It's been an incredibly exciting three months in mobile payments thanks to a number of shakeups that promise to turn the industry on its head.
In a new report from BI Intelligence, we look at the most important developments in the third quarter, how they've reshaped the mobile payments landscape and whether they'll be the catalyst for people to finally start paying with their phones.
Apple Pay: The biggest shakeup was Apple's announcement of its new payments feature: Apple Pay. The NFC-compatible system will allow iPhone 6 and 6 Plus users to make payments at over 200,000 retail locations in the US. Apple Pay boasts a number of security features that speak directly to consumers' top mobile payments concerns.
Big Retail's move: Hoping to steal the show, MCX, a consortium of over 70 of the largest retailers in the US, announced its own mobile wallet, "CurrentC," days before Apple. These merchants control one in five retail dollars spent in US stores, and won't be accepting Apple Pay, according to sources familiar with the matter.
The in-app crowd: Finally, a new breed of apps that bypass the payment terminal by allowing users to make in-store purchases entirely within their phone. They promise to fundamentally change the way we pay in restaurants and bars, and make it a software-only process.
Mobile payments will see explosive growth. Mobile in-store payments will grow at a five-year compound annual growth rate (CAGR) of 154%, to $189 billion in 2018 from $1.8 billion in 2013, according to our forecast. While the growth will be explosive, in-store mobile payments will still account for less than 4% of brick-and-mortar transaction value by 2018.
A small percentage of people have used mobile payments.In late 2013, just 6% of US adults said they had made a payment in a store by scanning or tapping their smartphone at a payment terminal. That percentage will go up to 8% this year. Apple's introduction of the Apple Pay mobile wallet in the iPhone 6 line will be the key factor that will drive this percentage up.
Millennials are early adopters of mobile wallets. Fifty-five percent of people who say they use mobile wallets are millennials (ages 18 to 34). These mobile natives are likely to continue to drive mobile wallet adoption.
Apple Pay will succeed and bring mobile in-store payments into the mainstream.Apple has a devoted fan base and the unique ability to change consumer behavior on a large scale. A majority of US tech consumers said they would absolutely use Apple Pay, according to a survey of Business Insider readers. In addition, the company has included a number of features within Apple Pay to address consumer privacy and security concerns.
Forget the Apple Watch and iPhone 6. Apple Pay is Apple's next biggest innovation and this is why: Touch ID has the potential to finally push mobile over the hump in the U.S.
Yes, Apple has spent a good deal of time discussing the near-field-communication technology and how it is working with retail, credit card and bank partners. It was quick to point out that there are merchants ready to accept Apple Pay as a very secure payment method. But that isn't the news. Go into any Starbucks on any day and you will see plenty of mobile transactions.
The far more intriguing topic, which was hardly discussed during last week's launch, is Touch ID. Touch ID enables "one-touch checkout" for online shopping apps. Say goodbye to the hassle of entering your credit card information on the small screen. See something you like, touch it, and it's yours!
App developers have already started building Touch ID into retail apps. On the same day of Apple Live, Target announced that it has adopted the Like2Buy platform that will allow the chain's Instagram followers to buy products featured in photos, and Target is now integrating Touch ID into its mobile app. Touch ID for mobile apps is the big deal, but not for the reasons you might think.
Apple is a "big play" kind of an organization. A $349 watch and people upgrading to an iPhone 6 isn't going to move the needle for a $171 billion dollar company. Apple Pay helps, but it's a basis-point (a unit equal to 1/100th of 1%) play that gets split multiple ways between the service provider, credit card company, bank, etc., and it will take years for it to be widely accepted. So where's the "big play" with Apple Pay?
It's mobile advertising. According to Mary Meeker's "2014 Internet Trends" report, mobile advertising represents a $30 billion opportunity in the U.S. alone. But mobile ad spend has lagged because of issues relating to tracking and measurability.
This is why Apple Touch ID is so important -- it has the potential to improve tracking, measurability and ROI significantly. With Touch ID, the buyer never leaves the screen to transact. Attribution, tracking and conversion rates will improve, but the challenge remains -- how do you get consumers to transact?
According to McKinsey, you give them a special deal or offer -- an ad. There's the closed loop, and a huge opportunity for marketers to put ads in front of audiences who can quickly convert.
Mobile advertising is just now taking off. Last year, global mobile ad revenue doubled, reaching $18 billion, and it is expected to grow 75% in 2014. Two players, Facebook and Google, account for about two-thirds of the total spend. A third player -- Apple -- could be on its way.
Apple has had a long history of introducing products at the beginning of the ''hockey stick'' (usually relating to the point on the consumer adoption curve that new technologies take off). This time the hockey stick is mobile advertising. The real payoff of Apple Pay, for now, is not retail, it's mobile -- it is about buying on your phone vs. paying with your phone.
