Daily Dose of iQ: With Mobile In-App Purchases, Facebook Makes Push to Become a Platform

Jun 07, 2012 — Jerome Valdez

Facebook Credits, the social network's payments system has been around for some time (we blogged about it last November), but as Dan Rowinski of ReadWriteWeb writes, "many Facebook users are not aware that they can pay for items in Facebook."

Yesterday, Facebook announced a payments system for mobile apps tied to is platform.

"The company has partnered with mobile operators in 30 countries to create a direct-to-carrier billing system for mobile Web apps available through Facebook," Rowinski writes. "That includes all four major carriers in the United States (AT&T, Sprint, T-Mobile and Verizon) and the United Kingdom (02, Orange, T-Mobile, Three and Vodafone)."

In previous blogs, we’ve discussed how “winning” mobile payment technology (whether driven by OEMs like Google Wallet; by banks or credit card companies; or by third-party payment processors like PayPal) requires convenience for the consumer.

The question here is whether Facebook has the right mobile payment recipe.

It appears that Facebook does have the right recipe, at least for commerce actions specific to the Facebook mobile user experience:

  • In-app purchases like those for Zynga games are one example.
  • Consider a scenario where a person sees new shoes show up in his feed available at Zappos -- that person can buy those shoes right there, without going to Zappos.com. The payment transaction could be handled by Facebook the charge for those shoes could show up on your next mobile phone bill.
  • Another possible scenario: A Facebook ad from FTD reminds you to send flowers to your mom for her birthday. You could click to order those flowers delivered, while staying in Facebook. Those charges would also be handled by the payment partnerships that Facebook has arranged.

Facebook Credits - Photo credit: ReadWriteWeb

Much has been made of Facebook’s ability to generate profits, particularly through mobile ads. This introduces a new potential revenue stream. Based on the iOS and Android app store models, for example, Facebook would only keep 70% of the transaction fees from in-app purchases; the other 30% would go to the carrier/payment processor. Does this seem lucrative enough of a channel to turn Facebook’s IPO woes around?

The cut that the payment processor and/or carriers ask would eventually be borne by the end customer. This means that companies who sell via Facebook would likely increase their prices to cover the added transaction fees. The question becomes whether consumers are willing to pay extra for the "convenience" of purchasing within Facebook. Unless those extra fees disappear or are reduced substantially, it seems logical that a premium will be paid by the end consumer for the convenience of purchasing via Facebook.

In regards to the difficulties surrounding the Facebook IPO, that's a separate issue. The IPO takes into account many more factors than just the mobile strategy. Not the least of which is the price-to-earnings (P/E) ratio at which Facebook stocks currently trade (and the expectations that belie that ratio). At the time of this writing, P/E is at 68. This means that the market expects earnings to grow by 68 times in order to rationalize the price. As a frame of reference, Apple's P/E is 14 and Google is at 17. A Vancouver business success story, Lululemon, is trading at a slightly lower price-to-earnings ratio of 62.

With mobile in-app purchases (and the rumored Facebook phone), Facebook is making steps to go from an app on your phone to its own platform (upon which other apps operate), like iOS or Android.

There is a real possibility that Facebook can pull it off. Compare Facebook's current situation to Google's initial position as a search engine. Google did search very well. This earned it a captive audience that advertisers wanted to reach.

Facebook, too, has earned its captive audience. And as an advertiser, one could argue that the data that Facebook can harvest about each of its users is even more valuable.

Google personalizes ads based on our searches; Facebook can personalize ads based on so much more of your personal information (and that of your friends). The more targeted an ad, the more valuable it is to advertisers, and the more money Facebook should be able to ask to place those ads. 

On the backs of those advertising dollars, Facebook could conceivably build out a platform much like Google did with Android, Gmail, Documents, Chrome, and their own mobile phone platform.

It does not take too much imagination to draw the parallels between Facebook's rumored mobile phone and what Google did with Android and Nexus.

Topics: Privacy, Retail Operations, Wireless Trends, Mobile Industry, Customer Experience, Retail Marketing

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