Facebook Credits 2012 a Merchant's Perspective

Facebook Credits 2012 A Merchant’s Perspective

The Leader in Social Entertainment February 23, 2012

______Facebook Credits Overview Facebook Credits are a virtual currency that can be used to buy virtual goods, digital goods and other select products on the Facebook platform. They can be purchased using a credit card, PayPal, a mobile phone, gift cards and 50+ payment methods in 47 currencies.

This form of payment was introduced to make it easy to pay for virtual goods and currency in applications across the Facebook platform.

Facebook Credits are valued at approximately $0.10 each, but discounts are available when bought in bulk. Facebook keeps 30 percent of transactions and the developer keeps 70 percent. So if a merchant charges 100 Credits ($10.00) for a virtual or digital good, Facebook earns 30 Credits or $3.00 per transaction and the developer retains $7.00.

On July 1, 2011, Facebook Credits became mandatory for Facebook Games and Facebook Deals; and are highly recommended for all other applications on Facebook. Facebook Credits can be purchased or earned and can be used for digital goods such as movies and music, but cannot be used for physical goods like clothing or DVDs.

Facebook Credits are valid worldwide and can be subject to state and local tax if the digital good is a taxable item. Users accumulate Facebook Credits in their Facebook accounts. Facebook Credits can be purchased or earned outside of Facebook, on merchant websites for example, but can only be spent within the social network.

An entertainment company or merchant can give Facebook Credits to users as an incentive or they can receive Facebook Credits for payment on their virtual or digital goods. There are applications and service providers that help merchants take advantage of this new and powerful online currency.

The following pages provide a more detailed and visual view of Facebook Credits and how they work.

______

Benefits of Facebook Credits Facebook charges digital merchants a 30 percent transaction fee for using Facebook Credits. In exchange, Facebook offers a simple, uniform and global currency to purchase virtual and digital goods for its 800 million users around the world. For digital merchants, this marketplace is too big to ignore.

The most significant benefits of using Facebook Credits are as follows: 1. Access to a nearly 1 billion person marketplace 2. Simplified approach to purchasing virtual and digital goods 3. Consolidation of virtual currencies across multiple providers 4. A secure payment and billing environment 5. Global currency available in 47 currencies 6. Ability to purchase and gift Facebook Credits in many ways (Credit Card, PayPal, Mobile, Retail Stores and more) 7. A growing base of merchants who reward customer loyalty and buying with credits. Similar to airline miles that are aggressively accumulated by consumers 8. An effective mechanism to convert fans into paying customers of premium or exclusive services 9. For credit-hungry fans, Facebook Credit distribution can be a low cost promotional effort to increase your brand awareness or customer conversions

Growth of Facebook Credits Facebook main sources of revenue to develop and maintain this soon to be billion- person social network are advertising and Facebook Credits. In 2011, Facebook earned over $470 million on Facebook Credits revenue. Given Facebook’s percentage of sale is 30 percent, that means more than $1.5 billion was spent in virtual goods in 2011. The average year-over-year growth in Facebook Credits has been 350 percent. The explosive growth in Facebook Credits and merchant revenue will likely continue as both distributors and consumers of Facebook Credits aggressively enter the market. At current pace, the Facebook Credit economy will be worth $4.7 billion in 2012. Below is a history of Facebook Credits growth and this year’s estimates by Milyoni. The main assumption is that the reported Facebook Credit revenue is from their 30% transactional fee and not other sources.

* All numbers, both credits and dollars are in millions

______

Inhibitors to Growth While the growth in Facebook Credits will continue to soar, there are forces that may reduce the growth rate. Some of the most significant include:

• 30 percent transaction rate is more that many merchants and content providers are willing to accept until the market demonstrates an ROI • Facebook is introducing several changes to basic interactions of its social network such as Timeline and newsfeed advertising that some users are finding too invasive and may cause them to exit the platform • While it has the benefit of being a global currency, charging 50 Facebook Credits for digital goods is acceptable in some countries but prohibitive in others • Any breach in privacy or security, given the media’s willingness to hyper-cover these issues involving Facebook, could create major resistance to using the social network for commerce • The novelty and enjoyment of Facebook diminishes and users turn to other social networks, like Pinterest or Twitter, to satisfy their needs

Despite these negative forces for growth, Facebook will respond to and overcome these issues and continue to experience growth as a commerce platform for digital goods. If Facebook Credits are expanded to cover physical goods, then an even larger market can take advantage of this currency. While 30 percent can be rationalized for digital goods, expanding into the low margin physical goods marketplace would require Facebook to lower their transaction fee significantly.

