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Why Amazon Coins Are a Bad Idea

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Back in February we found out (NASDAQ: AMZN  ) was launching Amazon Coins, a new way to make purchases from Kindle Fire devices. Yesterday, the new coins system launched, and if the short history of the Internet has anything to say about it, Amazon Coins are already doomed.

Coins don't make cents
First, let's talk about what these coins are and why Amazon is pushing them. Amazon Coins can be used to buy apps, games, virtual gifts for friends and even song collections inside certain apps. Amazon is likely trying to lure more developers to its platform by using the coins to boost in-app purchases. Amazon has said developers still receive 70% when customers make purchases with coins.

Amazon has already given every current and new Kindle Fire owner 500 coins, which is equal to $5. And users who buy coins in bulk will receive 10% off the purchase of those coins. By offering Kindle Fire users a way to buy and earn the coins, it's trying to keep them entwined into the company's Kindle ecosystem. There's no problem with wanting users to stay connected the Kindle device and making purchases -- all companies with a virtual ecosystem should be doing the same. The problem lies in getting users to accept the currency system and believe that it's better than using money.

Keep that in mind, it has to be easier than using money and users need to believe they're getting a better deal than paying with real money.

Been there done that
That's where two tech companies have gone before Amazon -- and mostly failed. Microsoft (NASDAQ: MSFT  ) launched an online currency system called Microsoft Points several years ago. The points were used to buy Xbox games, extra features inside of games, movies and TV shows. Sounds like a good idea, right? But with the launch of Windows 8, Microsoft started phasing out the use of points for the purchase and rental of music and video content.

Microsoft still uses the points for Xbox users, but while beta versions of Windows 8 used the points for video and purchases and rentals, the latest version of the software defaults to regular credit card purchases. Some have noted the conversion rate for the points -- $1 for 80 points -- confused Microsoft users. Therein is one of the major problems of virtual currency, users have a hard time knowing how much they're paying for something, which isn't a great way to make people feel like they can trust the payment system.

Facebook (NASDAQ: FB  ) also tried its hand at virtual currency starting back in 2009 with its Facebook Credits for game purchases and virtual goods. The company even sold physical cards in some stores to redeem the credits. Rumors swirled that Facebook Credits would become the new way for making purchases online. But at the end of last year, the social media giant phased out credits and went back to using local currencies for online purchases. Some have said Facebook didn't market the credits enough, or that developers didn't receive enough compensation when Facebook users made purchases with Credits.

But the reason why Microsoft Points and Facebook Credits didn't work may be much simpler than that.

Just because users are buying content online and in a virtual environment doesn't mean they want a new currency for making those purchases. We all understand how money works. There's no conversion we need to make in our minds when we buy something for $5. The problem comes when you have 13,729 Amazon Coins and an app costs 599 of those coins and a you can't figure out much that's actually costing you or how much dollar amount you'll have left when you make the purchase.

Think of your credit card points and how skewed the numbers feel when you try to redeem those points for a gift card, cash, or flashlight clock radio. They never seem to add up, and it always feels like a scam. I think Kindle Users will eventually feel the same way as Amazon Coin conversions become more complicated than using real money. A simple 1 to 1 conversion between dollars and virtual currency is the most honest and the least confusing. Anything less just doesn't add up.

Despite the cloudy future of Amazon Coins, there's no disputing Amazon is king of the online retail world. The Motley Fool's premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.

Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On May 15, 2013, at 1:48 AM, simonb332 wrote:

    "A simple 1 to 1 conversion between dollars and virtual currency is the most honest and the least confusing."

    500 coins for $5. That makes each coin a penny. Doesn't sound like it gets any simpler than that.

    Even adjusting for the 10% discount for buying bulk, the "true value" of the coin isn't confusing....that just means that whatever you are purchasing with the coin is actually a little bit cheaper.

    I actually think the Amazon Coin will be somewhat of a success (really, what's the metric for measuring?).