Apple Pay might compel consumers to finally leave their wallets at home — well, at least their credit cards — but it’s expected to have a significant and much more immediate impact on mobile shopping. According to a 2014 survey from marketing firmCatalina, which was charted for us by Business Insider Intelligence, the main reason people don’t use their phones to shop online is because it takes too long, whereas a trip to the store is perceived as less time-consuming.
The second-biggest reason in-app shopping isn’t so popular is “it doesn’t help me get past the checkout faster.” Again, speed seems to be the key issue with mobile payments. But based on the Apple Pay software, which simply involves choosing your preferred card and placing your fingerprint on the home button ("that's it," as Tim Cook says), some of the major pain points of mobile shopping could be alleviated as soon as October, which is when Apple Pay will be released as a free update to iOS 8.
Apple Watch was certainly the shiniest object in the room at Apple's big event Tuesday, and there are, no doubt, interesting opportunities for brands to play into its functionality. But Apple Pay -- a new mobile payment system -- presents many opportunities for marketers looking to reach and influence consumers at a most crucial point: purchasing. Before we dive into those possibilities, here's a breakdown of how the new mobile payment system works:
Pay replaces the need for a physical debit or credit card in an in-store transaction -- you just hover your phone (or your Apple Watch) over a near field communication (NFC) reader at the register and it near-instantaneously transfers payment information after a one-touch authorization.
Registering a debit or credit card with Pay is pretty simple -- you take a picture of the card, Apple verifies it, and the "card" becomes accessible through the Passbook app.
Over 220,000 retailers, including Macy's, Whole Foods, Walgreens, McDonalds, and Sephora are already equipped to work with Pay, with many more promised.
Pay also works as a one-tap system for in-app payments on the iPhone, with the Target app noted as an early partner.
Apple isn't the first company to introduce mobile payments -- it's not even the fifth or sixth. However, Apple has already overcome many of the pitfalls of past mobile payment efforts: It has major retailer cooperation, control of both mobile hardware and software, and enough notoriety to influence usage. Assuming that it takes off and, as Apple CEO Tim Cook said, "forever changes the way all of us buy things," here are a few marketing scenarios that Pay could enable:
Increasing in-app purchases In the purchase funnel, mobile phones originally occupied a "research" function -- how much does it cost, where can I buy it, etc. However, nearly a third of all online purchasestoday are made with mobile devices. That number should continue to climb, thanks to a better browsing experience enabled by larger mobile screens (including iPhone 6 and 6+), as well as the new ease of in-app purchasing via Pay. Quite simply, it will be more enjoyable to shop on mobile phones. Thus, marketers should take another look at their ecommerce experiences by making them beautifully and thoughtfully designed to encourage adoption and repeat usage. The user experience also needs to be shifted in order to encourage and incorporate one-touch checkout.
More mobile messaging Mobile ads are still struggling to find their way. Plenty of platforms have popped up, but most executions are just extensions of desktop display media. However, Pay gives iPhone users the biggest reason of all to have their phones in-hand while browsing a brick and mortar store. This increase in smartphone exposure could offer mobile ads a new lease on life -- NFC or iBeacon technology could trigger ads or notifications to appear while a person is shopping, and the proximity to the product could offer targeted messaging opportunities. (e.g. "The new Brand X shampoo is on Aisle 8" vs. "Try new Brand X shampoo.") There's also the possibility of serving up special offers.
Pushing in-store promotions During the presentation, Pay was presented as a way to speed up a store's checkout process. That may not matter to your brand, but Pay's inclusion in the Passbook app could be another way for marketers to create positive shopping experiences. Passbook was released with iOS 6 as a central place to digitally store physical "passes" -- things like movie tickets, airline boarding passes and coupons. Although a connection wasn't mentioned in Apple's keynote, it's likely that the contents in Passbook will be integrated with Pay -- meaning stored coupons, promotional offers and loyalty programs could be integrated into the Pay checkout process. Brands should take another look at Passbook -- how and where their apps can offer promotional integration that drives brand preference and purchase. And could this integration finally mean the end of direct mail? I wouldn't be sad if it did.
Apple Pay may not be a sexy addition to your wrist or a long-awaited upgrade to your smartphone, but it does ease and encourage something all marketers can appreciate: the act of purchasing. Apple did the heavy lifting, now it's up to us to explore how to create experiences around this new approach to shopping.
APPLE’S NEW PAYMENT SYSTEM WILL FINALLY GIVE DIGITAL WALLETS CRITICAL MASS
MURAD HEMMADI FOR CANADIAN BUSINESS SEPTEMBER 09, 2014
Apple today announced “the biggest advancement in the history of the iPhone,” a larger 5.5″ model dubbed the iPhone 6 Plus, with a slimmer design and the usual bevy of new features. But the biggest chance isn’t the form factor, it’s the functionality—Apple’s newest device is a digital wallet.