While Social Gaming has dominated Facebook Credits use to date, expect Social Entertainment to grow in significance in the coming year. While a small percentage of users actually pay to play Social Games online, the number of people willing to pay for entertainment content (movies, music concerts, and sporting events) is massive.

Another important consideration in the adoption of Facebook Credits is the need for better marketing and promotion by Facebook. While the company is expected to earn over $1 billion this year in Credits, very little has been spent to date on marketing the benefits of Facebook Credits to users or merchants. Facebook prides itself on organic growth and word of mouth marketing, but some traditional marketing would go a long way to make this currency more attractive.

The following section addresses how Facebook Credits are acquired and used by consumers to purchase digital and virtual goods.

______Acquiring Facebook Credits Facebook users can acquire Facebook Credits in two primary places:

1) In a user’s account located at the upper right hand side of every Facebook page • Click on credit balance to access Facebook Credits information • Click on the “buy more” button to the right of Credit Balance.

2) Credits can also be acquired within an application that uses Facebook Credits as demonstrated below with the movie The Big Lebowski from Universal Pictures:

______

Once the value is chosen, users have multiple options for payment, including PayPal, credit cards, mobile phone, and others, as shown here:

Facebook Credits are valued at the basic rate of $0.10/per credit. Discounts apply when higher volumes of credits are purchased.

When purchasing Credits, the process takes place within Facebook using secure and trusted processing methods. Facebook provides this functionality to all virtual and digital merchants to make the commerce experience on Facebook more predictable and secure for fans.

______Credits as Incentives Due to strong consumer interest, the growing number of places where Facebook Credits can be used and its high perceived value, retailers, consumer brands and marketers have begun using Credits as a cost-effective incentive for key customer actions including purchases, email newsletter registration and user-generated content. Facebook Credits incentives, just like other aspects of Facebook, are highly social. This means that when customers receive a Facebook Credits incentive, they are likely to publish it on their Wall for all their friends to see in their News Feed, which is valuable marketing for retailers.

Retailers offering Facebook Credits incentives for purchases experience higher conversion rates, lower shopping cart abandonment rates and lower return rates.

______

Facebook Credits to Improve Ad Performance When used in combination with Facebook Ads, Facebook Credits have the effect of increasing ad performance for those seeking to increase their Facebook Credit account balance.

In the example below, Shoebuy.com ran two ads. The ad on the left features an offer of 50 free Facebook Credits, while the ad on the right features an offer of $5.00 off. While the dollar value is the same, people were twice as likely to click on the ad featuring the Facebook Credits offer than the $5.00 off.

Gap UK has also provided Facebook Credits to customers that sign up for its email newsletter. The offer is only eligible to fans of Gap UK, therefore, many people signing up for the email will also become a fan as well.

______

Facebook Credits for Restaurant Loyalty Recently, Plink has created a service to reward customers of major food chains with Facebook Credits. Consumers who sign up for this service earn Facebook Credits for their purchases at food establishments like Taco Bell, Quiznos, Dunkin’ Donuts and a growing base of food establishments. Expansion into other brick and mortar retailers is the next logical step.

This is one of many loyalty programs we can expect to see in the coming year as Facebook Credits become a popular currency. The expansion of Facebook Credits outside of the Facebook social network and into the physical everyday world is significant. Will gas stations, grocery stores and other major retailers follow suit? Will Facebook Credits replace airline mile rewards as the favorite rewards program? The answer depends on what users can buy with these credits.

______Using Facebook Credits The following table summarizes where Facebook Credits can and cannot be used. These rules and recommendations are valid for applications that are used within Facebook only.

