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Why Facebook Wants A Virtual Currency

Facebook is clearly going to test some form of virtual currency in the next few weeks, in the hopes of finding new ways to monetize its more than 200 million active users.

The idea would be to convince a portion of those users to purchase Facebook dollars which they could then use to pay for stuff inside Facebook applications (although knowing Facebook, it would probably call the currency Wolverines or, to give it a more international flavor, Florins or Ducats).

Most of those applications would be created by third-party developers, and Facebook would take a cut of the pie.

To get an idea of the business model behind the idea, I spoke to Cary Rosenzweig, the CEO of virtual world IMVU. Rosenzweig told me his company generates around $1.00 per user per month from his 1.5 million users, 90 cents of which is from virtual currency and the balance from advertising; the mind boggles as to how much Facebook could reap from its 200 million users.

Of course, not all of Facebook's users will buy virtual currency, but then again, it's a safe bet that Facebook apps will cost more than $1.00. And while the comparison isn't perfect, note that the 20 million people who own iPhones have downloaded more than one billion apps -- some of which are free, but many of which are not, and can cost upwards of ten Simoleons.

In any case, launching virtual currency will probably give Facebook a more reliable revenue stream than advertising (which, if you take IMVU as a model, is probably generating Facebook something like 20 cents per user per month, or $40 million. That isn't chump change, but Facebook's ambitions are a little larger than being a $480 million company).

Facebook could also use virtual currency as a way of getting more users (yeah, it's already big, but Twitter serves as a reminder that someone else could come along and steal your hold on the zeitgeist); IMVU gives users 1500 credits (worth around $1.50) for every friend they get to register with the site.

One more thing Facebook could be angling for -- to become literally the gold standard for virtual currency on the Internet. More accurately, this would be like becoming the U.S. dollar. "Given their size and centrality in social networks, I wouldn't be surprised if they're trying to make their currency the equivalent of the U.S. dollar in international markets," Rosenzweig told me.

If you don't think that's a big deal, imagine the pickle we'd be in if the world didn't need dollars to pay for oil with.

For the record, Rosenzweig is thrilled at the prospect of Facebook launching its own currency, just as most SaaS companies are happy to operate in the shadow of Salesforce.com, which blazed a trail of trust and reliability among corporate IT managers. "[Facebook has] such a large footprint -- it will educate hundreds of millions of people about translating real-world currency into virtual currency... Once people get comfortable with virtual currency, once they get over that hump, there'll be no more problem getting them to use any virtual currency," he told me.

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