Facebook Credits Violate Antitrust Laws: Consumer Watchdog

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Facebook Credits let you buy as many bushels of virtual zucchini as you'd like. They may also violate antitrust law.

Consumer Watchdog, a nonprofit consumer advocacy group, has filed a complaint with the Federal Trade Commission accusing Facebook's virtual currency system of anti-competitive behavior. The complaint asks that the FTC issue an injunction stopping Facebook from continuing its behavior and that it investigate Facebook's relationship with social gaming giant Zynga.

According to a press release from Consumer Watchdog, virtual goods will raise $2.1 billion in revenue in 2011. Facebook, which reportedly hit 750 million members worldwide recently, has over half the market for virtual goods. Games like Farmville, Smurf's Village and others, allow users to game within virtual worlds and use real-world money, via Facebook Credits, to buy digital goods.

Facebook's proprietary Credit system becomes mandatory on July 1 and will require that game developers use only Facebook Credits when charging for goods in their games. Under the new contract, developers must charge the same price for their virtual goods sold within Facebook as those sold outside of Facebook, meaning that a developer can't offer a discount to users for purchasing goods on the developer's website rather than on the social network. Facebook will also charge 30 percent fees on each in-game purchase.

Because social games are mostly found on Facebook, Consumer Watchdog charges that Facebook's new Credits contract will let the social network "maintain and extend its monopoly power," meaning developers "must agree to adhere to Facebook Credits if they want to compete in the relevant market." By forbidding developers from offering lower prices elsewhere, Facebook makes it hard for developers to draw users off Facebook. By charging a service fee, the complaint argues Facebook could make it "far more difficult, if not cost prohibitive, for smaller game developers to compete inside the Facebook platform against larger developers."

The largest developer is social games company Zynga, which will reportedly make its initial public offering soon. The complaint also charges Facebook with entering into an improper joint venture agreement with Zynga in May 2010, exempting it from certain terms to which other developers are subject. Zynga is the biggest social game developer in the country, with over 250 million people playing the games each month, according to the report. Only Facebook Credits are accepted on the platform.

"Though Zynga is a game developer, Zynga has developed a large enough customer base that it is the single company in the market that could conceivably compete with Facebook if Zynga chose to leave the Facebook platform and/or establish a new social gaming site," Consumer Watchdog's complaint said. "The agreement between Facebook and Zynga, if published reports are correct, would therefore constitute a conspiracy between competitors and further extend Facebook’s already overwhelming monopoly power."

The complaint also warns that while Facebook Credits are currently only used in social games, the possibility is high that the site will allow the currency to be used towards other kinds of digital goods, such as pay-per-view movies. Consumer Watchdog cautions that Facebook's behavior with Credits use in games could extend to these other markets.

“This isn’t just about fun and games,” said John M. Simpson, a consumer advocate, in the press release. “These activities in the virtual world are a big business, worth billions of dollars. If Facebook is allowed to dictate terms in the online gaming market though anti-competitive tactics, consumers will pay more and innovation will be stifled.”
Facebook is not the only web giant to face antitrust charges. Google, which just unveiled its answer to the social network with Google+, is also being investigated by the FTC for potential antitrust violations.

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