It might be Facebook's worst-kept secret.
It's become increasingly clear in recent weeks that Facebook is finally inching toward the launch of a micropayment platform. The social site has been expanding the presence of its virtual currency, which Facebook debuted last November when it changed the monetary units for its "Gifts" product into "credits" rather than U.S. dollars.
Credits are now bundled with some promotional items in the Gifts app. And soon, select developers on the Facebook Platform will be able to start working "credits" into their own applications, in a move that could lead to a lucrative new revenue stream for Facebook, which currently relies on an advertising-based business model. First reported by a number of tech blogs, the company has confirmed this development.
There's been talk of Facebook's planned foray into the e-commerce sector for well over a year now. But the "credits" product that's being released to developers soon appears to be quite different from the Facebook payment platform that followers of the company have anticipated. As recently as last fall, Facebook's plans--reportedly called "Facebook Wallet"--were something much more like a straight-up, PayPal-like transaction platform.
At least initially, that's likely not the case.
Facebook's official comment on whether this is a shift in company strategy is coy. "We think enabling developers to accept these credits as a form of payment has the potential to create exciting new use cases for users and developers," spokesman David Swain said in an e-mail. "We do not have details to share at the moment because this will be a very small alpha, only a handful of developers, but will likely share more as we evaluate the results of the test."
Swain declined to comment on whether Facebook would ever pursue a more standard e-commerce product like what many had assumed the "wallet" would be. But sources with knowledge of Facebook's product development say that what started as the "wallet" eventually turned into the "credits" system. According to one well-placed source in the virtual-currency sector, there's been a clear change from Facebook's earlier plans to foray into the transaction and payment space.
"It's an absolute change in strategy," the source said. "So, they're not competing with PayPal now."
Virtual currencies, with silly, often casino-inspired names and an unfortunate reputation in the mainstream as the way to buy enchanted swords and potions in fantasy role-playing games or to bling out your virtual penguin, don't carry the serious-business gravitas of services such as PayPal. But shifting strategy to a virtual goods platform is a savvy and forward-thinking move on Facebook's part. Since it launched two years ago, Facebook's developer platform has changed and matured a lot.
Most notably, a few app development companies are making an astonishing amount of money without paying Facebook a cent--and most of these are on the games and entertainment side of things. It's probably not a coincidence that those apps--from poker games to virtual pets to the seemingly endless parade of Mafia Wars and Zombie Wars applications--are the ones that would benefit the most from a virtual currency system. In turn, they're the ones from which Facebook could profit the most by taking a cut of revenue.
Facebook's global reach
But the decision to launch a virtual currency is bigger than simply to appeal to games. More importantly, the credits system is a necessary response to Facebook's newfound role as what's effectively a functioning sovereignty. With well over 200 million members now, Facebook has extended its reach well outside the U.S., and the Palo Alto, Calif., company has said that over three-quarters of membership registrations now come from overseas. The concept of "Facebook Wallet" might have sufficed when the majority of its users were dealing in U.S. dollars. That's far from the case now.
"There are currency implications, there are buying power implications, and there are payment provider implications," said Mike Trigg, vice president of marketing at social network Hi5, when asked in an interview about balancing the physical world's diverse economic systems. Hi5 launched a virtual currency called Hi5 Coins late last year.
For Hi5, launching a virtual currency early on was a logical conclusion because much of its user base is international, particularly in Latin America. "You really see market differences, especially for youth, which is really our target audience, in how they can pay for stuff online," Trigg said. "In some countries (credit cards and PayPal) aren't used at all. We see other markets where paying by SMS is the way to get into the system, and we see markets where cash cards and game cards and wire transfers and mailing cash through the mail even are ways that people get real currency into the virtual currency system."
With Facebook's reach significantly broader than Hi5's, the complications are even greater. And with hundreds of millions of people able to use this currency when it's available to all users, this is no enchanted-swords-and-penguins affair. Economists and Web developers alike will want to keep tabs on the expansion of Facebook credits, as they could quickly become the closest thing the Web has seen to a standard monetary unit.
"I think the universal currency wars are going to be on soon," said Lisa Rutherford, president of Twofish, a company that helps developers and companies manage virtual currencies by providing data and analytics.
There are plenty of start-ups that have attempted to launch virtual currencies that would be interoperable across participating developers' and companies' games and other applications. None of them have become legitimate Web sensations, perhaps because of the inherent security concerns in online payments. Facebook already has millions of users' credit card numbers on file from transactions through the Gifts app--its "credits" are in the lead before they even launch in full.
"When everyone was launching, when Spare Change and Jambool were launching virtual currencies three or four months ago, we had an opportunity to jump on the bandwagon," Rutherford said. "We just thought that universal currency needed to come from a big, robust, more stable player. It shouldn't come from a start-up."
At the same time, Facebook's massive size and name brand aren't going to make it immune from the concerns that surround any other e-commerce player. Facebook, suffering from a rash of phishing attacks and the occasional bad press about user privacy and safety, is going to have to be more careful than ever when it comes to security. Virtual economies in general have endured their fair share of scrutiny, too: one of the best known, Second Life's "Linden dollars," took a blow when a wave of scams prompted the virtual world to shut down user-run banks. Regulations still keep them a shadow of their former selves.
Still, if anyone can do this, it's Facebook.
"They might all have grand visions," Rutherford continued, "but you're asking people to trust what's essentially a sovereign banking system, and yeah, it should come from one of the big guys."
