By James Kwak, The Baseline Scenario
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.
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