Is Facebook Strangling the Golden Geese?
Facebook is in the process of introducing Facebook Credits, its entry into the burgeoning ecommerce/virtual currency area. Given that Facebook is the prime destination for people playing social games, this is hardly surprising. However, in so doing, is it in danger of driving away the sources of its fast-rising revenue? Is Facebook strangling the geese that lay its golden eggs?
The geese in this scenario are of course all the developers running apps (mainly games) on Facebook, reportedly driving Facebook’s revenues to over a billion dollars this year. The lion’s share of this revenue comes from advertising — much (most?) of which is paid for by game publishers trying to attract new players to their games.
But as reported today over on Inside Facebook (in a clearly written article, well worth reading), a lot of developers are worried not only about the already high 30% cut of revenue that Facebook takes for using its Credits, but the additional, hidden, and/or uncertain costs above that. By some estimates — estimate that seem fairly reasonable to me — these could mount to a real cost of over 50% of revenue, and in some cases may present an almost unbounded downside for Facebook to take back revenue based on unused Credits.
The case for using FB Credits with its 30% cut is that developers will see a higher monetization rate due to lower friction for customers: it will create an umbrella for them that makes buying easier, and so more prevalent. Thus while a developer might pay less per purchase to another ecommerce provider, they will see more monetization traffic if they allow users to pay via FB Credits. As Inside Facebook reports, FB says that using Credits will provide “better security, more payment options, a simpler user interface, and a range of smaller incentives and promotions.”
Hmm, maybe. None of these seem like particular points of pain that aren’t already addressed by Paypal, Social Gold, Offerpal, Gambit, or any of the many other ecommerce/virtual currency providers out there. All provide just those benefits — and some perhaps better than Facebook can. In addition, their costs are typically far below Facebook’s 30% take-it-or-leave-it level, driven there by competition.
And competition is where things might really begin to rub. Facebook’s CEO Mark Zuckerberg has said that eventually its Credits will be the only virtual currency available to games on Facebook. If Facebook exiles all other forms of payment (in a move that effectively removes all competition by fiat), developers who wish to have their game on Facebook will have no choice but to pay whatever costs Facebook demands.
At this point, whether that will happen is still speculation — but it seems reasonably within Facebook’s method of operations to date. If Facebook chooses to make the use of its Credits mandatory, or even exclusive, this will be Zuckerberg’s hand closing around the throat of all those golden goose developers who have helped bring his company hundreds of millions of dollars in revenue.
Some would comply, I’m sure, with such a policy, and might even do well under it. Many others however would take this as a sign that Facebook is no longer the place to be, with its viral channels largely cut off and a mandatory usurious payment scheme in place, and would escape to other social networking sites, game sites, and the web itself. Fortunes might be more variable by going elsewhere, but for many developers this will be worth it to escape a near-certain death by strangulation by these policies.
We don’t yet know how Facebook will complete its rollout of its Credits. But no matter how this unfolds, it will have a dramatic impact on the continuing development and growth of the social games market.