point is made in the NYT article referenced by James: “…Currently users can buy Credits with 15 currencies, including the United States dollars, the euro, the British pound, the Venezuelan bolivar and the Danish krone… ” along with comments subsequent to that

    where it gets really interesting is expanding on Cynthia Lichtenstein’s September 24, 2010 at 10:27 A.M. comment along with other questions about tax and trying to imagine accompanying regulatory considerations, (beyond pricing and transacting – but IP mounting/ownership, standards which will certainly grow with the amount of $$ potential involved) if a small part of market potential is effectively monetized on a global basis

  38. Off topic, but related to tech. In another post, James K. made a positive reference to Ubuntu. So I gave it a try. IMHO, Ubuntu and the GNOME desktop is better than MS Vista. :)

  39. If its anything like Microsoft points, I think the major advantage is that it doesn’t seem like real money. Just to make it tricky they pick a conversion rate such that it doesn’t translate evenly into dollars. (80 points to a dollar, why not use 100?)

    I don’t think empty accounts will be a major limitation. On Xbox Live when you don’t have enough points to make a purchase, it will just ask if you want to add enough points to make the purchase and bill your default payment option. So I always keep 0 points in my account.(And they tell me how much it is in dollars when they ask to bill me for the points on my card.)

    Of course some people probably run a balance, and this is all gravy for Microsoft as they get to do whatever they want with that money until people spend it.

    But 30 cents on a dollar is extortion. I don’t think that even MS is that shady and they actually add some value with XBox Live. (Like making a video game console and the console OS and XBox Live)

  40. Not strictly true. In PA it is a sales and use tax. The vendor doesn’t collect the tax in the instance you mention, but when you receive the product (except exempt ones) from out of state you are obligated to pay the sales and use tax yourself. We have received several official notices to this effect. I wouldn’t want to estimate what the level of compliance is.

  41. A secure, ubiquitous micro-payment system is the holy grail of the internet. At least, it’s thought to be. There have been multiple attempts, dating back to the late 1990s. The closest to a success continues to exist – Paypal (purchased by Ebay in 2002). Of course, Paypal quickly became simply an electronic version of Western Union rather than a micro-payment system.

    The idea of micropayments dates back to when the internet was new and people were trying to reconcile the value of ‘content’ through subscription services with the fact that there was much available for free. The theory at the time was advertisement-supported websites and content wasn’t feasible, and content owners wanted $ for their intellectual property but couldn’t attract enough people via subscription services.

    Micro-payments were thought to be the way people would read, say, newspaper articles online. At least, they would be happy to pay $0.05 or something for old newspaper articles they wanted to access.

    As we well know, online advertising has become an accepted method of getting revenue for content. Google wouldn’t exist without it.

    Until such time content owners want to sell their property at very low prices, there simply is no need for micropayments. Some possibilities in the future are electronic books and older content in other media (old TV shows, old movies, etc). The main thing holding this up, in my opinion, is the content owners place a much higher value on their property than a micropayment system would offer. E-books don’t sell for a small fraction of printed books, and you can find old TV shows on DVD for the same (or often higher) price as newly released films.

    Facebook credits are a micropayment system in search of a marketplace that doesn’t exist.

  42. Right now, Facebook Credits cost $0.10/FC. Credits aren’t a currency the way they are set up now. For the end user, they aren’t fungible. Users can’t earn FC in any way other than buying them from Facebook. As far as I can tell, developers can’t write an app that pays users in FC for doing certain work. (Think Amazon Mechanical Turk, but with FC payments instead of cents.)

    What would be interesting, and Facebook has the userbase to pull this off, is if they treated Credits as a real currency. Two things would need to happen first: users would need to be able to transfer FC between one another (same as writing a check or handing a friend cash); second, the cost of credits would need to float.