Facebook Credits Credit Card/PayPal Virtual Goods in Games Mandatory Not Allowed*

Digital Goods Preferred Acceptable

Tickets Acceptable Acceptable

Coupons Acceptable Acceptable

Gift Cards Acceptable Acceptable

Physical Goods Not Allowed Mandatory

Facebook Deals Mandatory Not Allowed*

*Credit Cards and PayPal can be used to purchase for Facebook Credits in these scenarios

Virtual Goods: primarily found in games. Virtual goods are goods that exist within the online gaming world. There is no physical world representation of these items.

Digital Goods: products that can be fulfilled online such as music downloads, movie downloads, pay-per-view movies, pay-per-view concerts and other digital-based products.

Tickets: products that are used in the physical world for access to movies, concerts, sporting events and other events. These tickets can be fulfilled online with barcodes, QR Codes or other methods.

Coupons: Coupons can be created and fulfilled online and therefore are similar to digital goods. Coupons can be used for purchase of digital online or physical goods offline.

Gift Cards: Gift cards are physical cards that contain monetary value that can be depleted with repeated use.

Physical Goods: products that require shipping for fulfillment. Cannot be created and distributed online.

______Examples of Applications that consume Facebook Credits:

Virtual Goods

Social Gaming companies like Zynga and Electronic Arts allow customers to buy virtual goods and premium membership using Facebook Credits. Consumers play a variety of games and use virtual goods to enhance the overall experience.

Below is an example of a consumer ability to buy virtual farm animals from the popular Farmville application by Zynga. In this example, Facebook Credits are used to by virtual currency from Zynga called FarmCash that can be used to build a virtual farm. This application has over 28 million fans.

______In addition to Social Gaming, Social Entertainment applications are beginning to use Facebook Credits. Several studios have now deployed movies via Facebook including Warner Brothers, Universal, Lionsgate, AMC/Sundance, Miramax, Paramount Pictures and several independent studios.

Below is an example of the purchase of a movie with Facebook Credits using the Social Cinema app from Milyoni. In this scenario, the movie lover has the option of inviting up to five friends to watch the movie for a discounted rate.

Because movies are considered digital goods, studios have the option of using Facebook Credits or other payment options like Credit Cards or PayPal. In this case Focus Films Studios opted to give users a choice between Facebook Credits or PayPal. In addition to watching movies, users can share quotes, clips and comments with their friends, have conversations with directors and actors and a variety of social interactions that makes movie watching a shared experience.

In addition to Video on Demand movies, live events including music concerts and sporting events can be made available on Facebook leveraging Credits. In the coming year, thousands of movie titles and hundreds of live events will be experienced on the Facebook platform making the use of Facebook Credits that much more compelling.

The Facebook Credit ecosystem will continue to grow as technology companies continue to work with leading brands to provide Facebook applications that will consume this method of payment in exchange for entertaining content.

###

______

These guidelines are further outlined in Facebook’s Credits Policy. For more information on Facebook’s Credits Policy, please visit: http://developers.facebook.com/policy/credits/

About Milyoni Based in the San Francisco Bay Area, Milyoni, Inc. is the leader in social entertainment. The company’s technology provides entertainment companies with a way to connect and engage with Facebook fans, and turn them into customers. Whether it’s watching a live concert, movie or sporting event or shopping your favorite brands, Milyoni enables companies to monetize fans pages through a unique level of engagement and a shared, social experience. Milyoni's services reach over 150 million fans from industry leading customers, including Universal Pictures, Lionsgate, Paramount Studios, Big Air Studios, Austin City Limits Live, Turner Broadcasting, University of Oklahoma and The NBA to bring a variety of digital content and physical goods to fans on Facebook. For more information, visit www.milyoni.com.

###

The information contained herein is provided as a courtesy and is for general informational purposes only. This document is not intended to be a complete description of all applicable rules, policies and procedures. The matters referenced are subject to change. Individual circumstances may vary. The information contained herein includes, among other things, a compilation of information received from third parties. Milyoni shall not be responsible for any inaccurate or incomplete information. Nothing contained in this presentation is intended to supplement, amend or modify any applicable contract, rule or regulation.