Facebook Could Become the iTunes of the Internet

Note: I recognize that iTunes really is an Internet application already, so saying Facebook Could Become the iTunes of the Internet is like saying Justin Timberlake Could Become the White Michael Jackson. But alas …

I continue to be bullish about Apple in general. They make the best computers. The best media players. And they have the best media distribution platform – and if you follow Fred Wilson, you know that software is media too. Take a look at the AppStore. The success of iTunes when everything else failed miserably was based on a couple key factors:

1) Apple had the best media player and leveraged it – It’s amazing what a simple track wheel can do. Basic file interface and playlisting, easy to navigate. Drop dead simple. That’s what it took to win a billion dollar industry. A trackwheel.

2) iTunes was simple and just worked – I got my first MP3 player from my roommate Al. Getting songs on and off of it was a chore. The interface was flashy and choppy at points. Features were hard to use. iTunes you could just install and go. And provided the music you needed.

3) Micropayments were made easy – I think it’s kind of silly that Amazon “patented” one click check out, because Apple is even better at it. You put your credit card in once, and then any time you make a purchase, all you need to is put in a password. Easy. People will buy at $0.99 a song if it takes less than 15 seconds but won’t buy at $0.49 a song if it takes 1-2 minutes. They optimized on the right dimension – time. And because they roll up all transactions minimizing the fixed costs of credit card processing, they optimize on cost as well.

4) Apple worked with the media companies at desperate times – Yes Apple implemented DRM when no one else would, and that was more of a perceived chore than an actual one for the consumer. But in the end, that was what kept Apple in the game. And by leveraging the desperation of the moment (and their iPod install base), Apple struck a good deal with the media companies. A minor inconvenience for the power of consolidation.

Now the iTunes model to micropayments can apply to all kinds of digital media including news, magazines, stock research, blogs and almost anything. So now let’s shift gears to Facebook, which is in a tremendous position to become the iTunes of the Internet. The parallels are interesting:

1) Facebook is the Biggest Internet Application and Social Network – Already being there for now 500 million people is a HUGE advantage. No one else can really compete there. By integrating payments into Facebook apps like Farmville (60M players) they can overnight build an eWallet install base. With a little creativity, you could increase penetration well beyond that.

2) Facebook is Simple and Works – Facebook’s differentiation from MySpace was that it was simple, not cluttered and that the activity feed brought you what you really wanted – what your friends were up to. It was surprisingly useful and provided what you wanted before you realized how much you needed it. Now 250 million people check it every day.

3) Micropayments Made Easy – I haven’t seen Facebook’s payment interface, but it will be simple. They have a growing history of embedding their technologies into outside web sites. And their applications have experimented with credits already, so they have lots of sample implementations to reference. Plus, with tons of payment applications for person-to-person gifting and gift cards, group payments and social gaming, weaving in payments to the social fabric makes sense. But the success depends on the chances of a collision: that the person you are interacting with is on the same network. Facebook is the natural choice.

4) Facebook Will Work with the Leading Media Companies in Desperate Times – Ok, so this hasn’t exactly happened yet but all the pieces are in place. Media companies like NY Times, Meredith, Hearst and more are scrambling. They continue losing money, audience and differentiation – just like the Record Labels were. They are trying to create subscription based services and micropayment access, but they are unlikely to succeed. If they could plug in a simpler payment service with one click payments, they sure will have a hell of better time of it. They may lose the 5-10% margin in payment processing, but they will probably get 50+% increased conversion.

Now there is one thing I didn’t mention in the analysis that could be the X factor of success. Apple has much better brand standing than Facebook. Facebook’s Beacon program was an unfortunate misstep from which they will not easily recover. Customer trust is built over a lifetime and lost in an instant.

So Facebook needs to tread lightly. Start by integrating payments into its applications like Farmville. Partner or create some basic apps that further increase penetration (event payments, gifting, etc.). Then offer a payment API like Google Checkout to a few big media companies and then you are off to the races.

It wouldn’t take that long, but it would transform the Internet. Micropayments everywhere … Facebook is the iTunes of the Internet.

Now of course no one is going to just give up the largest payment processing opportunity on the planet. PayPal is no slouch at 30M monthly uniques. Amazon Checkout has had limited penetration beyond it’s walls, but there are a few noteworthy customers like Meetup. Google Checkout is a good small vendor solution, but has had little penetration among the big boys. And with the media hating Google right now, they seem unlikely bedfellows. Then of course there is Apple, with iTunes owning paid media distribution right now. If the iPad sells 5M units this year, that’s significant traction. But hardware purchase is a big obstacle to customer adoption. So advantage Facebook.

It’s all very early … but that makes it all very exciting too.