The world’s most profitable company has moved from a cult-like following of die-hard fans to the top of the consumer electronics market. But Apple has come under pressure from naysayers who believe the company will flounder without a steady stream of category-creating new devices and investors unhappy with its humongous cash pile.
The buzz around the newest iteration of the iPhone has focused primarily on the size of the device, with the much-anticipated larger model designed to compete with Samsung’s ever-growing phone stable. Apple has to this point resisted the growing phablet trend, but as with the launch of the iPad Mini, the company could not hold ignore consumers’ desire for a particular size of device any longer.
However, the announcement that the iPhone 6 will include near-field communications (NFC) capability and a system called Apple Pay hints at a more long-term gamble: mobile payments. Consumers’ internet use increasingly takes place on hand-held devices, making the closed garden of iOS a sleeping monetization opportunity for Apple. Internet rival Amazon recently launched its own smartphone offering in a bid to become users’ default shopping location.
Apple has a long record of building category-busting products that draw on the company’s own innovative offerings that failed to catch on. The iPad, a device that arguably launched the tablet market, built on the lessons of the failed Newton personal assistant family of devices, and presaged many of the present-day features of the mobile iOS platform. Apple Pay, which allows users to make payments by pressing down on the TouchID key, similarly build on existing Apple ideas, combining two existing functionalities into a location-sensitive virtual wallet.
Apple Store employees use a system called EasyPay to process payments and issue receipts. The application allows blue-clad “Specialists” to scan barcodes and accept credit cards, and the company recently began replacing the souped-up iPod Touches that run EasyPay with the iPhone 5s. The move ostensibly adds some functionality, including chip/pin card reading capability and RFID, but it could herald a broader rollout of scanning technology in mobile devices.
EasyPay is location based—it also allows ordinary customers visiting a physical retail location to purchase certain accessories using the credit card associated with their Apple ID to make purchases, but the system hasn’t received much attention or use. Expanding that functionality to other retailers would remove the pain point of walking up to a checkout counter, enabling shoppers to pay by simply taking a picture of a product’s bar code. Apple is reportedly in talks with retailers like Target and Nordstrom over NFC-enabled shopping.
The iPhone already has a mobile wallet of sorts, called Passbook, which allows users to store digital copies of boarding passes, event tickets and coupons. Passbook interacts with an ecosystem of proprietary apps from companies like Indigo, Eventbrite, WestJet and Starbucks, but doesn’t itself hold money. An updated Passbook is among the improvements included on the iPhone 6.
Digital wallets are hardly new—we’ve been talking about the shift to a virtual payment economy since the beginning of the smartphone era, and traditional commerce operations like credit card leader MasterCard and banks like CIBC have been expanding their mobile payment options. But the model for Apple could be arch-rival Google, which launched a digital wallet that combines the tickets-and-loyalty-cards storage of Passbook with credit or debit card information for real-world purchases.
These moves don’t mean that these tech companies are entering the financial business; even e-commerce processing leader PayPal requires users to have some kind of bank account or credit access. Rather, they are attempts to keep consumers within companies’ digital ecosystems, allowing users to access products and services from other retailers and providers but through Apple’s or Google’s or Amazon’s platforms.
Apple has shown an eerie ability to enter digital markets at exactly the right moment. Amidst all the hype about a larger iPhone and the possibility of an iWatch, the company’s latest product may signal a less obvious consumption shift: the era of the mobile wallet is finally, finally here
Apple is expected to introduce a new mobile payment service on Sept. 9, which is expected to be a standout feature in the new iPhone 6. But based on Nielsen data from July, which was charted for us by Statista, most people are using mobile payments by presenting a barcode or QR code on their smartphone, which is popular among ticketing agencies for transportation and sporting events.
While iPhones (and almost all other smartphones) are capable of presenting visible barcodes or QR codes, reports sayApple’s new mobile payments solution will leverage the company’s Touch ID security system, as well as a new near-field communication (NFC) chip, said to be exclusive to the next-generation iPhones, to pay for goods securely. According to Nielsen, 37% of mobile payment users have used NFC on their smartphones to pay for goods and services — but that could soon change if Apple finally includes NFC in one of its devices.
Mark Zuckerberg streams through the crowd at the Concourse Exhibition Center in San Francisco like a politician working a pancake breakfast.
As the Facebook CEO makes the rounds at f8, the company's daylong developer conference, it is clear that he is among his people. Fifteen hundred hackers have amassed, the first time Zuck has called this flock together in two and a half years. They're here to attend engineering sessions about how to build, grow, and monetize their apps; to munch on plastic-wrapped sandwiches trucked up from Facebook's Menlo Park headquarters; and to try to catch a glimpse of Zuck casually hanging out by the Oculus Rift demo, a sight even more surreal for them than the virtual-reality experience itself. Despite the stuffy heat--the 125,000-square-foot space doesn't have air-conditioning, so Facebook had to import its own ventilation ducts, which hum along the wooden ceilings--Zuck looks cool and relaxed in his T-shirt and jeans. He walks tall, chest out firmly, and with each quick hello he leaves a trail of starstruck smiles and excited whispers in his wake, as if Harry Styles were strolling through a suburban shopping mall. As one beaming attendee says after shaking hands with the CEO, "He seems pretty fucking confident!"
