Amazon's big bet on 'Coins'

The online retailer has spent millions depositing its virtual currency to Kindle users but the real trick will be to convince them that it provides the right bang for their buck.

Amazon has launched its 'Coins' virtual currency in the US for Kindle applications sold via its Appstore, and is hoping to get Kindle Fire owners hooked by giving them $us5 worth of Coins for free. As a further incentive, Amazon is also offering discounts of up to 10 per cent on bulk purchases of Amazon Coins, which in turn will allow consumers to save money on app purchases.

Amazon has spent “tens of millions of dollars” depositing free Coins in Kindle users’ accounts, a sign of its serious intent for the virtual currency. The challenge it faces is to persuade those users that Coins provide value and convenience beyond existing ways to pay for applications. This will not be easy, and if Amazon fails then Coins will fall by the wayside, as other online virtual currencies have done before.

The driving force

There are other potential benefits from Coins in terms of customer loyalty; Amazon intends to use it as a promotional tool to create lock-in. Some multi-player, online social games already use virtual currencies as a way to reinforce the gaming brand and enhance the sense of community among players.

Amazon has already dipped its toe into social gaming with Game Connect and GameCircle, and Coins can be seen as part of this experiment. But gaming is context specific, and so far virtual currencies have struggled to gain traction outside of this environment. The initial objective of Amazon Coins is to help strengthen the application ecosystem for Amazon Kindle devices. Amazon no doubt hopes that providing users with an alternative, novel way to purchase applications – along with the opportunity for cost savings – will encourage them to buy more. This would in turn mean greater monetisation opportunities for developers.

Users can still pay for digital content with Amazon’s existing 1-Click payment system. The 1-Click checkout is fast and easy to use, which raises the question of why anyone would want to use an alternative. The answer depends on whether Amazon Coins offers consumers additional value of some kind; at the moment the value premise is based on novelty and the prospect of discounts on bulk purchases of Coins. This might be enough to tempt some Kindle users, but the majority will probably want more going forward – otherwise they will simply use the free Coins allocation and then forget about it.

Can Amazon succeed where others have failed?

Virtual economies need scale and reach to flourish and drive significant revenues, and in this respect Amazon is well positioned. Facebook also has scale, but it does not have Amazon’s established commerce expertise and huge base of registered accounts – Amazon had 209 million active accounts as of Q113. It is a credible, trusted commerce brand, which will help it expand into the provision of a virtual currency.

Facebook’s move into virtual currency was a leap, whereas for Amazon it is a small step. However, there are no guarantees that Amazon will not trip up, just as Facebook and so many others have done.Virtual currencies have a poor track record outside of gaming communities, and are actually a harder undertaking than is often presumed. Several big online players have launched virtual currencies, only for them to fail – think Facebook Credits and Microsoft Points. With the exception of Bitcoin, none have really taken-off. Virtual currencies are linked to real monetary value, and can be just as hard to manage as real-world currencies – Bitcoin’s fluctuating price is a case in point. Virtual currencies also present the same challenge to consumers that they experience when swapping between different real-world currencies.

For now, Amazon Coins should be viewed as an experiment that will either be scrapped or ramped up depending on how consumers respond. Amazon is not afraid to take risks, and is always seeking new ways to enhance its commerce ecosystem – a virtual currency is consistent with this approach. If users take to Coins, there is little doubt that Amazon will expand the currency’s scope beyond its app store. At the launch of Coins, Mike George, Amazon’s vice president of apps and games, noted: “We will continue to add more ways to earn and spend Coins on a wider range of content and activities – today is Day One for Coins.” What could be interesting in the longer term is whether Amazon will move to position Coins as a wider internet virtual currency.

Eden Zoller is a principal analyst in Ovum Telecom’s Consumer Practice, covering communications, content, applications, and social media.