Facebook: Pay or get out

Facebook: Pay our way or get out
http://tech.fortune.cnn.com/2011/01/28/facebook-pay-our-way-or-get-out/
By Chadwick Matlin, contributor
As Facebook starts to host all sorts of commerce -- and is now mandating the use of its currency -- perhaps it's time to stop thinking of it as a company and start thinking of it as a country.

"The strength of a nation's currency is based on the strength of a nation's economy." Richard Nixon, circa 1971, announcing that foreign governments could no longer convert U.S. dollars into gold.

"If you're a very large company, and supporting you is going to cost us tens of millions of dollars, then we want to at least have an understanding of how you're going to use what we're doing, and that you're not going to just import the data but also contribute back to the ecosystem and make peoples' Facebook experience better." —Mark Zuckerberg, circa 2010, explaining its agreements with social game companies that bring in 30% revenue cuts to Facebook.

Earlier this week, Facebook announced that by July 1 developers that have apps on the site must make their users pay for virtual goods using Facebook's official currency, Facebook Credits. Along with Credits come fees: 30% of every credit spent goes to Facebook.

Smaller developers, of course, aren't pleased. They would rather avoid paying Facebook altogether. Facebook, meanwhile, would rather avoid being a site that confuses its users with dozens of currencies.

At first glance, the move suggests Facebook has become a monetary autocracy, forcing the companies critical to its success to use its currency, and to pay a fee for doing so. But on second thought, isn't that more or less how taxes work? As Facebook grows and starts to host all sorts of commerce, perhaps it's time to stop thinking of the social network as a company. Maybe it's best to think of it as a country.

Imagine, for a moment, that you're the central banker of a country with nearly 600 million residents. Your economy is growing quickly, and the bigger it gets, the more foreign investors are knocking at your door, trying to hawk their wares and build within your borders. Nobody knows how much your economy is actually worth -- some place the GDP at $50 billion, making it the 73rd largest economy in the world, though everyone agrees that your country will be a global force for years to come.

But there's one sector of your economy that won't fall in line. By the end of the year, it'll be worth over a billion dollars and it has proved to be sustainable even during an economic downturn. But a lot of the companies that make up the industry don't want to use the national currency. They'd rather use their own currencies and avoid a hefty 30% tax on all transactions.

But, as a wise central banker, you know that for a country to grow its economy, it needs a singular currency so the proletariat doesn't get confused. You've been able to convince the largest companies to use the national currency, but rogue stragglers remain. What do you do?

Tell them they can either use the currency or get the hell out.

It's a raw deal, but it's one the social game companies can't decline. They're trapped within Facebook for the same reason the rest of us are -- it's still the largest social media site in the world, which means it's also the most powerful. Facebook knows it can force them to pay taxes because there are no other places to earn the kind of money they'll earn within Facebook.

Facebook, already a technological and cultural hegemon, is becoming an economic one as well. A key feature of Facebook's decree is that developers can still use their own currencies; they'll just have to peg the local currency to Facebook Credits.

This, too, should sound familiar. Plenty of foundering countries peg their currencies to the dollar or Euro to help stabilize their economy and encourage trade. Two differences of note:
1. Foreign currencies get pegged to a hegemon's through a de facto process. Facebook's Credits scheme is de jure.
2. Facebook is still forcing the developers to pay taxes, something that, say, Saudi Arabia, doesn't (directly) pay to the U.S.

All of this leads us back to the 30% fee/tax, something that should also sound familiar for another tech hegemon. Apple (AAPL) has established just as strong of a hold on its app market as Facebook's, and largely for the same reasons: it has a critical mass of users, an easy payment system that users trust, and a rule that developers must agree to use Apple's storefront to sell its apps on iPhones, iPods, and iPads. Apple skips the step of translating dollars into its own specialized currency, but the mentality is the same. If a company is going to operate within our borders, they're going to pay us for the privilege.

So to understand what this means for Facebook's future, let's look to the future of Apple. Along with Facebook's announcement this week came an expected and reliable report that the next generation of iPhones will act as credit cards, using iTunes accounts to make all sorts of payments that have nothing to do with iTunes.

If iPhones become credit cards, what's to prevent Facebook from becoming PayPal? Paying friends back online; buying goods from vendors; wiring money as soon as it's needed. That's PayPal, but there's no reason it can't become Facebook, and there's no reason Facebook, with its social features, wouldn't be a better at it.

For that to happen, Facebook Credits has to reach a critical mass. And the only way for Facebook to ensure that happens? By getting its citizens to adopt its currency.