Virtual light

Facebook’s currency: Facebook has to work hard to justify its soaring valuation. Inserting itself as a financial middleman — by offering Time Warner flicks online for “Facebook Credits” — is a good start. But while movies, games and books may be a natural fit for Facebook money, it's far from becoming an Internet reserve currency.

The way it works, customers buy credits using credit cards, mobile phones, or gift cards. The credits are pegged at ten to the dollar, yet customers can't take them out of the Facebook system, exchange them for cash or give them to other users. So it's a much more limited system than, say, eBay's PayPal system. But they can be used for virtual goods such as characters in online games or applications for genealogical research on Facebook — and now for Warner movies.

Facebook takes a hefty 30 per cent cut of the transaction. The company can partly justify this charge by saying it provides services such as billing and payments security. But PayPal’s cut is only in the single digits, and it offers these services and more.

Yet Facebook has the economics of digital content production on its side. The marginal cost of making one more copy of a film, book, game or virtual sword for a game is close to zero. If distributing to Facebook's 600 million users results in additional revenue, the social network's fees may well be worth it for content producers. Online gaming company Zynga, for example, generates most of its revenue through Facebook, and is currently valued at more than $6 billion in gray market trading.

Moreover, Facebook isn’t shy about throwing around its weight. It will require all game developers that use its platform to process payments through Facebook Credits starting July 1.

Facebook Credits aren’t about to replace the dollar, or even PayPal for that matter. Its limitations mean it won’t generate anywhere near the total transactions that PayPal does. Yet the system still potentially leaves lots on the table for the social network. China’s Tencent, for example, gets about half of its revenue from online gaming, of which selling virtual goods is an important part. The firm is valued at more than $50 billion by the market.

Of course, Facebook is already valued at $65 billion by the market. Yet the company’s — and investors’ — focus has mainly been on advertising. The lighting of the Facebook Credit engine may help lift it to investors’ lofty goals.