Zuck, now 30 years old, has reason to be confident. His company is crushing it. Monthly active users: up to almost 1.3 billion worldwide. Engagement: up, with more than 50% of users now visiting the service six days a week and, according to a report by the app-analytics firm Flurry, spending 17% of their time on their phones in Facebook's app, far and away the most popular service on iOS and Android devices. Speaking of mobile, Facebook, which spent all of 2012 and into 2013 dogged by concerns that it would not be able to make money on people's phones, now generates 59% of its ad revenue from mobile. One particular ad unit--the one that suggests apps a Facebook user might want to download--is the envy of the entire industry and is being widely copied. Revenue for the first quarter of 2014 was $2.5 billion. The company earned profits of $642 million, almost triple its haul a year earlier.
These feats are even more impressive when you consider that Zuck is delivering these results with a core product that has been criticized for being as stagnant as it is ubiquitous, a place where parents and grandparents share photos of kids who may be less likely to embrace the service when they grow up. In a world churning out startups with one innovation after another--Snapchat, Tinder, Whisper--Facebook can seem like yesterday's news. Yet how many businesses see revenue and engagement surge just as passion for their products stalls?
Zuck went on a shopping spree last February and March that seemed, on first blush, downright desperate. On February 19, Facebook announced its acquisition of global-messaging phenomenon WhatsApp for almost $19 billion--the largest sum ever paid for a venture-backed startup. Five weeks later, Zuck shelled out $2 billion for the promising virtual-reality headset company Oculus VR. Two days after that, he spent $20 million on a drone company. Yes, drones.
Although Zuck has outlined his three-, five-, and 10-year goals for employees, he has never crisply explained publicly how all of these recent moves fit together, and that has gotten tech watchers buzzing about whether he and the company have lost their way. But after dozens of interviews with current and former employees, rivals, advertisers, developers, and users, it becomes clear that Zuckerberg has launched Facebook on an aggressive and potentially brilliant strategy--one that has very little to do with the company you think you know based on your desktop use of its social network. [Facebook granted Fast Company access to several company executives, but not to Zuckerberg or COO Sheryl Sandberg.] To make Facebook more relevant than ever, the company has targeted the very core of the app economy to fulfill its vision for the next half-decade. As the six lessons that follow illuminate, the great social network of the early 21st century is laying the groundwork for a platform that could make Facebook a part of just about every social interaction that takes place around the world.
To understand where Facebook is going, you need to start by understanding where it's been. Remember Poke? How about Gifts, or Beacon? Graph Search? Camera? Facebook email? Places? Deals? If none of these ring a bell, don't worry. They're all Facebook products introduced in the past seven years--and they were all failures. Together these missteps have become symbols of a culture where innovation has seemingly evaporated. It's even infected Facebook's subsidiary Instagram, whose two big releases since being acquired--video sharing and Direct Message--flopped, according to a source familiar with the company's metrics. (Facebook rejects this characterization.)
The most prominent failure of all, perhaps, was Home. Introduced on April 4, 2013, at a splashy event replete with overwrought Jobsian flair and blockbuster expectations, Home was a novel software experience created to give users a distinctive Facebook-first way of using Android phones. "A lot of people came over from Apple to work on this stuff," says a product manager on the project. But Home bombed, receiving a tepid reception from critics and an even worse one from consumers. Just a month after launch, HTC, Facebook's hardware partner, slashed the price of its phone that came preinstalled with Home to 99 cents, and weeks later discontinued it altogether. "Everybody was disappointed," says the manager.
But it has hit roadblocks along the way. For one thing, as the company has grown to include almost 7,000 employees, Facebook remained overly dependent on Zuckerberg, whose blessing has been required for projects to gain steam beyond their origins in Red Bull–fueled hackathons. "You face the reality of large organizations, where it's hard to convince anyone to give you resources [for an idea]," says one product manager who recently left to build his own app. "There's that lure of saying, 'You know what? I'm too worn out to fight [for this idea inside Facebook]; I'll just leave and try doing it on my own.' "
Projects that did fight their way through the system faced other burdens rooted in the company's history. The "truth" of data is so paramount at Facebook that products were given little time to improve after launch. "A startup would try again or change it," that recently departed manager says of Facebook's graveyard of failed products. "But that kind of culture doesn't exist at Facebook. If something doesn't work off the bat, it's like, 'Okay, the metrics aren't working, let's put the engineers over here.' " One nasty by-product of this approach: demoralized employees.
