Among the splashier, next-generation video-game announcements made by Microsoft during its E3 press conference on Monday was the quiet demise of Points, the company’s virtual currency that was used by Xbox players to purchase games and other extras in its digital store. Microsoft Points will join Facebook Credits in the dustbin of virtual currencies; the social-networking giant recently announced the end of an ambitious effort once seen as having a chance to be bigger than PayPal.
Not everyone is killing off their currencies: Last month Amazon launched Coins, a way for people to buy apps, e-books, and other digital goods in its online store. So why are consumer tech companies trying so hard—and often failing—when it comes to minting their own cash?
It’s important to understand that Points, Credits, and Coins are much more like airline-loyalty systems than Bitcoin or Ripple, which have aspirations of becoming new global currencies. The idea is to drive users to spend more by making transactions easy and abstract. Routing small transactions away from credit cards also avoids a steady stream of fees, and companies that do a portion of their business in play money have more flexibility for creative accounting.
Microsoft showed what can go wrong. The company irritated customers by forcing them to buy Points in chunks that didn’t correspond to common purchase prices, guaranteeing that most users would have Points left over on their account. Many people felt its exchange rate of 80 points per dollar was intentionally deceptive because it made purchases appear cheaper than they were. Microsoft also didn’t adjust the value of Points to changes in their value of international currencies over time, so they became more expensive in different countries as real-world currencies fluctuated. The company eventually gave in to complaints. “The ability to buy and rent content using local currency is something that the Xbox Live community has told us they want,” Microsoft said in a statement.
Facebook said the initial inspiration for Credits was to try to simplify a situation in which many developers building games on its platform were setting up their own currencies. “Previously, developers were building all of their own currencies and it was a confusing user experience to have a virtual currency to buy a virtual currency. Credits simplified this,” wrote Tera Randall, a Facebook spokeswoman, in an e-mail. Except that it didn’t get any simpler. Developers kept using their own currencies, muddling things for customers, even as Facebook had to deal with the hassles of keeping up with foreign currency exchanges.
One of the key appeals of airline loyalty points has been lock-in: You’ll fly with, say, Delta—even if you grow frustrated with the airline—because of all those travel miles you’ve racked up. But technology companies could get that benefit only if people like using virtual currencies, argues Dennis Armbruster, a managing partner at Loyalty One Consulting, which advises large companies on loyalty programs. ”It’s really about the data,” he says. “The currency itself won’t drive lock-in, although it might encourage the kind of engagement that could lead to lock-in.” In addition, says Armbruster, technology companies are reevaluating the value of virtual currencies because of tax and regulatory issues, being driven in part by the government’s increasing interest in the disruptive potential of projects such as Bitcoin.
Amazon, however, still thinks it can make this work. The company is seeding customers accounts with Coins, essentially footing the bill for them to spend money on products the company sells. If customers don’t find the process as annoying as they did on Facebook and Xbox, they could well appreciate the free money. Amazon is also offering discounts to those who buy Coins in bulk, encouraging them to build up reserves that can be used only in Amazon’s store.
“If we’ve learned anything from Amazon, it’s that they can innovate with the best of them and that they can build incredible user loyalty and adoption,” said Chris Larsen, the founder of Ripple. “So there is certainly a path to success here.”