    The Federal Government has been the one with their hands on the control levers of the money supply since the creation of the Fed. While it’s an imperfect science, the government can generally cause the money supply to grow or shrink when they need to. However, with a floating exchange rate, Facebook would be on equal footing to the government to set monetary policy. Of course, it will take a long time before there are eight and a half trillion dollars worth of Facebook Credits on the market. ($8.6 Trillion is the M2 supply as of last month.)

    It would be fascinating to see what happens when corporations start to be able to wrest control of monetary policy from the government. Right now, there is at least some (albeit minimal) controls on the money supply. I would hate to see what a company could do to increase its profits and harm others by manipulating the money supply and profiting on the currency arbitrage if they had that direct of control.

  43. Wouldnt’ the complete palindrome be:

    Tupac is, si, caput?

  44. Should be “wouldn’t” – that’s what I get for typing and submitting too quickly…

  45. Right now Zynga (makers of farmville) have their own “coin” system, that can use on virtual products in Farmvile.

    FB Credits seemed like a copy of those, that could be used in any game.

    Now, this is kind of embarassing but I actually started playing some of those ridiculous FB social games because a friend and I were thinking of making one. That kind of went by the wayside but I got sucked into one of them. (they don’t really require a lot of time, at least not the ones I tried — only two of which were any fun)

    Anyway, one of the games I was playing actually takes FB credits, while another one uses their own credit system. And at some point FB actually gave me 15 credits free.

    But the other day I logged on and they were gone. No warning whatsoever that they were use or lose.

    I think the odds of me purchasing FB credits after that is pretty low, since I know they can go away at random.

  46. OMG …

    I started using Ubuntu about two months ago. I just downloaded Gnome Do Docky onto my desk top. It’s better than the last Apple dock I had (many versions ago.)

    I am starting to understand why there are techies dedicated to software freedom. Why-why-why is there an OS and desktop that is free, simpler to use, and more sophisticated than Vista? I think I know why … :)

  47. Another reason to use credits (that’s good for Facebook and vendors, but bad for customers), is that is obfuscates the real prices of goods – especially if one uses odd conversion ratios.

    A lot of people will therefore be much more willing to spend 420 “credits” or “points” than $9.99 in “real money”.

  48. All Facebook has to do is lower its 30% cut in order to compete with PayPal in the Real-Goods-outside-of-Facebook market. If they do that, Credits can be huge.

    I wrote a blog post just a week ago about this: http://bit.ly/cCULNx

    Cheers

    José Matías

  49. im also new to that facebook credit thing.. thanks to you for opening this up.. replies were very helpful.. thank you too

    Sell Luxury Watches

  50. FaceBook is trying to work around the high credit card fees on micropayments.

    The solution should be PayPal. But PayPal belongs to eBay.

    Any company that fears possible future rivalry with eBay naturally refuses to accept PayPal. This is why Amazon accepts nearly every form of payment on the planet — except PayPal.

    The easy solution is for eBay to spin PayPal off to its shareholders. Transaction volume would double almost overnight. It would be a huge win for eBay shareholders.

  51. I an wary of Facebook … and more so with JK’s posts. As for my venture into Ubuntu, the Gnome dock (mentioned above) a fun tech toy. Ubuntu panels are fine and much better than Vista.

    One of the more interesting insights I’ve had is that over the next 5 years wireless technology may become as common as electricity. Some people are already connected 100% of the time using iPhone, blackberry, android. It will be interesting to see how these devices evolve and it’s happening very quickly.

  52. This is new for me as I am not a regular user of Facebook. Thank you for posting this Question, I learned lot of things from the above discussion about the Facebook credit.

  53. There are some very good lines on Facebook credit. You are right on that Facebook might win this battle, if they bring their fees down to credit card levels. Overall I like the post very much. There is some good information on FB credit in the post and in the comments.

  54. Not only is tax being charged (for example… 25 YoCash used to be $5.00 through Zynga, it is now $5.33 through Facebook) but Facebook is also charging a processing fee of a little over a dollar on these purchases.