Bret Taylor, Facebook's former CTO and now the founder of a document-creation app called Quip, traces the situation back to Facebook's earliest success: the integration of photo sharing into the News Feed. Almost by accident, Facebook became the world's largest photo-sharing site, "creating a dynamic," says Taylor, "where, when you were thinking of a new product, it was always integrating with News Feed--just like the photos product did, because that's what drove all of its usage and traffic. The conventional wisdom was that if you don't do that, there's no way you're going to grow as fast." The problem with this is obvious when you compare the litany of Facebook failures (Beacon, Places, Poke, and so on) with successful social apps that have become popular over the same time. Consider Snapchat. Predicting the success of ephemeral photos would have been impossible. And that's just one of an endless stream of startups experimenting with new ways for people to communicate with one another. A social media startup can be bootstrapped very cheaply. WhatsApp, after all, grew to almost half Facebook's size with just 55 employees; Snapchat (which Facebook tried to purchase more than once) became a perceived threat with even fewer people. Which means that Facebook faces an eternal game of Whack-a-Mole as it tries to predict what's a fad and what's the future. Throw in the impediments of data and bureaucracy, and the chances of creating a breakthrough app within Facebook become slim indeed.
Zuck seemed to acknowledge this challenge when he announced a division last February called Creative Labs, which functions as a separate space outside of Facebook's traditional product teams, for "things that are nascent." At the same time, Facebook revealed what it said was the first Creative Labs product: Paper, an elegantly designed mobile app for reading and responding to your News Feed. "Creative Labs allows teams to go off with very loose time constraints and think about problems," says Scott Goodson, a leader on the Paper team and a former senior software engineer at Apple. "A lot of the core people came here because they saw that level of freedom--they wanted its small-team feel."
If you start asking questions about Creative Labs, though, it becomes less clear just what Zuck and company have learned from their product misadventures. "There's no Creative Labs building; there's no, like, Creative Labs organization," admits Cathcart, who serves as the engineering lead for several (but not all) projects that Facebook has anointed with the Creative Labs moniker. Cathcart describes Creative Labs as more of a framework. It's one with a striking familiarity. "Honestly, a lot of it is Mark," he says, meaning that the way an idea gets green-lighted as a Creative Labs project is exactly as it's always been.
One thing that does seem to be different: Facebook seems willing to be more patient and iterate on ideas rather than just scrap them. Paper, which was in development before Facebook devised Creative Labs, has grown slowly, at least in Facebook terms, and it is being downloaded less and less. But during Facebook's first-quarter earnings call, Zuck said that products like it will be given room to grow and come into their own, indicating that the company won't even worry about trying to make money from any app until it reaches more than 100 million monthly active users. Facebook has even decided to try to develop another Snapchat-like service after its first knockoff attempt, Poke, disappeared almost instantly. All this signals that Facebook can't simply follow its long-standing hacker playbook. It still wants to try to create great products, but it is also willing to buy the hottest next-wave services when it can't. And as we'll see, it's become crucial to tap into a much wider network of apps to fuel its success.
This isn't an analogy you'll hear from anyone at Facebook, in part because it sounds crazy, and in part because Zuckerberg just doesn't seem to be making his strategy clear these days. But one way to think of Facebook is as the Coca-Cola of social media.
Warren Buffett is addicted to Coca-Cola. He's never sold a share in Coke because it has always offered a flavor to please his taste buds: cherry and orange and lemon-lime sodas, energy drinks, flavored waters, organic juices, and teas. Coke serves 1.9 billion drinks per day because the 122-year-old conglomerate recognized long ago that customers will forever thirst for something new. Whenever and wherever you are thirsty, Coca-Cola will be there for you.
Zuck wants Facebook to be just like that.
At f8, Facebook wowed developers with VR stations, visualizations of their app data, and more
When you think about it, social media at first seemed to be a kind of basic cola designed for all tastes. But, of course, it has proved to be much more than that. Especially after online interactions migrated to mobile devices, users began craving more specialized flavors, encompassing everything including communication via photos, instant messaging, group and video chats, and more. Zuck wants Facebook to be involved, in some way, in each of these exchanges. Frankly, he has no choice but to try if he's going to achieve his goal of adding 5 billion more active users--Coca-Cola–like ubiquity--and creating a business that makes today's Facebook seem tiny.
The Coca-Cola of social media won't look like today's Facebook because it will become less and less reliant on the basic cola--the desktop experience that was rather clunkily transported to that big blue app on your phone or tablet. "There was a lot of debate internally as to whether all these experiences should live in the core Facebook app or whether they should live in separate applications," says Josh Williams, the Gowalla cofounder who spent a year and a half at Facebook after it acquired (and shut down) his startup. "Should there be a Facebook Local app? A Facebook location app? A lot of people, including myself, thought that should be the case instead of shoving them in the more drawer on the core app." (The more drawer he's referring to is the button on the bottom right of the Facebook app, under which it has slotted things like Groups and Nearby Places.)
