In a recent Investor’s Business Daily article, Max Cherney reports that in the near future, Apple, Google and Facebook are likely to buy payment companies. This is not surprising, as the payment sector has attracted major Silicon Valley investment over the last several years. What isn’t totally clear to many is why the world’s most valuable companies, including a hardware manufacturer, a search engine and a social network, are so interested in the previously boring payments industry.
In an absolutely brilliant interview at Code/Media 2016, Gabe Leydon, co-founder and CEO of mobile game developer Machine Zone (MZ), articulates the reasons very clearly. MZ is one of the world’s largest app developers and most sophisticated media buyers, so Leydon represents Apple’s, Google’s and Facebook’s very best customers. He is therefore one of the best possible representations of the market forces that these companies face. In his 40-minute takedown of traditional media companies, he lays out a vision for the future of commerce that perfectly explains the strategies of these three companies plus those of many others, and it is must-see material for any payments executive trying to understand market evolution.
He articulates three main themes:
Frictionless Transactions Are the Future of Commerce
MZ provides free mobile games to consumers, hoping to make money when some users complete in-app purchases. Leydon explains that it’s “the most frictionless business that the world has ever seen,” because a consumer can move from initial product awareness to spending money within the game within a few seconds and with almost no effort. He states “you can’t sell water that efficiently, and you need water to live.” It’s this type of frictionless experience that enabled Apple to bury Tower Records, Netflix to bury Blockbuster Video, and that thousands of companies have been working to replicate in various segments ever since.
It is clear that this type of user experience isn’t just for digital content anymore. Uber and its competitors serve as perfect examples of this model being extended into the physical world, as do Amazon Prime Now, Google Express, Google’s self-driving car, Open Door, Square’s Caviar service, Zipments and almost anything referred to as part of the “Internet of things.” This is reason #1 why Apple, Google, Facebook and others are so interested in payments—frictionless commerce cannot happen without payment details on file and ready to use. Apple, Google and Facebook are already huge enablers of frictionless digital content transactions and are extremely well positioned to extend their services as this type of commerce extends further beyond digital content.
To take advantage of this opportunity, they need to solve for payments that involve physical goods and services. That’s the foundation upon which PayPal was built, so it’s a highly attractive target at this time. It’s also important to note that Android Pay and Apple Pay weren’t built to promote tap-and-pay at traditional points of sale but rather to revolutionize the point of sale around frictionless commerce, so near-field communication (NFC) is merely an entry point designed to help these companies build their bases of payment details on file.
Performance Marketing Is Everything
Leydon points out that Google and Facebook are two of the most valuable companies in the world because they are “performance marketing companies,” advertising firms that earn their revenue based on performance (the number of consumers who click, download and/or purchase) versus traditional media that earns based on the number of consumers who see advertisements. It’s important to point out that many other household-name companies either are performance marketing companies or have performance marketing divisions, such as Amazon, Apple, eBay, Etsy, Groupon, Pinterest and Twitter. These are the firms that are revolutionizing the nearly US$2 trillion media and entertainment industry. Leydon points out that performance marketing provides huge advantages over traditional advertising because it enables tracking of consumer behavior from initial viewing of the ad all the way through to purchase:
There is a fundamental misunderstanding of what the Internet means for media companies. It means that we’re very quickly getting to a point where we can value your eyeballs….No one is going to give you money because you have eyeballs…We want to know if [advertising] performs when we buy it…Digital breaks that all down because it’s all track-able.
He then follows with a critique of how traditional media companies just don’t get it:
Some of the largest networks in the world, you can’t even get country data from them…There is a denial on what their business really is and what the true value of their business is. They are doing everything possible to avoid real value measurement of what they do.
And then with a vision of the future, where marketers track their advertising expenditures all the time, they measure return on investment for every ad. They become far more sophisticated in what they buy, and they have to justify their expenditures based on financial benefit to the business:
Once people have insight into how they are spending their money, brand marketing will completely disappear…Marketing will become a justified business.
What does this have to do with payments? Payments are a key part of tracking marketing efforts. If a performance marketing company lacks insight into payments, it can charge for downloads and/or clicks but not for purchases. Purchases are the most valuable outcome for any ad buyer, so gaining insight into payment is a critical piece for any performance marketing company. If the performance marketing company can not only gain insight into the payment but also participate in it, then it has the opportunity to charge its customer at the point of purchase and charge its fees as a percentage of the transaction value.
Performance marketing linked to purchase behavior means that ad buyers can buy ads with guaranteed payback. What company wouldn’t maximize its spend on investments that provide a guaranteed return? If you get nothing else out of this article, please understand that the combination of performance marketing and payments is the holy grail—it enables ad networks to provide guaranteed returns on advertising expenditures and to price their advertising based on what matters the most to the buyer, actual sales.
This Future Is Inevitable
Finally, Leydon spells out that this future is inevitable. Performance marketing companies such as Google and Facebook will continue to invest in expanding their cores not only by expanding their services but also by penetrating new markets. Additional companies such as Apple and Square will try to generate more and more revenue through performance marketing. Finally, ad buyers will become more and more sophisticated and will insist on tracking financial performance for every advertising expenditure:
Buyers are going to become more sophisticated whether everyone likes it or not. It’s inevitable, and everything is going to get re-priced…Media will be quantified, period.
By now it should be very clear. Apple’s interest in payments isn’t due to an interest in becoming a bank or even in becoming a payments company. Apple is interested in becoming a performance marketing company. So is Square, which is why it continuously works to build consumer brand and consumer-facing apps. Facebook and Google are performance marketing companies interested in expanding their core. So are Amazon, eBay, Groupon, Pinterest, Twitter and an ever-increasing cast of startup companies. Payments are the key part of performance marketing, and if the payments industry doesn’t embrace that role and transform itself accordingly, it will go the way of Tower Records and Blockbuster Video, as will NBC, ABC, and CBS. Payments simply will be transformed, lead by a transformation of commerce in general.
The full interview is simply must-see material. If you can spare the time, watch the below video. It’s the type of content you pay for at conferences but rarely actually receive. If you can’t spare the time, at least scan through it, paying special attention at 5:35, 8:10, 11:01, 14:02, 14:40, 15:38, 17:30, 18:15, 19:55, 24:17, and 28:27.