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Greed comes home to Facebook?

Nelson Alcantara, eTN editor-in-chief  Jul 15, 2011

“Facebook isn’t being run on dorm rooms anymore” is a clear message that a consumer advocacy group called Consumer Watchdog wants to send out. Citing Facebook’s decision to revise its “Terms for Using Its Virtual Money,” the Santa Monica-based, nonpartisan, nonprofit group has raised concerns about the social networking giant’s tweaking of its virtual money policies and cautioned that a Federal Trade Commission (FTC) “intervention is still necessary.”

According to Consumer Watchdog, it filed an anti-trust complaint last week after Facebook revised terms for game developers using its "virtual money” (referred to as “Facebook Credits”). The group said Facebook's revised terms “still require developers to use Facebook Credits exclusively to sell virtual goods in their games and to pay an exorbitant 30% fee for redeeming credits so they can be paid.”

"Faced with an antitrust complaint, Facebook tweaked one blatantly anticompetitive provision, but they've used their monopoly position to maintain an onerous burden on developers that ultimately will mean higher prices for consumers," said John M. Simpson, director of Consumer Watchdog's Privacy Project, in a statement dated July 6, 2011. "Facebook tweaked its terms when its worst policies were highlighted; now there is nothing to stop them from changing them when the heat's off. We call on the FTC to formally block Facebook's predatory policies."

The old policy prevented game developers from offering lower prices for virtual goods when they used a different platform for a game than Facebook -- for example My Space or Yahoo or their own website - a clear limit on fair price competition, Consumer Watchdog said.

The revised rule states: "You may not charge a logged-in Facebook user of your game app on Facebook a higher price in credits for an item, virtual currency, or service than you would charge a logged-in Facebook user on another platform or service via another payment method."

Significantly, a developer now can offer price competition on other platforms as long as the player isn't logged into Facebook. "While this specific modification quells concerns about the effects of the credits terms on other possible markets, which may arise through the Facebook platform, we still need to remember that Facebook holds monopoly power in the market for virtual goods purchased in social games so it's important to keep a close eye on its pricing terms in this market," said Laura Antonini, Consumer Watchdog Research Attorney.

Facebook’s revision in terms came on the eve of the July 4 holiday weekend as the social network giant began requiring all virtual goods sold through game applications to be bought with Facebook Credits. The practice that allowed game developers to take payment for their games' virtual goods directly using such methods as PayPal or credit cards ended on July 1, 2011.

Simpson wants to point out that Facebook has become “a global, multi-billion dollar corporate giant that dominates its market and must play by the rules. Its executives shouldn't have to be embarrassed into doing the right thing by the filing of a complaint with the Federal Trade Commission."

Consumer Watchdog estimates that the virtual goods market is expected to produce revenue of US$2.1 billion in 2011, up from US$1.6 billion the previous year. “Facebook has 500 million users worldwide, with 30 percent of them in the United States, meaning roughly half of the US population uses Facebook. The social network controls well over 50% of the market for virtual goods offered in social gaming.”

Facebook has also said it reserves “the right to change the Facebook Credits terms at any time.”

Read the June 28 complaint from the nonprofit, nonpartisan public interest group at: .

In the complaint, Consumer Watchdog warned that Facebook was creating its own online monetary system and could use exclusionary tactics similar to those from social gaming to control prices and exclude competitors from other markets. Facebook is expected to offer streaming media, music, and potentially real-world, non-digital goods for purchase with Facebook Credits as the applications become more diverse on the social network.

According to Consumer Watchdog, its June 28 complaint asked the FTC to investigate the development of Facebook Credits and its imposition upon developers; investigate alternative arrangements that Facebook has offered to developers, specifically whether the May 2010 agreement between Facebook and Zynga and/or other developers contains anticompetitive terms; enjoin Facebook from requiring social game developers to exclusively utilize Facebook Credits for the purchase of virtual goods within their games; enjoin Facebook from prohibiting any developer or application provider from offering lower prices on their products outside the Facebook platform; and enjoin Facebook from requiring any developer or application provider to exclusively utilize Facebook Credits for goods or services sold within the Facebook platform.

Useful links:
Read an analysis of the changes in the Facebook Credits terms here:
Read the Facebook Credits terms revised on July 1 here:
Read the old terms here:

Greed comes home to Facebook?
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