"I'm a little surprised it took so long," says one former Facebook product manager who helped build its mobile platform. "We actually had studies three years ago that clearly demonstrated this was the strategy that we needed. People didn't want one big blue app." The company considered creating a series of Facebook-branded apps (a strategy it flirted with when it launched Poke and Camera in 2012), but research made it clear that users were growing totally comfortable with--indeed, were beginning to prefer--apps that served a single function and that had no connection to a centralized behemoth. "All of them had four to five different social apps on their phones," says the source of the still-confidential studies. "The more we dug into why, the answer that came back pretty much universally across the board was, 'This is how I keep my friend groups separated.' "
Thinking of itself as a conglomerate of apps, rather than as a single one, is a mind shift for Facebook. The user numbers behind each of those smaller apps can pale compared to the almost 1.3 billion people who employ the big blue app. But it's not just Coca-Cola that has made this kind of leap. Television networks are one example of companies that have captured a wide swath of consumers and then diversified into new turf. Fox has FX, FXX, Fox Movie Channel, Fox Sports, Speed, Fox News, and Fox Business. Earlier tech giants did so as well. Yahoo grew from being a directory to providing email, news, and sports products; Google, more notably, went from search to Gmail and Android. Facebook is following an analogous path. "They have this kind of suite developing where they have Instagram and WhatsApp, and it's easier to position it like a grouping of experiences," says Williams, who left Facebook before it decided on this approach. "I have to respect Mark a lot for his aggressive execution on his strategy. Home base is covered, and we've dug a moat around our castle now, and we can be a little bit more aggressive on these fronts because the likelihood of this core toppling over is low."
Transforming Facebook into a multifaceted operation won't be easy. But a little-noticed change that Zuck made two years ago paved the way.
For a long time at Facebook, the advertising team was responsible for the ad products, and the product teams were charged with creating and refining the user experience. They were separated, the way that business and editorial at a newspaper are, because Zuck believed that the product team should focus only on the consumer's experience, without being distracted by financial concerns. The ad team was rewarded for increasing revenue, while the product teams were assessed based on user-engagement metrics.
A number of key players within the company began to argue that if Zuck rewarded all teams for contributing to revenue, the enterprise would get a whole lot more ideas, and they would be better, more creative, more diverse. According to a former senior employee with knowledge of the conversations, Zuck was reluctant to make the change but eventually agreed. Under a revised management structure, the News Feed product team, for instance, would now be accountable for how much money came through News Feed advertising, and the mobile product team would be charged with developing ideas to make money through mobile. "It was a very awkward thing," says the former employee.
But the impact proved to be profound. "As we went through our mobile transition, we had to figure out something different in how ads integrated with content," says Mike Vernal, Facebook's VP of engineering. "That precipitated rethinking how we think about making ads feel like a really well-integrated experience."
"The News Feed team all of a sudden was coming back with suggestions about what to do with the ads product that the ads team had proposed six months ago but were shot down because they were too consumer-aggressive," says the former employee. "But now the Feed team wanted to do those things. It was like, 'Oh? Well, twist our arm! Sure! We'll help you do that! Sounds like a good idea! Why didn't we think of that?' "
This single decision may have been the main catalyst behind Facebook's rebound after the company saw its market capitalization more than halved during the months after its May 2012 IPO. At first, investors didn't believe Facebook had a good plan for generating more revenue from its customers, especially those using Facebook on their phones. Facebook's move to integrate the teams led to it running ads within their apps' News Feed, and that led to its first breakthrough mobile-advertising product.
App Ads are units that only appear on phones and tablets in Facebook's mobile app. As the name suggests, they promote other apps, ones that Facebook thinks you might like based on your usage history. Better yet, each features a prominent install now button, allowing Facebookers to download the promoted app with a tap. "App stores are effectively popularity contests," says Vernal. "If you make the top 10, you'll get a bunch of people using your app. But if you're No. 11, you basically fall off a cliff." In return for using its massive popularity to drive users to interesting apps, Facebook, according to developers, is charging its advertisers as much as $3 to $4 for each new customer. "It's solving that problem of discovery," explains Facebook product-management director and App Ads creator Deb Liu.
The ad unit debuted in November 2012, and the results thus far have been nothing short of phenomenal. In 18 months, this one advertising product has resulted in 350 million app installations. Facebook does not break out revenue by ad product, but by our estimate that would translate to roughly $1 billion. "By the third day of testing Facebook [App Ads], it was already dominating every mobile-ad source out there," says John Earner, CEO of mobile-game startup Space Ape, one of the first developers to use the ad unit. "By April of 2013, App Ads was the worst-kept secret in the gaming industry." Space Ape's Samurai Siege game pulls in $70,000 a day by spending up to 75% of its marketing budget on App Ads. More broadly, Facebook reports that 60% of the top-grossing apps on Apple's App Store and Google Play use App Ads.