The murkiness surrounding Facebook's valuation got in the way of its attempt to acquire Twitter last year, according to a BusinessWeek article posted Sunday.
Early Facebook investor Peter Thiel's interview with BusinessWeek make it sound like while the talks were serious, they simply didn't go that far: "It became pretty clear it wasn't going to happen...The deal would have to be done with Facebook stock. And then you have to figure out how much the stock is worth." Twitter, according to an anonymous source, was told that the social network's valuation was in the range of $8 billion or $9 billion but was aware that employees were privately trading stock at a valuation that was, at most, half that.
So the deal didn't happen.
Controversy over the true value of the privately owned company also came into play earlier last year when the settlement of the ConnectU vs. Facebook lawsuit was being negotiated. Court documents were redacted to keep the true valuation under wraps, and media outlets, including CNET News, petitioned to have the documents made public. The founders of small social-network ConnectU, who had sued Facebook because they claimed founder Mark Zuckerberg stole their code and business plan, contested the original settlement when they said they had been misled as to Facebook's true valuation.
Way back in October 2007, Microsoft invested $240 million in Facebook at a $15 billion valuation. The company's actual valuation was never really that high, and with the recession, it's currently somewhere south of $4 billion.
But valuations aside, would Twitter really have been a smart buy for Facebook? The "status update" feature on Facebook is very Twitter-like, but integrating the two services would've involved all kinds of complications. For one, Facebook's content is still hidden behind a log-in wall, whereas Twitter's "tweets" proliferate all over the Web. And while Facebook's profitability woes have been well-documented, Twitter beats it in that department: the buzzworthy start-up hasn't yet made public a business model of any kind.
In his interview with BusinessWeek, Thiel, one of the founders of PayPal, didn't discount the possibility that Facebook could make other acquisitions in the future. But as the interview also points out, that could be difficult as long as Facebook's valuation remains as volatile as it has been in recent months.
Forrester Research analyst Charlene Li interviews Max Levchin at the Web 2.0 Expo.
(Credit: Corinne Schulze/CNET Networks)SAN FRANCISCO--In his keynote address Wednesday at the Web 2.0 Expo here, PayPal co-founder Max Levchin said his current company, social-network application developer Slide, will prevent social sites from becoming fads.
Pretty ambitious for a start-up that made a name for itself by letting you throw virtual sheep at your friends on Facebook. (That'd be SuperPoke, a delightfully pointless Slide application.)
Levchin, interviewed onstage by Forrester Research analyst Charlene Li, was recently crowned Web 2.0's poster boy--as bestowed upon him by Portfolio magazine, which put him on the cover with the caption "Brilliant!" and a giant lightbulb seemingly balanced on his forehead.
"It's incredibly embarrassing and also 'pressure-full' and all sorts of other emotional things which I'm not all that good at expressing," Levchin said of the experience. "One, to be on a cover, and two, to be a 'poster boy.'" Plus, a $50 million funding round in January valued Slide at half a billion dollars.
Those are some pretty valuable sheep.
Early on, Li asked Levchin how exactly Slide makes money. Like so many other Web 2.0 execs, Levchin answered that he believes in advertising. He has it easier than most of his dot-com brethren: Slide has the good fortune of having enough active users and advertising connections, not to mention Levchin's star power, to score top-shelf advertisers. Neither Levchin nor Li touched upon anything involving the shaky economy and a potential downturn in online ads.
Li did ask whether Levchin is concerned about running a company that's wholly dependent upon the existence and popularity of other platforms--Facebook, MySpace, and the like. A big social network is perfectly capable of creating SuperPoke equivalents in-house, throwing a potentially fatal sheep at the company.
Levchin drew an analogy to Adobe's software, which is wholly reliant upon operating systems like Microsoft Windows. There were plenty of opportunities for Microsoft to put Adobe out of business in the past, he said, and Microsoft ultimately realized that it was in its best interest to keep Photoshop and Acrobat around. "I sleep relatively well at night about my competition, or the lack thereof," Levchin said.
The sheep, according to Levchin, can weather the storm.
The interview didn't raise any points that Valley junkies didn't know already. Application spam, he said, is an "intellectually challenging" issue that he hopes to solve "the same way (e-mail) spam gets dealt with today." And lightbulbs aside, Levchin maintained an air of humility, reminding the audience that his first four companies failed but that his fifth was "pretty successful." He was, of course, referring to PayPal, which sold to eBay for $1.5 billion.
He added that one of the ways he measures success is "the number of people that make a million dollars or more in your employee roster when your company has an exit."
So what makes Slide so special? It's that people actually use it, Levchin said. SuperPoke might be silly, but user engagement rates are through the roof. Procrastination-happy users of Facebook, MySpace, and other social networks for which Slide has created applications still haven't gotten sick of them. For a promotional tie-in sponsored by last year's hit movie Juno, a "pregnancy test" option was added to the SuperPoke roster--370,000 virtual pregnancy tests were administered in the first day of the campaign.
So what keeps him going? Levchin said he isn't really sure. "People are driven to do stuff. Jackson Pollack was driven to splash paint on canvases," he said.
Max Levchin, it seems, is currently driven to enable the world to hurl virtual sheep, Easter eggs, groundhogs, and meat pies (that was a Sweeney Todd tie-in) at their social-networking contacts. And thus far, he's been quite the success.
Enough for a magazine cover with a lightbulb above his head, even.
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