June 29, 2011, 2:09 PM

Facebook faces antitrust pressure for promoting its new virtual currency

Consumer Watchdog calls for a federal investigation into Facebook Credits.

Lead Photo

Consumer Watchdog, a nonpartisan advocacy group, has asked the Federal Trade Commission to launch an antitrust investigation of Facebook Credits, the social network’s virtual currency. The call comes right before Facebook Inc., on Friday, requires all developers of social games that appear on its site to include Facebook Credits as a payment option for the purchase of virtual goods that players can use in those games.

“Consumer Watchdog believes that Facebook is engaging in anticompetitive and unfair business practices in the market for virtual goods,” writes Harvey Rosenfield,  the group’s founder, in a letter to the FTC. Specifically, the advocacy group says the terms Facebook imposes on game developers regarding the virtual currency will enable the social network to maintain a monopoly over the market for virtual goods used in social games.

Consumers generally can play games for free on Facebook. Players use Facebook Credits to buy virtual goods within games—say, extra life for a wounded video game character, or equipment for a virtual farm. Consumers can use payment cards to buy Facebook Credits; $1 buys 10 credits, though consumers can receive bonus credits for bulk purchases. (Online retailers also use Credits as promotional tools, such as rewards for purchases.)

As of Friday, developers can still include their own in-game currencies on Facebook, but consumers will have to purchase those currencies through Facebook Credits. Because Facebook commands at least 60% of the virtual goods market when it comes to social gaming, Consumer Watchdog says, the requirement means that the social network will extend its monopoly in this area via the new Credits policy.

Consumer Watchdog objects to several parts of Facebook’s terms for Credits. For instance, the social networks takes a 30% cut of Facebook Credit transactions; Consumer Watchdog says the fee for using the mandated virtual currency will make it difficult for smaller, less well-funded developers to compete on Facebook against larger developers.  

The letter says Facebook also will prohibit developers from offering virtual goods and currency discounts outside Facebook—that is, offering their gaming products for lower prices elsewhere. Consumer Watchdog says because most developers cannot afford to lose access to Facebook, the rule works to ensure higher prices for virtual goods and stifle competition.

“The effect of these terms is to create a barrier to competition between social game developers, and between potential competitors to Facebook—social networks or web sites operating as a platform for games,” the complaint reads.

Facebook did not respond to requests for comment.  While estimates vary, most observers agree the virtual goods market is booming, with consumers expected to spend $2.1 billion on such digital products in 2011, up 40% from 2009, according to a projection from social media research firm Inside Network; some $840 million of that total will come from social gaming. Based on the fees it might earn from spending by social gamers, Facebook could take in at least $250 million from virtual goods purchasing by its members this year, according to a rough estimate.

Another sign of the power of the virtual goods market came earlier this week, when marketing firm Ifeelgoods, which enables e-retailers to offer digital rewards such as Facebook Credits in marketing promotions, said it has raised $6.5 million in new funding.  Ifeelgoods, which launched in September, has signed such retailers as Shoebuy.com, No. 87 in the Internet Retailer Top 500,  Gap (24), 1-800-Flowers (45) and Gamefly.com (155).

The Consumer Watchdog complaint raises the stakes of the complaint by bringing up the possibility that consumers eventually will use Facebook Credits for a host of other digital goods. Already, consumers can use Facebook Credits for non-gaming purchases, including Facebook Deals, the social network’s daily deal offering. “Analysts predict that Facebook Credits will eventually become a payment method outside of Facebook, usable for purchases of virtual goods on other platforms Facebook forms partnerships with, or even for purchases of tangible goods from web sites integrated with Facebook,” the complaint says.

But at this month’s Internet Retailer Conference & Exhibition 2011 in San Diego, David Fisch, Facebook’s director of business development, said that the social network does not have plans to expand the use of Credits to tangible merchandise.

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