The resurgence of Facebook's stock has enhanced the company's ability to acquire innovation that's taking place elsewhere. Zuckerberg is aggressively using company stock to buy startups--because he knows that at least one other competitor is trying to beat him to the punch. "The biggest existential threat is not Snapchat," says one employee who has heard Zuck speak about his strategy. "Their biggest concern is Google."
As social messaging took off around the world, "Facebook was obsessed with WhatsApp," says a former Facebook product manager. In the months before the acquisition last February, one where Facebook reportedly outmaneuvered Google to close the deal, "most meetings you would go to regarding growth and competition, you'd hear about WhatsApp. Mark is a very paranoid person in the way he thinks about Facebook. He cannot stand that there are other people out there doing something better than Facebook. And WhatsApp was clearly doing that: It was faster, more reliable [messaging]." WhatsApp filled a need, at a hefty cost.
Virtual-reality firm Oculus, on the other hand, is a long-term bet at a tenth of the price. It's a roll of the dice. Why would Facebook want to be a significant player in how people interact in 3-D virtual worlds? Because if 3-D is another version of social media, then the company doesn't want to leave that territory open for someone else to develop. The same is true for the $20 million Zuck spent on a drone company, a technology that fits in with Zuckerberg's utopian vision of a world in which everyone, no matter how poor, has ready access to the Internet.
"The glass-empty view," according to one former top Facebooker who has worked closely with Zuck, "is that Facebook can't innovate internally, so it has to buy all these companies. And the glass-half-full view: Facebook is a very innovative company and, as a result, is looking for other like-minded, blue-sky thinkers to join its world." The fact that Zuckerberg can more often than not persuade startup founders to join the company and work with him is a vote for the glass-half-full perspective. "What I found compelling was Mark's commitment to spending a lot of time with us," says Oculus CEO Brendan Iribe, adding that he's talked to Zuck nearly every day since the $2 billion buyout. "He spends a lot of time with Kevin [Systrom] and Instagram, and has made the same commitment with Jan [Koum] and WhatsApp. If you look at a company like Google, from what I've heard, Sergey [Brin] and Larry [Page] are too busy to work on any one project, so you don't get much of their time."
Facebook cofounder Dustin Moskovitz, who now runs Asana, a fast-growing enterprise-software company, notes that while Zuck's personal style differs from that of Google's cofounders, both companies are pursuing a similar strategy. "Rather than just refine the existing product and nail it down to harden against potential competitors," he says, "Facebook, very similar to Google, is saying, 'Okay, we've got all these resources; what bold new things can we do?' " As one employee who spoke on the condition of anonymity puts it, "I always assumed these big moves were out of desperation," he says. "But I actually think it's more like, 'Fuck it, we're going to get Google.' "
Largely unnoticed among Zuckerberg's recent acquisitions was his April 2013 purchase of Parse, a well-regarded mobile-infrastructure startup. Facebook bought it for a reported $85 million. While the dollar value of the deal was modest, this acquisition may say more about where Facebook is going than all the others.
At the time of the Facebook acquisition, Parse made it easy to build apps faster by offering ready-to-use web-based services for otherwise tedious tasks such as creating notifications. Some 60,000 apps relied on Parse, including buzzworthy offerings from brands like Armani and the Food Network. Facebook execs had been talking with Parse's founders since 2011, when the company had just six employees, and Zuck reportedly won the deal over Dropbox (Google was also apparently interested). "Facebook wants to connect the world, and this is part of it," says Vernal, Facebook's engineering VP. "Parse is all about simple and delightful tools for a wide swath of international devices so developers can create great apps."
Yes, but that's only the beginning. It is easy to understand how Facebook can make money from Instagram (luxury brand advertising and shopping) and even WhatsApp (competitors such as Line are vibrant commerce platforms, and only last week, Zuck even poached PayPal president David Marcus to run the company's in-house Messenger product). Facebook now owns all the ad impressions on those services--and on News Feed, and on Paper, etc. Parse promises something else: a way to get a piece of all the other apps that make up the universe of mobile social media. As noted earlier, Facebook is already the most dominant single app in mobile, commanding 17% of users' time. Now Zuckerberg wants a slice of that other 83%, and Parse can be an essential tool in pursuing that goal.
The fundamental challenge to creating a unified mobile platform is that apps are inherently siloed experiences. You can't surf through apps like you surf the web, where you might start at the Weather Channel and follow a long trail of links--traceable links, by the way--that ends with you seriously contemplating the purchase of a model train on Amazon. "That's what made the web what it is," says Simon Khalaf, CEO of the app-analytics company Flurry. "Mobile applications are like TV channels. You make the conscious decision to go from one to another."
The world of apps is further complicated by the fact that companies like Facebook can't plant a cookie on iOS or Android to follow you around, as they do in your desktop browser. Benefits aside, we're less likely to discover new content, new apps--and new ads.
