Facebook Credits and the Perils of Research on Digitisation

I never thought very much about Facebook Credits until an MBA project team decided to explore them more fully last year. The team tried hard but I really could not understand why Facebook wanted people to buy credits when they made purchases (of, say, virtual sheep) on Facebook. They explained that you could now earn Credits too by testing software and viewing ads. Sure, but then what? To buy sheep?

Anyhow, things like Facebook Credits are surprisingly pervasive. Nintendo, Sony, and Microsoft all have them for gaming. But iTunes doesn’t. That was puzzling. My guess had been that Apple had cut through some strange credit card rules but these systems were still there. And they seemed kind of restrictive as users could put money in but couldn’t take it out — although developers could remove 70% back.

Alongside all of this were new digital currencies like BitCoin. But this was different, it was meant to substitute away from sovereign currencies. Its record is mixed but as an economist I would predict that they would be most useful where people don’t want sovereign currencies to be: illicit activity. This wasn’t something I found that interesting.

Back to Facebook Credits. Various commentators had, for some time, lauded the potential of these to emerge as a competing payment system. First, to Visa and Mastercard. Then, even quite normally level-headed people like Matt Yglesias were suggesting that Facebook Credits could displaced broader currencies. This just seemed strange to me but I couldn’t quite put my finger on why.

That motivated Hanna Halaburda (of Harvard Business School) and myself to propose to look into the issue for the NBER’s Economics of Digitization: An Agenda conference. This is a big endeavour — so much so that it has a Pre-Conference next week followed by a full conference next year. We toiled at this exploring the economics of money before realising that there was one thing all of the non-convertible currencies had in common — they were established by platforms. That meant that the right way to look at this was how these currencies supported platform activity.

As it turns out the rationale is quite straightforward — although there are some technicalities we will delight our conference crowd with next week. Imagine that there are two types of users — time rich and time poor users. Time rich users have time to spend time building up Credits that hard way — by playing games etc. Time poor ones don’t. But platforms are interested in more activity as this generates more ‘fun for all.’ They want to get the time poor users more engaged. So what do they do? They provide a path to buying their way in to more interesting levels of the game. That increases their activity but also those of others who have more friends to play with. Add to that a dolup of price discrimination and you have a winning formula for a platform.

The final twist of course is why not make these credits convertible back into dollars? In that situation, the time rich may spend time earning credits to get those dollars. That may be fine if these are complementary to game activity but more broadly, from the perspective of playing the game, convertibility has increased their opportunity cost. That would be bad news for the platform. In the end, the way these platforms have designed their currency seems well targeted to complement the goals of the platform and not some broader agenda of displacing traditional currencies. Of course, it also means that it is very strange indeed to hire a monetary economist to advise platforms on their currency options (as Valve did this week). They need to hire economists skilled in platform and network strategy like the ones Microsoft, Google and Facebook employ.

But here is the thing. No sooner had a polished off my slides that Facebook through the ‘take over the world’ option way out the window and dumped Facebook Credits altogether! Sadly, they vindicated my presumption that this was not part of their goal but they also through out what we had just predicted was a good strategy!

Actually, what they really did was cede currency control to app developers like Zygna. Those companies had overlaid a set of their own currencies over the top of Facebook and it was pretty darn confusing for consumers. For one slide I wanted to work out what the actual price of one of those sheep were on FarmVille. It took me an hour to juggle the transactions from Dollars to Facebook Credits to FarmVille Coins (or Cash — they have two currencies!) to work out that it looked like a sheep cost around 46 cents. No wonder Facebook wanted the confusion to end. But if Facebook had been Apple they would have imposed their own currency option across the platform. That they didn’t is telling and I wonder if they have given away too much.

In any case, all this illustrates the perils of researching on digitization. We hadn’t even got to the pre-Conference before the world had changed to dissipate our attempts to enlighten the world as to a misconception. If they could have just waited a couple more weeks!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s