Facebook Seeks New Revenues with a Promotion for Its Virtual Currency

Behind all the buzz about social payments and virtual currency is an often-overlooked fact: few social-network members today actually use digital money. The antidote for this ailment, according to executives in the social-networking world, is something they call monetization, which is simply a term for tactics that generate revenues from those who visit a network and play online games but don’t buy anything. And Facebook Inc., by far the biggest social network, is trying to do just that with its Facebook Credits virtual currency by using a centuries-old tactic: cutting prices temporarily.

One Facebook Credit normally costs 10 cents in U.S. currency, or 10 for $1. But on Feb. 10, Facebook told its third-party software developers that it would encourage game players to make a first-time purchase by enabling them to get $4 of value for free if they buy 10 Facebook credits at the regular price of $1. Users typically buy Facebook Credits by charging them to a major payment card or PayPal. As the promotion’s sponsor, Facebook said developers would be paid their full revenue share.

Facebook’s massive site includes games and programs from many third-party developers, especially leading social-games developer Zynga Inc. Facebook requires game developers to accept Facebook Credits and takes a 30% cut of transaction revenue.

Though they are independent companies, the fortunes of Facebook and Zynga are closely intertwined. Menlo Park, Calif.-based Facebook, which is planning an IPO, gets 85% of its revenues from advertising and 15% from payments. Some 12% of its total advertising and payment revenues come from Zynga, developer of such popular games as Zynga Poker, FarmVille, CityVille, CastleVille and others. The five most popular games currently on Facebook all come from Zynga.

Meanwhile, San Francisco-based Zynga generates “substantially all” of its revenues through players on Facebook’s platform, according to the registration statement the company filed ahead of its own IPO in December. On Tuesday, Zynga reported its first quarterly earnings since becoming a publicly traded company. The fourth-quarter report has some big numbers: Zynga’s overall player base, or monthly unique users (MUUs), grew to 153 million in December, up 38% from 111 million a year earlier.

But most social games can be played for free. Only 1.9% of MUUs, or 2.9 million people, are what Zynga calls monthly unique payers (MUPs): customers who buy something in a game, such as a digital tool or weapon. The number of MUPs grew 13% from 2.6 million in 2011’s third quarter.

Facebook in its IPO registration statement said that monetization is a major corporate goal, as did Zynga in its recent regulatory filings. “It is true that they want to convert more people into paying users, I think that is one of the challenges for the online industry, to monetize,” says Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin Strategy & Research. “I think the goal beyond that is to grow the base of people using virtual currency and the types of services where it is being used.”

A Facebook spokesperson would not comment about the promotion beyond what the company revealed on its blog for third-party developers. “Facebook has begun sponsoring promotions to help developers convert game players into paying users,” the blog posting says. “We are currently running an offer to encourage game players to make a first-time purchase using their credit card or PayPal account.” Facebook didn’t say how long the promotion would last.

The social network offered some users 80% discounts on Facebook Credits last year and early this year, according to Inside Facebook, an independent online newsletter. In its blog post, the social network said it would “evolve these promotions over time to better grow our ecosystem.”

Facebook has indicated that it could expand the required use of Facebook Credits to other merchants on the network, a requirement that today only covers online games, according to Inside Facebook. Getting credit card and PayPal account numbers on file now will make it easier for consumers to buy Facebook Credits, but greater use of the virtual currency might have a downside for Facebook in the form of pressure from merchants on its 30% take of Facebook Credits transactions. “If the use of Facebook Credits becomes more prominent … ultimately they’re going have to drop that rate,” says Robertson.

nn