At f8, Zuckerberg began to reveal the ways in which Parse could lead Facebook deeper into the app economy. Parse CEO Ilya Sukhar introduced the first building block with a new protocol called App Links. App Links empowers developers to "deep link" one app to another. As a result, users regain the web-surfing experience within apps, and for Facebook, it creates bridges between its unbundled apps.
Deep linking presents a lot of interesting possibilities. If you were using Dropbox's email app, Mailbox, for example, and a friend shared a song she was listening to with Spotify, you could click the link and open Spotify directly to that song or artist's page. This creates a lucrative feature Facebook can offer advertisers: Uber, for example, might like to put a mobile ad into Facebook's News Feed that lets a user request a car without even opening the Uber app. "This is one of those products like motherhood and apple pie," says Vernal. "How could you be opposed to it?"
At f8, developers gushed over App Links, saying that it could make Facebook the fabric of the mobile world. If deployed widely, App Links would create a knitwork that would connect users to every delicious service and chunk of knowledge they desire without going through a mobile web browser. The payoff for Facebook would go well beyond whatever it charges for a more-attractive News Feed ad offering.
The rest of Facebook's announcements at f8 all tied into this same idea of knitting this mobile fabric. It debuted a mobile like button, which means that app creators can make it easier for users to share app content back to their Facebook pages. Zuck revealed a new login product, which lets users sign up for apps anonymously (of course, Facebook knows who the user is). And App Ads creator Deb Liu announced the Facebook Audience Network, which helps developers make money by embedding ads into their apps from Facebook's pool of 1 million advertisers. Ads are both targeted and designed to resemble their app's look and feel.
In contrast to his grand stage at f8, Zuckerberg revealed a wonky new motto: "Move fast with stable infra."
Picture how this can work for Facebook: A developer chooses to build her app using Parse. To get users to discover it, she'll buy Facebook's App Ads. When she hits a certain threshold, she'll start to pay $100 a month for Parse's services--and more as the app continues to grow. ("You don't have to pay us until your app gets huge," Parse's Sukhar told the f8 crowd.) At this point, to generate revenue, the developer joins the Audience Network, where Facebook will get an unspecified cut of the ad revenue from the spots that run within her app. And finally, in an effort to get users to use her app more often, she takes advantage of deep linking or other tools Facebook might offer down the road. That's at least four ways that Facebook could get paid off the same developer--and Facebook would garner the additional benefit of knowing which apps mobile users were excited about.
As one employee who requested anonymity puts it, "Mark does not fuck around. Parse doesn't have any direct benefit to Facebook.com and the Facebook app. But Parse makes it so much easier to build apps quickly. If you support entrepreneurs to build apps more quickly, you have a lot of data around which apps are doing well, and which aren't. Small things like that show that Mark is many steps ahead."
To understand how valuable this could be, remember that the Google ad business, which places contextual ads alongside your desktop search results and across your web surfing, brings in $50 billion annually--six times more than Facebook's sales.
There are now more than 260,000 apps built with Parse products, but Facebook doesn't have anywhere near Google's heft yet. There is a cadre of users wary of Facebook's growing appetite for personal data, and a lot of developers who built on Facebook's web platform were burned when the company kept changing its rules. A project like App Links, in particular, will require considerable work before developers fully embrace it. Although it launched with an impressive list of more than 20 partners, including Pinterest and Hulu in addition to Dropbox and Spotify, developers say that it will only become truly effective when many more apps sign up.
This challenge reveals a fascinating strategic shift for the social network: The greatest obstacle standing between Facebook and its ambitions has nothing to do with persuading any of us to log in to Facebook tomorrow or to spend more time using its features. It's entirely dependent on outside app developers' adopting these tools. Facebook has become the world's first social-media enterprise company. "The new Facebook is different from the old Facebook," says one company insider who spoke on condition of anonymity. To those who remain fixated on what the social network used to be, this source says, "They're just going to have to learn. We're in a different world."
If Zuckerberg succeeds in makingFacebook, in essence, the most important mobile platform on the planet, he will create all kinds of other opportunities for the company. Expanding globally will become even easier, as the social network learns more and more about the habits of international users. New lines of business, like enabling peer-to-peer payments, are likely to open up; no other company knows as much about the many people it connects. Indeed, the more it becomes an enterprise company, the more the Facebook of five years from now will have erased all traces of the dorm-room quirkiness on which it was founded.
That may seem sad to those who once loved the service, or it might seem to be further evidence that Facebook will never again be cool. But you get the sense that Zuck couldn't care less. There was one other thing he debuted at f8: a motto to replace "Move fast and break things." The new one? "Move fast with stable infra."
That's it. Really. Perhaps never in the long history of Silicon Valley has a company rallied under a clunkier cry. But if Facebook actually executes on the phrase, it will come to have a charm all its own.
BII
