Why Facebook Needs a Payment Platform

-Cash Picture-Facebook has supposedly postponed development of their payment platform but we believe they need to launch sooner rather than later. Facebook has been building an advertising supported “economy” for developers. The problem with an advertising supported economy is that developers are incentivized to build applications that “virally” reach millions of users. Developers end up being forced to work harder at gaming the Facebook platform which has become increasingly difficult.

Facebook’s Free Economy

In college I didn’t take a class on free economics (not to be confused with free market economics). The reason was that the course wasn’t offered. If Stanford or any other well known University offered such a course, I’m sure plenty of people would flock to it. The free economy is an extremely challenging place. It’s the same environment that traditional media companies like the Wall Street Journal, New York Times, and many others are now facing.

The free economy generates revenue strictly through advertising. That advertising can be for premium products or services offered by the publisher or for products owned by outside companies. It’s not a great environment to be in because there is an increasing number of impressions going around while there is a decreasing amount of attention for content consumers.

Engagement in the Attention Economy

As advertisers and publishers have quickly realized that the price for impressions are decreasing, they are turning to a new model called “engagement”. In this environment, advertising is sold at a premium when it’s based on engagement. Companies like Buddy Media and Context Optional are both selling engagement and the advertisers have been willing so far to pay the premium for this new form of engagement.

Unfortunately a model has yet to be developed that quantifies engagement effectively. I’m not sure when one will actually be developed but most believe that it will be years before one is developed, if ever. It’s for this exact reason that I believe Facebook needs to roll out a payment platform sooner rather than later.

Real Economies Sell Goods and Services

If you studied economics then you know that traditional economies are based on the sale of goods and services. Such a concept is foreign in the Facebook economy though. All of the revenue being generated right now is from advertising. This model results in the exact types of applications that Facebook wants to avoid. The applications are essentially media that’s distributed for free living and eventually dying in what will become the Facebook application wasteland.

Just think about the garbage (the old sites that nobody visits, etc) that litters the internet and you’ll know what I’m talking about. If Facebook developed a payment platform, companies would rapidly be incentivized to develop products that the Facebook users actually want and will pay a premium for. In such an environment, developers are forced to innovate their products for the sake of selling more.

Right now there is a huge number of applications that are simply passing users from one to another. To illustrate this, go take a look at the fastest growing Facebook applications. It’s Facebook’s advertising supported economy that has resulted in this. I would argue that if Facebook launches a platform, they will see developers that actually build quality products for one simple reason: it sells more.

One Problem

The idea of launching a payment platform is a good one aside from one thing: it’s hard to generate leads on Facebook. With Google you can use their advertising platform to effectively generate leads (that are ready to make a purchase) but so far there hasn’t been a way to do that with Facebook. While I believe Facebook is a great advertising platform for specific things, it’s not very good at getting users right before they make a purchase.

While this is an entirely different problem, marketing virtual goods on Facebook will be much more challenging without direct leads. The last thing Facebook wants is their developers to go pay Google for application promotion.

Conclusion

Aside this one problem, I believe it’s critical that Facebook build a payment platform soon so that software companies that focus on selling products can thrive. Developers will build quality products when there’s a clear incentive. Right now the only incentive is a bunch of traffic and traffic is a decreasingly valued commodity. So when will Facebook launch their payment platform?

Image from Tom Kirkendall