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Social Media Virtual Currencies, Facebook Credits and the Internet

Op-ed - Social Media Virtual Currencies

As little as five years ago, virtual currencies only had a very niche role in the internet ecosystem. You might see one used to maintain the internal economy of a massively multiplayer online game, but that was just about it. There was simply no need for them, as video game purchases cost more than $40 and were generally done in retail stores. The other form of monetization was subscriptions, and these cost more than $10 per payment, an amount high enough that the transaction fees involved in transferring money through credit cards were bearable.

Then, however, something happened. As the smartphone revolution took over the digital world, a new market for casual games appeared, games which are made by independent developers making a few hundred thousand dollars at most and close to nothing on average and which rely on quantity to earn their largest gains - one of the most popular titles so far, Angry Birds, sells its different versions for $1-$2. The same happened in social media, releasing a completely new class of games based on playing them with your friends and relying on a different model to generate their income: micropayments. The core game would be free, but players who wanted to get ahead could buy additional in-game content or equipment for a low price per piece. Even in the traditional video game market, developers who could not compete with major game production studios for quality adopted microtransactions as their main business model. And such models work; the gamers that are drawn into such games the most may end up spending hundreds or even over a thousand on them, one small item at a time.

However, there is a problem: the credit card fees. Online money transmission services like credit cards and Paypal have a two-part fee structure, with a percentage component of 2-4% and a fixed fee component of 20-30 cents. For a $10 purchase, for example, paying with Paypal (2.9% + $0.30) requires a total fee of 69 cents, giving $9.41 to the payee. For a $2 purchase, however, the fee is 36 cents, or 18% of the purchase price, and for a $0.99 app that figure would almost double. For this reason, Apple's App Store and social media gaming companies have come up with the same solution: pay into an account in lump sums and spend from there. With social media companies, since players would not necessarily know ahead of time which game they were going to spend their money on and might even want to only spend $2 on each of ten or twenty games, the "accounts" became virtual currencies.

Apple, meanwhile, went with the centralized solution: require all apps sold for their platform to go through Apple's centralized payment system, which generates considerable revenue as they take a 30% cut of all revenues. Some developers tried to bypass this restriction by sending their users to make in-app purchases elsewhere, but Apple eventually banned the practice. And Facebook, with its new Facebook Credits system, is seeking to do the same. Replacing the choice of competing virtual currencies with a mandate to use their own, they intend to extract the same 30% tax that Apple does from all revenues made within their ecosystem. Also, the move serves to help lock users in to Facebook itself, as independent currency providers would have gladly allowed users to spend their money at any social media platform they prefer while now quitting Facebook entails leaving your deposit behind. Also, much like credit card merchant agreements, Facebook's new terms of service also prevent game developers from offering discounts to users making purchases outside of Facebook. The end result is that Facebook wins, and everyone else loses. In fact, as any economist would quickly point out, the harm to the users, developers and competing social media platforms is much greater than the gain to Facebook as the policy isn't just a money transfer - it's also a deadweight loss dampening the incentive for innovation. Some are so frustrated by this move that they have set up a website,, to criticize the move and are even considering filing an antitrust lawsuit.

While some are only concerned about this specific application of Facebook's near-monopoly power, moves like these are ultimately symptomatic, a mere part of a larger ongoing trend toward the proprietarization of the internet. The internet's original infrastructure, largely developed by Tim Berners-Lee, was designed to be open and public so that anyone could use it, and it was this strength that caused protocols like HTML to win out over proprietary alternatives. Everyone was equal on the internet, and you did not need anyone's permission to participate. For the first few years of the internet, this paradigm largely remained. Email was designed from the start to be federated, people maintained personal webpages under their own control and online forums were accessible to everyone. Now, however, the situation is slowly sliding in the opposite direction. The focus of our online activities drifted away from the internet to proprietary "walled gardens" built on top of the internet, accessible to no one but those who are already inside. In 2011, Google lost its position as the most visited site on the internet to Facebook, and its response was to build yet another walled garden, Google+. As the internet began to be monetized, there were no decentralized or federated protocols in the spirit of HTML to do so; instead, we rely on credit cards and Paypal. And these new giants are waking up to the potential to turn their newfound power into profit. Each individual move may be protested, fought and perhaps even banned, but the problem will only persist and grow as long as we deny the core principle that made the internet so strong in the first place: that the basic infrastructure on top of which everything else relies must be open and accessible to all.

There are signs of hope, as OpenID has become a fairly successful standard for authentication to online services, Diaspora has appeared as an alternative to Facebook and Google+ and credit cards and Paypal are under attack by Bitcoin. Indeed, if Bitcoin succeeds the very motivation behind the battle over Facebook Credits may cease to exist as no one would be willing to pay a central provider 30% of their profits. Once free is the norm, for better or for worse changing it is a steep uphill battle. But it is situations like these that remind us why such efforts are necessary in the first place, and why it does not suffice to simply shame the business or petition the government into giving users a temporary reprieve or marginal improvement. The internet is the greatest laboratory of innovation and driver of technological progress that the world has ever seen, and the reason for its initial success is not any central body pushing its development to extract a profit but the sheer openness and freedom of it all, and such freedom must be defended in order for it to survive.