    Is it any different than buying an iTunes gift card? The money just becomes a credit for your account. $5 is $5. As far as consumers are concerned, whether it's "dollars" or "Amazon coins," it all gets spent.

    Parents will (should) love the concept. It will allow them to load "coins" into their Kindle account and not worry about their kids "wildly charging" to their credit cards.

    To me and many others, it will be no different than using an iTunes or Google Play gift card for kids to make purchases.

    The problem comes when trying to cash out. Merchants want cash to spend wherever and whenever they want. They certainly don't want to be tied to spending their money with Amazon.

  • Report this Comment On May 15, 2013, at 12:27 PM, BMFPitt wrote:

    "Think of your credit card points and how skewed the numbers feel when you try to redeem those points for a gift card, cash, or flashlight clock radio. They never seem to add up, and it always feels like a scam."

    You're using the wrong card, then. $1 purchase = 1 point = $0.01 cash back is the gold standard and the minimum that you should accept. Any math beyond that should only a bonus or discount be in your favor.

  • Report this Comment On May 16, 2013, at 12:08 PM, Efernal wrote:

    How would any state collect a tax on a virtual currency.? Bit-coins were the first and they are highly popular. And as long as Amazon maintains a current price per coin unlike Bit-Coins then It could become a new place to hide money. The government is greedy but they don't want to look like fools going after peoples virtual goods. Look up on Google about congress looking into taxing online video game virtual item sales. They were seriously looking into taxing the sale of say a sword that was paid for with gold coins. They were also looking into taxing items that dropped as loot for the player.

    What is wrong with it is

    #1 all items on a game server is the property of the game company.

    #2 There would need to be a department of the IRS per game and per server. Their duties would involve not only collecting the taxes on the item sales but also keeping track of the market on these items since in some games the Item might be worth nothing on one server yet worth alot more on another server. Since some game allow players to transfer items from server to server.

    It ended up being not only the butt of a joke but also A huge management problem. Like - what happens when a player quits or dies in real life? Do they owe property taxes on items they may never use again or by law isn't even really theirs to begin with.

  • Report this Comment On June 09, 2013, at 2:32 PM, COSTMENOTHING wrote:

    What everyone is forgetting is the most important aspect of the coin trade. If you buy a game app that uses coins in order to play it, you can pay as much as a $100.00 or more for a game that would ordinarily cost only $2.99 or $5.99 at most. But once you start pumping coins into the virtual slots, if you lose, you are actually losing real money at one cents per coin. In order to play many of the games, you have to buy more coins, go to the coin page and see how much you would have to spend. It is a ridiculous rip off.

  • Report this Comment On June 27, 2016, at 5:10 AM, Destriarch wrote:

    "A simple 1 to 1 conversion between dollars and virtual currency is the most honest and the least confusing."

    You're forgetting one very important thing about virtual currency - multinationalism. This option is all very well for America, but it is impossible to have such a concept work world-wide. Furthermore, as exchange rates shift between different currencies, wherever you ground your virtual currency, it is going to be affected in some way.

    The sensible option from a financial standpoint is to divorce the pseudo-currency from all real-world currencies as this allows you to govern your own exchange rate independently of international trade evaluations. Unfortunately this means you can't give any end-user an entirely intuitive exchange rate and still be economically sensible. The very idea of a virtual currency is therefore flawed and, as I think also needs pointing out, completely unnecessary. Everyone knows they can pay with ordinary cash electronically from the majority of countries. Why change?

  • Report this Comment On June 27, 2016, at 5:14 AM, Destriarch wrote:

    While I'm at it, let's point out another case study: BitCoin. Ok, one can't exactly say it's been a success for buying things, but for trading it has, at least at one point in the past, been a lively trading commodity. Why? Because more or less anyone with a computer and internet connection could set up a bitcoin miner and earn something. It didn't matter if they could spend it because psychologically they felt they were earning something. Idle games like 'Adventure Capitalist' also cash in on this sense of 'achievement'. Thus we have BitCoin, a currency with no stable standard or value upon which to base itself, which nevertheless managed to get onto the FTSE index.

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