Facebook is making a play to become the dominant player in virtual currency — the funny money you use to everything from digital magazines to Farmville turnips. It’s already a billion-dollar business in which Facebook, the world’s largest social network, will face stiff competition from other behemoths like Apple, Google and PayPal.

Facebook already has a big advantage over those companies: a virtual currency, Facebook Credits, that works across different apps rather than being tied to one specific app or another.

Virtual currencies are a promising way to sell because users buy them in pre-paid chunks, rather than plunking down a credit card for each individual purchase, which increases transaction costs. Skype credits are a classic example: Users don’t add just enough credits for each call, as they did with payphones; they re-up periodically with payments of $10 or so.

Right now, most virtual goods are acquired within games, but music, movies, and other forms of content could follow suit, increasing the stakes in the race to reduce the friction affecting in-app transactions.

Sales of virtual goods are projected to reach $1.6 billion this year in the United States alone, according to an Inside Network report. About half of that will be spent on social games, and the majority of that in Facebook games such as Farmville.

Facebook claims 30 percent of revenue when people buy these credits — the same cut Apple and Google slice off when users buy virtual goods within their apps — but is already the number one app across all smartphone platforms according to Nielsen.

Because they are accepted by a number of companies, Facebook Credits are are more liquid than those credits within iOS and Android apps can be. And even though they are significantly less liquid than real dollars processed by PayPal (or Visa and Mastercard, for that matter) they are often handed out in unorthodox ways — for instance, when you sign up for a Netflix subscription, view a video ad, or the like. Facebook itself gives every user 10-25 free credits when they join the social network.

Farmville owner Zynga (like Facebook, the subject of increasing scrutiny for putative idea theft), recently made the switch to Facebook Credits, and had already been selling over $1 million-worth of virtual credits per day as early as April. Now, all of the other major Facebook game publishers are planning to adopt Facebook Credits to create a new standard for in-app currency — according to TrialPay co-founder Terry Angelos, who says they didn’t exactly have a choice.

TrialPay, Facebook’s “de facto exclusive free payment partner” for Facebook Credits, specializes in bundling offers for one thing when consumers are buying something else. They’ve already done on campaigns for McAfee, Netflix, Domino’s Pizza, TrendMicro, Corel, Winzip, The Wall Street Journal, and CNET. Now, it’s awarding Facebook Credits to users who watch video advertisements or register for services.

“When [Facebook can] take a player like Zynga and force them – and Playdom, Playfish, Crowdstar, RockYou, which are all moving over to Facebook Credits — you have a platform that’s going to go from zero to, I think, a billion-dollar run rate in the next six months,” Angelos told Wired.com. “And that’s unprecedented, and unheard of. It’s very, very rare that a payment platform gets to that much traction so quickly… Because of the relationship that Facebook has with publishers, it’s able to have every single major publisher switch to Facebook Credits.”

Facebook a strong hand, but not a perfect one. Apple currently bars developers of  iOS apps from accepting Facebook Credits, which competes with its own budding in-app payment model. A developer who made the popular Aki-Aki iPhone app, which integrates with Facebook in many other ways, told Wired.com his app could not accept Facebook Credits due to Apple’s ban on the practice.

Apple has yet to create a cross-app virtual currency, but offers other virtual goods — iTunes songs, for instance — through pre-paid gift cards. Users may start wondering why they can’t use iTunes credits to purchase goods within iPhone apps like Farmville — and vice versa. And because so much money will be spent in this way, this problem could become a source of annoyance for users and app developers alike.

The U.S. has strict laws against creating new forms of currency, but there’s enough wiggle room for Apple (iTunes), Google (Checkout, Android), Paypal, individual developers, and others to join Facebook in creating virtual currencies that work in apps across their respective platforms, even those beyond games — music, movies, productivity apps, and so on. And that’s when things could get tricky, in the huge and expanding market for virtual goods.

Developers don’t have to embrace Facebook Credits or any other virtual currency. But once a critical mass of other apps adopt one, to ignore them would be to leave money on the table. Will app users and gamers have to maintain stockpiles of multiple virtual currencies, one for each platform on which they wish to access the same cloud-based app or game?

It’s impossible to predict what might happen if Apple and Google create their own versions of Facebook Credits, though it certainly seems likely that some sort of showdown would eventually occur. I wouldn’t be surprised if a squabble over micro-payments weren’t partially responsible for the failure of Apple and Facebook to come to terms over Ping, as an early salvo in this war.

Follow us for disruptive tech news: Eliot Van Buskirk and Epicenter on Twitter.

See Also:

• Virtual Worlds, Real Money: Can Social Games Solve Music’s Woes
• What is the Value of a Virtual Gift?
• Farm Wars: How Facebook Games Harvest Big Bucks
• The Future of Money: It’s Flexible, Frictionless and (Almost) Free
• Virtual Cash Breeds Real Greed
• Creating a Virtual Currency

Authors: Eliot Van Buskirk

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