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Why Amazon wants its own currency

amazon coin

Despite the failures of Facebook Credits, Microsoft Points, and the dot-com virtual currency Flooz, Amazon has decided to mint its own money. The ecommerce giant announced today that customers will soon be able to use a new virtual currency called Amazon Coins to buy apps and make in-app purchases in the awkwardly-named Amazon Appstore for Android on Kindle Fire.

Gamers loathe this practice

Customers tend to dislike, nay abhor, the unnecessary process of transferring between their home currencies and virtual tender — just look at Microsoft, which forces customers to spend $1 to buy 80 Microsoft Points in order to make purchases in the Xbox Live Marketplace. With the Nintendo Points system, customers must buy a different set of points in order to purchase games for the Wii versus the handheld DSi console. Gamers loathe this practice, which at the very least forces them to do math before they can tell how much a rental or purchase truly costs.

So why does Amazon need to have its own proprietary currency, especially since customers will still be able to use their credit cards alongside Coins? For that matter, why does any company need to have its own currency?

Amazon Coins: they’re for app makers!

There’s one group that Amazon is clearly targeting with this move: app developers. Amazon Coins won’t be available until May, but the company announced the initiative today in order to ensure that developers have time to get apps ready for the day that Coins rain upon the land. And they will rain — Amazon has announced it will be giving away "tens of millions" of these Coins, which are each worth one cent, when the program officially starts. That means an injection of hundreds of thousands of dollars into the Kindle Fire ecosystem, 70 percent of which will go to developers.

It’s common knowledge that it’s much tougher to make money on Android apps than iPhone apps. Amazon is trying to promote the Kindle Fire as the exception to the rule. "Developers continue to report higher conversion rates on Amazon compared to other platforms," said Paul Ryder, Amazon’s vice president of apps and games, said in a press release.

Amazon has been promoting the idea that its platform is a moneymaker for a while. By encouraging developers to support Coins, Amazon is taking another tack. If developers invest time into making an app that dispenses Coins, they'll be more committed to the platform. However, Amazon says developers won’t have to do anything extra in order to accept Coins for app and in-app purchases.

"If you have to buy Coins, then I don’t understand what’s the difference between that and money."

Kevin Galligan, an organizer of the 969-member New York Android Developers Meetup and president of Touch Lab, an Android development agency, said his reaction to the Coins announcement was mixed. "Anything that’s going to help Android monetize anything at all is good," he said. "But how do you get Coins? They don’t go into that. If you have to buy Coins, then I don’t understand what’s the difference between that and money."

Among developers, the general sentiment toward Amazon is "a little wary," he said. Kindle Fire apps do tend to bring in more money than apps for other Android tablets or phones, he said, since Amazon already has credit card information for many of its users.

Mike Novak, another organizer of the New York Android Developers Meetup, just had an app update rejected by Amazon and decided the whole process wasn’t worth it. He thinks Amazon’s move with Coins could be smart and makes sense for games, which frequently use in-game currencies. But for other applications, "I am not sure I see any added value, especially with the various actual money options there are," he said in an email.

Amazon Coins: they’re for customers!

Amazon’s Kindle Fire users will also supposedly benefit from Amazon’s expected spring Coin dump, although the company declined to elaborate on who will get the Coins and how many. "We will be announcing additional details when Coins launches in May," a representative said in an email.

She did elaborate a bit, though: "Amazon Coins are an easy way for customers to purchase apps, games and in-app items. And customers have the option - those who prefer to use traditional forms of currency can continue to do so."

Imagine lost money, locked up in Amazon Coins

It’s unclear what about Amazon Coins will make it easier for customers to purchase anything from Amazon. From here, it seems like adding a new currency would mostly make things harder for customers, who may end up succumbing to the pitfalls that surround gift cards: lost money, locked up in Amazon Coins, which cannot be converted back to dollars. Customers can’t use them to buy subscriptions, either.

Developers can award Coins within their own apps, the rep said, so this is one potential perk for customers. It’s also almost certain that Amazon will use Coins in promotions, rewarding users with extra Coins to spend in exchange for a tweet or a Facebook like.

The situation is reminiscent of when Amazon shoehorned its store onto Android phones even when Google’s Android Market was already there by giving away a free app per day. The same may work for Coins: they’re a bit redundant, but the incentives may make it worthwhile.

Amazon Coins: they’re for Amazon!

Amazon isn’t the first company to introduce its own currency, and it won’t be the last. That’s because proprietary currencies have lots of advantages for their issuers, especially when the issuer is attempting to build a proprietary economy.

Amazon’s move is still a bold one, though, because not many companies have been able to pull this off. Facebook abandoned Facebook Credits, Microsoft is giving up on Microsoft Points for PC apps, and many standalone virtual currencies such as Flooz and Beenz, two archetypal dot-com travesties, flopped miserably.

One place where proprietary currencies have taken off is in video game economies. Yanis Varoufakis is the in-game economist for Valve, which makes Team Fortress 2 and other games where commerce thrives. He pointed out that proprietary currencies have many advantages for game makers, and many of those advantages would also accrue to Amazon if the company can get Coins to catch on.

"Just like frequent flyer point schemes, they capture their audience and prevent them from transferring value generated within a game or company to some other game or firm," Varoufakis wrote in an email. "Courtesy of perfect control of this ingame ‘money’ supply, it is a cheap way for rewarding certain behavioural or consumption patterns, or even penalising others. Thirdly, it bypasses the objections of regulatory authorities to instances when players receive money from the company — flows that may need to be, otherwise, taxed or regulated in accordance to gambling laws."

Three things: loyalty, an easy way to reward customers without simply giving away free money, and flexibility on their balance sheets. So in the future, will every company have its own branded currency? Varoufakis said that’s doubtful, because creating a currency is hard, contains hidden costs, and is rarely worth it for a company to bother with the intricacies of designing their own.

"When entering amazon.com, at least for some people, it is a little like going to a foreign country."

"Amazon stands a better chance than anyone else because its customer base uses the company regularly," he said. "When entering amazon.com, at least for some people, it is a little like going to a foreign country. If this ‘foreign country’ has its own currency and gives you discounts and various goodies provided you change some money into its currency upon entry, you may well do it."

Amazon declined to comment on whether Coins will eventually be usable outside the app store — on Amazon.com for example, or with one of Amazon’s services such as Audible — suggesting that it’s not out of the question. The more things that can be bought with Coins, the more useful it will be to customers.

Good as gold?

Amazon is hedging its bets by allowing customers to continue paying for apps via the regular methods. If all goes well with the Appstore rollout, we wouldn’t be surprised to see Amazon push its proprietary currency harder across all its marketplaces. In the immediate, the introduction of Amazon Coins will act like a stimulus package for the Kindle Fire app economy. And just like the American government, Amazon is hoping that this short-term boost will translate into long-term growth.

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