RockYou At The Mercy Of Facebook Credits For The Next 5 Years

RockYou and Facebook announced a deal where RockYou will exclusively use Facebook credits and where Facebook will keep 30 percent of the revenue from the credits. In the same press release, the two firms discussed a “Deal of the Day” project where RockYou issued 6 million Facebook credits to users who interacted with ads.

What just happened? Did RockYou just admit defeat? Did RockYou single-handedly inflate the credits market? Did RockYou publicly admit to radically changing their business model?

RockYou’s agreement to exclusively use Facebook credits at the standard 30 percent cut to Facebook says several things:

1. RockYou didn’t have enough power to negotiate better terms than the 30 percent cut for Facebook
2. RockYou seems to be betting the farm on Facebook, as they’ve just foregone revenue from potential non-Facebook users
3. RockYou is admitting that its star may not be shinning as brightly as in the past and may not shine as bright in the future in their applications business

RockYou is far larger than the other two exclusive users of Facebook credits, Crowdstar and LOLapps, and a bet of this type usually only happens when you’re options are dwindling. Add to the mix the new focus on “branding and promotional” opportunities in the RockYou press release boilerplate, and you see that things are changing for RockYou.  No wonder. Just consider what it means that they serve 15 billion impressions a month or 500 million impressions a day to a social networks with combined populations of over 600 million registered users (sum the user base as listed on Wikipedia for each social network shown on the RockYou home page). That’s less than 1 impression per user per day.

And what about inflation? RockYou and Facebook flooded the market with 5 million Facebook credits in four days. but more recently, every game player I know (half of my Facebook friends) received 20 or 15 free Facebook credits sometime over the last two weeks. So in a not-unlikely scenario, it would seem that Facebook issued 250 million x 15 credits, or 3.75 billion credits. So, yes RockYou did contribute to inflation, but there’s a bigger inflationary pressure.

3.75 billion Facebook credits = $375 million value at the stated “15 credits, a $1.50 USD value”, or $0.10 per credit. If Facebook actually paid developers for these credits when used, that would be the equivalent of 70 percent of $375 M, or $262.5M net to developers. Whether that cash is actually paid out or not, that represents $260+ million of equivalent cash value on the market that didn’t exist before.  Why does this matter? Suddenly the cash equivalent of Zynga’s 2009 revenues (per Jeremy Liew) were dumped on the market. In commonly accepted money supply theory “There is strong empirical evidence of a direct relation between long-term price inflation and money-supply growth, at least for rapid increases in the amount of money in the economy”. This inflationary pressure can drive down real monetary value, making it more difficult for application developers tied to Facebook credits to grow revenues.

The Facebook application economics are changing, and vendors who are exclusively tied to Facebook credits are at the risk of both short and long term fluctuations on the value of Facebook credits and at the mercy of any Facebook credits promotions run during the period of exclusivity. While it may seem that Facebook has enough power to hold its developer partners over a barrel, you have to give them credit for successfully executing a strategy to lock in partners and extract money from their partners’ businesses.

As for RockYou, it may look grim, but look at the fine print of the press release. I’m hopeful that they haven’t really admitted defeat as they state that they will use Facebook credits as “the exclusive virtual currency in RockYou’s social games and applications”. While it does lock them into Facebook credits for virtual currency for their social games and applications anywhere they are distributed, it doesn’t sound like they are actually precluded from using real currencies such as PayPal and credit cards.

So is the RockYou deal the harbinger of bad deals to come, leading developers to lower income and inflation while Facebook reaps the benefits? It could be, and it’s definitely limiting, but the real test will come as more developers start to accept Facebook credits and take a long hard look at the agreements and the limitations on their distribution and revenues that come with such deals.

About Duane Kuroda

Business ninja, deal hunter, Internet marketer, and technology fiddler obsessed about growing companies and launching products. Currently at Peerspin, Duane’s past lives include Vice President of Marketing roles at companies leading micropayments, Internet video, and online communities as well as research and consulting for mobile advertising. Duane has spoken at conferences including Digital Hollywood and Digital Video Expo on topics covering monetizing online content and online video, has appeared on TechNowTV and KNTV, and has been quoted in various magazines. Follow Duane on Twitter: @dkuroda.

Website: http://svexec.blogspot.com/