Why Amazon's virtual coins raise my hackles

When I heard about Amazon Coins, the company's virtual currency for making Kindle Fire app and in-app purchases starting in May, I immediately grew worried.

Amazon's customer focus, something I find sorely absent at money-extraction engines such as airlines and banks, has kept me loyal for years. I'm concerned, though, that the Amazon Coins program is a step in the wrong direction for Amazon customers.

In short, I don't like the inflexibility, costs, changeable rules, and risks that can be attached to virtual currency. I dislike it when there's a special form of money that works only in a limited marketplace, and I dislike it even more when the company operating the marketplace sets the rules for using that currency.

Amazon isn't yet sharing details or answering my questions, so this isn't a final judgement. I'm willing to be persuaded if Amazon's virtual coins are useful and beneficial and if Amazon runs the program sensibly. But my experiences with this idea so far make me leery.

My biggest concern is that Amazon Coins are a way to suck me and my money into the Amazon financial ecosystem and to make it hard for me and my money to leave. Here are three real-world examples showing why.

1. I owe my soul to the company store
Amazon's coins fundamentally are less flexible than real money, with which I can buy haircuts, groceries, and mutual funds. Amazon's coins remind me too much of company scrip, which mining and timber companies used instead of cash to pay employees. Scrip could only be used at the company store, the economically wicked institution immortalized in the song "Sixteen Tons." With real money, people can spend it where they see fit.

If done right, Amazon Coins could be relatively liquid. I'm sure it'll be easy to buy them -- Amazon's FAQ says the exchange rate is one Amazon coin equaling one U.S. cent. Amazon's coins should be as easy to convert back into real money, with no transaction fees.

But even a quick and simple conversion process is enough of a hassle that I suspect a lot of people will just let Amazon's virtual coins sit around. After all, of the $110 billion that people spent on gift cards in 2012, 1.6 percent -- $1.8 billion -- never will be cashed in, according to an annual gift-card report by CEB TowerGroup.

2. Frequent flier rules
Here's another worry about virtual currency: changing rules. My cautionary tale here is the airline industry.

I had an aha moment years ago when I first used the Quicken financial management software and the program suggested that I keep track of my frequent-flier mile balances, too. I realized then that frequent-flier miles are, in effect, virtual currency.

But frequent-flier miles have all kinds of problems as a virtual currency. First, they can be spent only on a very limited range of goods and services like magazine subscriptions and airplane tickets. And of course those tickets are subject to blackout dates and whatever other constraints the airlines choose to impose.

Second, the rules change. I remember when my miles were suddenly devalued 20 percent when the airlines raised the price of a round-trip ticket in the U.S. from 20,000 miles to 25,000 miles. I remember when my frequent-flier miles didn't "expire" if I didn't use them or buy a new ticket on that airline.

You might say I shouldn't complain about frequent-flier miles since the airlines are giving them to me for free. But I think it's more accurate to see them as included in the cost of the ticket I already bought, so I resent it when the airlines reduce the miles' value.

The lesson here for Amazon is that the company should commit to a fixed Amazon coin exchange rate, so customers don't have to worry they'll suddenly be devalued. Amazon should promise that people can always convert their virtual coins to real money.

3. Virtual currency flameouts
There have been efforts to create virtual currencies before, but the history is not encouraging.

Facebook credits, introduced in 2009 as a way to enable in-app purchases, were scrapped in 2012.

"By supporting pricing in local currency, we hope to simplify the purchase experience, give you [the developer] more flexibility, and make it easier to reach a global audience of Facebook users who want a way to pay for your apps and games in their local currency. With local pricing, you will be able to set more granular and consistent prices for non-US users and price the same item differently on a market-by-market basis," Facebook said last June when announcing the end of the program.

Zynga's similar ZCoins and their RewardVille marketplace exited the stage in 2012. "Be sure to redeem your ZCoins for game items before they expire," Zynga said.

I imagine most people with ZCoins could find games where they could spend their virtual money, but I don't like it was the only option. At least Facebook converted people's Facebook credit balances to local currency that could be used for in-app purchases at any point in the future.

And here's a trip even farther down memory lane to earlier-era currency experiments. Flooz abruptly ceased operations in 2001, leaving customers with balances in the lurch. At around the same time, competitor Beenz told its customers they had 10 days to spend their virtual money before the company shut down.

Sure, real real-world money isn't a perfect medium of exchange, but it's vastly more flexible and less flaky than virtual currencies have been so far. Too often, real-world money put into virtual marketplaces can't come back out.

Amazon-scale differences
One thing that could make Amazon's coins very different from earlier virtual currencies is Amazon itself. It's no dot-com-era startup or online commerce experiment. It's an e-commerce giant through which billions and billions of dollars flow every month.

When Amazon Coins debut in May, they'll just be for buying apps and in-app purchases with the company's Kindle Fire tablets, which use an unbranded version of Google's Android operating system but an app store separate from Google Play.

But it's not a stretch to imagine Amazon extending the coins so they can be spent elsewhere -- Kindle e-books or Amazon music tracks, for example. Other options include Amazon Web Services, Amazon Prime subscriptions, and of course the colossal array of real-world products Amazon sells online.

Maybe Amazon Coins will remain in a tiny app-store corner of the company's commercial transactions. But the possibility that they could spread so much farther makes them much more important than other virtual currencies and means we should pay much closer attention to what Amazon does with them.

Anytime somebody tries to persuade you to use their own special form of money, ask yourself why it's worth sacrificing the flexibility of real-world currency. Maybe it's something benign -- lower transaction costs or commerce friction, for example, which can lead to a more vibrant or efficient marketplace.

But especially when Amazon says it "will give customers tens of millions of dollars' worth of free...coins to spend," be very careful.

There's no such thing as a free lunch, and there's no such thing as a free Amazon coin, either.