Facebook Credits won’t contribute to profits for “several years”

Facebook’s emerging virtual currency Credits may look like the cornerstone of a significant new source of profits for the social network, but the virtual currency won’t add to the company’s bottom line for awhile, according to Ethan Beard, director of the Facebook Developer Network.

Beard said the company would reinvest profits from Credits back into the product for “several years” to come.

Facebook has so far stopped short of banning competing virtual currencies, but Beard’s comments are a sign that the company will spend whatever it takes to help Credits become the de facto currency for the platform.

Such a currency might improve paid conversion rates for users, who might feel more comfortable with Facebook’s brand than an unknown one from a third party and who might not want the hassle of multiple payment systems for different games. But it also means that the company will take a 30 percent cut of much of the financial activity its platform generates — like a tax that slices profit margins for social gaming companies.

Facebook recently signed five-year deals with some of the biggest social gaming companies like Zynga and Crowdstar that cement Credits’ ascendancy. Beard added that more similar five-year deals are in the works for other social gaming companies.

None of the companies have commented on the terms of the deal. Speculation on how the deals happened has ranged from involving aggressive tactics like threats to cut off platform access to Facebook offering concessions like preferred placement in game directories.

But Beard said the deals were “strictly about Credits,” ruling out the possibility that Zynga got concessions like reduced rates on advertising, which are a big channel for user acquisition. Nor did either company get a discount on Facebook’s 30 percent take, he added.

Beard said the company is entering the market at an early enough stage when other competing virtual currencies on the platform (like what Social Gold or Offerpal have tried to build) haven’t yet taken off.

“There aren’t a lot with a huge amount of momentum behind them,” Beard said. “We think a single, universal currency is going to deliver the most value to partners and developers.”

The idea for Credits had been around since the very first days of the platform back in 2007. But the company held off from implementing it initially. After watching social games flourish on the platform, the company recognized an untapped niche for a payments solution, Beard said.

“We didn’t want to duplicate what the rest of the world was doing,” Beard said. “We started research on where we could uniquely add value and we began to see that with games and the growth of virtual goods. The success of social gaming on the platform helped us realize that there wasn’t any product that really focused on digital and virtual goods.”

VentureBeat: I imagine you probably have numerical targets for Credits adoption by year-end. What are your goals?

Beard: We don’t have any specific targets and goals that we can share.

VentureBeat: How did you decide on the 30 percent rate? Who was involved in that decision?

Beard: I don’t remember how many people were specifically involved, but it’s similar to how we make a lot of decisions in the company. We had a cross-functional team with people from different departments. We looked at industry comparables as well as different projections for different rates. There are some pretty established precedents for revenue share along those lines.

VentureBeat: Where do you think Facebook Credits will fit in with advertising in terms of the company’s overall revenue mix?

Beard: We expect to reinvest profits from Facebook Credits back into the product for the next several years, so it will bring very little or marginal profit.

VentureBeat: And what share of revenue might it take up in the long run?

Beard: I don’t have anything to share on that, but we think it’s a really interesting market where there hasn’t been a great solution in the market place that’s broadly adopted. We’re seeing a lot of success from developers.

We haven’t released conversion numbers in a long time, but we expect Credits to improve those rates. Crowdstar has done a deep integration with Credits as their in-game currency and seen a 50 percent increase in average revenue per user.

VentureBeat: What about real-world payments? (Beard had a Facebook-branded radio frequency identification tag taped to the back of his phone. RFID tags are used to power mobile and transport payments systems throughout Asia and Europe.)

Beard: Right now it’s against our terms. There are some great products out there for buying real-world goods. PayPal is a perfect example, but no one has built a product that’s mainly focused on virtual and digital goods.

VentureBeat: And mobile payments?

Beard: I think it’s a fascinating space. There are plenty of interesting opportunities. We’re still pretty narrowly focused on ramping up Credits on Facebook, though. There’s lots of opportunity, though.

VentureBeat: How did the Zynga and Crowdstar deals come about?

Beard: We’ve actually had demand from developers for a long time to have a formalized relationship, one that aligns our shared objectives in making money together and that recognizes a shared commitment and acknowledges that we’re both dedicating resources to make initiatives like Credits successful.

VentureBeat: What did you both need to put on the table to make the deal work?

Beard: The Crowdstar and Zynga deals were only about Credits.

VentureBeat: They didn’t involve advertising or marketing?

Beard: The terms are confidential, but they were strictly around Facebook Credits. I can’t get into specifics. Sorry!

VentureBeat: I’m not an expert on this, but more mature virtual economies like Linden Labs’ Second Life have pretty sophisticated systems for managing inflation with different currency sinks and sources. How are you steering the the virtual economy created by Credits?

Beard: I’m not an expert on it either, but we do have a team of people that handle this and manage deflation and inflation through seeding or bulk discounting. It’s all very carefully handled.

VentureBeat: How do you establish the exchange rate between Credits and real-world currencies? Is it real-time? Could I arbitrage the Facebook Credits exchange rate in one country with the exchange rate of a different market? (Other virtual economies like Linden Lab’s Second Life allow currency trading.)

Beard: We adjust Credits daily. We don’t want to be exposed to currency risk. There are also not that many places where money comes out our system. The only way to do that is through these 100 apps or so that Credits flow to. You can’t really arbitrage exchange rates right now.

VentureBeat: What are the biggest problems you’re facing now in your job?

Beard: Managing the growth is the hardest thing. We have more than 550,000 applications and 1 million developers. There are 350,000 websites using social plug-ins. Two months ago, social plug-ins didn’t exist. We’re just trying to understand what’s not working well and how much value the product is delivering.

VentureBeat: How is uptake on the open graph metadata?

Beard: The open graph and open graph protocol are still at pretty early stages. We basically released this Like button with a simple protocol. But the protocol can continue to evolve. A large portion of the sites that have integrated the Like button are using the metadata.