Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Facebook charged with eliminating competition for virtual currency services, (Dec 31, 2014)

By Linda O’Brien, J.D., LL.M.

Social networking website Facebook has engaged in anticompetitive conduct in the market for virtual currency services by requiring social game software developers to use its virtual currency services and by charging supra-competitive prices on all in-game transactions conducted on its website, according to a complaint filed in the federal district court in Wilmington, Delaware (Social Ranger, LLC v. Facebook, Inc., December 29, 2014).

Facebook operates the world’s dominant online social networking website with over a billion users. Super Rewards is a web advertising company that offers points and rewards to web users. Social Ranger is the successor in interest to Super Rewards.

According to the complaint, in 2007, Facebook launched a development platform to increase its user base and encouraged third-party software developers to create social games for its platform. Initially, the developers were allowed to retain any revenue generated from the games. Social games are usually free for game players so developers earn revenue from in-game direct payments and by displaying advertisements. One revenue model is that game users pay developers for virtual goods.

Virtual currency service providers deliver services to both game players and developers that include virtual currency, virtual reward management, payment processing services, advertising offers, and related customer service. Super Rewards was among the earliest and most successful competitors in the virtual currency services market.

In 2009, Facebook began offering its own virtual currency service, Facebook Credits, to compete with Super Rewards and other rivals. Since Facebook charged a much higher rate than its competitors and offered a narrower range of services, the service was unable to capture significant market share through competition. To exploit its position as the dominant participant in the social game network market, Facebook changed its strategy. In 2011, Facebook implemented a new policy which prohibited social game developers from publishing games on Facebook.com unless they used Facebook to provide virtual currency services, the complaint alleges.

Facebook’s new policy allegedly wiped out the once-vibrant virtual currency services market, including Super Rewards. By seizing the market for itself, Facebook reaped billions of dollars. In June 2012, Facebook ceased offering Credits as a site-wide virtual currency. However, Facebook maintained its monopoly of the virtual currency services market by (1) continuing to require that social game developers exclusively use Facebook’s payment system for any transaction involving real currency and (2) charging a 30 percent fee on those transactions, the complaint charges.

By eliminating competition, Facebook would charge developers high prices for virtual currency services without risk of losing business to competitors. The new policy also harmed game players, since the overall effect was higher prices for virtual goods and social gaming, according to the plaintiff.

There are no reasonable substitutes to virtual currency services available to social game developers on social networking websites. Virtual currency service providers offer social game developers an integrated monetization solution that is cost effective. Other payment processing services are not reasonable substitutes since those services are not tailored specifically for incorporation into a game and are difficult to implement, the complaint states.

The plaintiff asserts claims for illegal monopolization, attempted monopolization, and illegal tying in violation of Sections 1 and 2 of the Sherman Act. The action seeks declaratory and injunctive relief, treble damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 1:14-cv-01525.

Attorneys: Kenneth L. Dorsney (Morris James LLP), Derek A. Newman (Newman Du Wors LLP), Brian R. Strange (Strange & Carpenter), and Bruce Van Dalsem (Quinn Emanuel Urquhart & Sullivan, LLP) for Social Ranger, LLC.

Companies: Social Ranger, LLC; Facebook, Inc.

News: Antitrust DelawareNews