Editor’s note: Charles Edward Hudson is a venture partner with SoftTech VC and the CEO and co-founder of San Francisco-based, mobile games company Bionic Panda Games. Follow him on Twitter @chudson.
I have been trying to wrap my head around Amazon’s decision to launch Amazon Coins as a currency. It works in the Amazon Appstore and allows consumers to pay for digital content, namely games, apps and in-app purchases, using virtual currency in lieu of cash. The reason this struck me as curious is that most major platforms that have offered universal, platform-wide virtual currencies have dialed back those efforts or simply abandoned them over time.
The most recent example of a platform that offered, and ultimately removed, a platform-wide currency is Facebook. Facebook launched the FB Credits system in 2011 to simplify the myriad payment experiences developers were rolling out for their Facebook apps and social games. At the time, each developer was hacking together his or her own payment system, which was normally a mixture of PayPal, incentivized offer walls, credit card processing, carrier billing and just about any other monetization scheme developers thought would generate revenue. The result was that every developer spent a lot of time playing with and optimizing payment options, rotating through offer wall providers, and generally coming up with what they thought would work best. Each and every app had its own checkout flow and payment system.
Facebook Credits was an attempt to standardize the payments and checkout experience across all Facebook applications. Facebook mandated the use of credits and took 30 percent for doing so. Facebook ultimately shut down its Facebook Credits offering a year and a half after launch. My sense is that Facebook realized what Apple, Google and others have realized – the real value is in controlling the payment experience and making that standardized across all apps in the ecosystem. You can control the cash register without having a universal, platform-wide currency.
If so many other people have concluded that platform-wide currencies are unnecessary, why does Amazon view things differently and how does it fit into their strategy? Well, Amazon is coming at this from a different angle than Facebook, Google or Apple, and Amazon Coins makes a lot of sense in the context of the company’s desire to build a big app developer ecosystem around its existing devices (Amazon Kindle Fire) and other products that are likely in the pipeline.
The Appstore On Steroids
The most compelling reason I can think of for Amazon to launch platform payments is as a way to drive more volume and velocity in digital goods purchases on the Kindle Fire and, more broadly, in the Amazon Appstore ecosystem. Amazon Coins, as they exist today, can only be used to do two things: purchase applications in the Amazon Appstore or make in-app purchases in Amazon Appstore applications.
In their press release announcing Amazon Coins, the company makes it clear that they are going to give away (not sell) tens of millions of dollars worth of Amazon Coins in the coming quarters. The only rational reason to give away tens of millions of dollars of virtual currency that has real-world value is to juice the market and get people who have Kindles spending more money on apps and in-app purchases. It will be great for developers who have apps live in the store and for consumers looking to get more free stuff.
Google and Apple don’t need a “coins” product given their current market positions. Google has Google Play gift cards that can only be spent in the Google Play store. Apple has gift cards that can be spent on both apps or anything else Apple sells. Those are crude but effective ways to drive digital content purchases. But for Amazon, simply giving people Amazon gift cards would not guarantee that the spend was done digitally – people could use those cards to buy anything in Amazon’s vast catalog of digital and physical goods. The only way to ensure that the spend is made on digital products is to come up with a form of currency (gift card, virtual currency, etc.) that can only be spent on digital products. And Amazon has done that with Amazon Coins.
Amazon Coins are basically restricted cash that can only be spent in the Kindle Fire ecosystem, And Amazon is going to use them the way some athletes use steroids – to boost performance and inject a burst into their ecosystem. Aside from the obvious benefits of putting free cash in the hands of consumers, this could also enable some other really interesting product combinations for Amazon:
- Bundle Amazon Coins with Kindle hardware purchases. For example, if you buy a Kindle Fire, you get $50 in Amazon Coins to spend on apps and services. Amazon can be sure that this money will only be spent in their ecosystem and specifically on digital content.
- Allow parents and family members to “gift” Amazon Coins to children to control digital content spend and to allow for usage without sharing credit card credentials or other information. This would be a very interesting play on the “digital allowance” that many people have been exploring.
One great lesson Amazon seems to have learned is that they are not asking developers to make any modifications to their apps to accept Amazon Coins. That’s a great way to get developers on your side when rolling out a new currency.