Facebook’s Virtual Currency Draws Antitrust Complaints From Consumer Advocates

Published on

The tech industry has become dominated these days by a few goliaths who have smoked their competitors.

Google runs the go-to search engine, Apple is way ahead in the race to deliver movies and music to consumers, and Facebook has built the most popular social network by far in this country. With U.S. antitrust enforcers already examining Google and Apple for violations, some say that Facebook should also go under the microscope.

The non-partisan group Consumer Watchdog sent a complaint to the Federal Trade Commission on Tuesday, claiming the company is abusing its power as a popular site for online games by requiring all game developers to exclusively use Facebook’s virtual currency — and then taking a 30 percent cut with every transaction.

“It’s a digital shakedown,” said Jeff Chester, executive director of the Center For Digital Democracy, who also has raised concerns with the FTC. Facebook is “using its powerful control of … a closed system that arguably rivals Google in power across the world to force everyone to use only its digital currency.”

Games played between friends on Facebook have become enormously popular on the site, spawning a mini-economy of users who buy virtual goods with real money.

One popular game called FarmVille, for instance, invites users to buy supplies to build farms and grow crops. And business in this area is booming. The entire market for virtual goods in this country is expected to reach $2.1 billion overall in 2011, up 40 percent from last year, according to Inside Network, a research firm.

Developers of these games and Facebook have a symbiotic relationship. Part of Facebook’s explosive popularity resulted from the site’s willingness to allow outside developers to create games and other applications to work on Facebook’s platform. When Facebook offers games that become hits, users are more likely to stay on the site longer, allowing Facebook to sell more ads.

Most of the games are free, but users pay for virtual items used in the games in a variety of ways, including third-party payment sites such as PayPal or by purchasing them directly from the game’s developers.

But starting July 1, all games on Facebook’s site will have to use Facebook Credits, the site’s virtual currency. Because each purchase will include a 30 percent fee, critics say this added cost is essentially a tax on developers who rely on Facebook for a vast majority of their business.

“This is a serious thing. If they can dictate terms using anti-competitive tactics, it’s all going to mean that consumers pay more for their games and that innovation in this whole space will be absolutely stifled,” said John Simpson, a consumer advocate at Consumer Watchdog.

Facebook, which declined to comment for this story, surpassed Google as the most-visited site in this country last year. And the company is branching out. Earlier this year, it inked a deal with Warner Bros. to rent out movies, paid for by users with Facebook Credits.

This expansion of the Facebook ecosystem, to some experts, resembles the growth of other tech giants like Google and and Apple.

Google has expanded its brand onto mobile phones, maps and e-mail to the point where many users rely on Google’s products for much of their Internet use. Apple, too, has found success creating a self-contained system that melds its devices with iTunes and its applications store. Like Facebook, Apple collects a 30 percent fee from publishers that sell content on an iPad or iPhone app.

“I think in all of these cases — whether it be Apple, Google, now Facebook — the government is going to be keeping a close eye on all these companies as long as they are ubiquitous, dominant and getting into vertical [other] areas,” said Rebecca Arbogast, an analyst with Stifel, Nicolaus.

But, Arbogast added, it’s not clear yet whether any of these inquiries will result in formal antitrust charges. The companies are all complex and changing constantly.

In a sense, the antitrust concerns about these companies are all descendants of the government’s blockbuster case against Microsoft in the 1990s. In that case, officials accused Microsoft of leveraging its dominant Windows operating to funnel users to its browser, too. Likewise, critics of Facebook say the company can shepherd users to its own currency because of its dominance as the most popular social network.

“We call them winner-take-all businesses,” said Ben Edelman, an assistant professor at Harvard Business School. “The benefits to participating in a competing social network are slim to none. You might be the only one there.”

Latest Videos

Latest Releases

In The News

Latest Report

Support Consumer Watchdog

Subscribe to our newsletter

To be updated with all the latest news, press releases and special reports.

More Releases