Can Facebook Become the Next PayPal?Or, Will It Become the Next MySpace?

I’m writing this on the eve of Facebook’s IPO, so there’s a lot of speculation circulating about how much Facebook is really worth and what returns its future direction can ensure stockholders. Of course, by the time you’re reading this the first part is already old news, but the second part is still very much largely unrevealed.

As I’ve speculated before, Facebook may only be the current iteration in a succession of generations of ever-evolving Internet experience. It built upon its predecessors, learned from their successes and failures, and its successors will do the same. What is different is that Facebook has the largest captive audience to date and that is going to be a difficult feat for a contender to match. The question on Facebook investors’ minds is how such a large audience translates into revenue and subsequently, share value.

Facebook has to live up to the hype and high-dollar valuation of its record-setting IPO and investors aren’t going to care about retaining the novelty of the Facebook format for sentimental reasons. To increase revenues, Facebook will need to wring more revenue from every viewer; in short, this means more ads in more places. The ads are already permeating the users’ Walls, Profiles, mobile devices and even outside sites which link to your Facebook profile (don’t say I didn’t warn you about that one) making it look like you are recommending a link to your Facebook Friends. But this only puts Facebook in the same business with Google for relevant ad sales based on user profiling. To grow beyond this, Facebook will likely have to move in a relatively new direction and take on another Internet titan … PayPal.

Currently, the Facebook currency (Facebook credits) is used for purchases inside the Facebook environment. Used primarily for virtual goods in Facebook Games, this is an untapped, new arena in which Facebook can reap huge financial returns which will reward stockholders. Of course, the 800-pound gorilla in the online payment game is PayPal, and like the Facebook-Google battle, it’s unlikely that a clear winner will immediately emerge. It’s more likely that a longstanding rivalry will develop and drive fierce competition for many years. PayPal has the advantage of being in the arena first, but that’s unlikely to deter scrappy newcomer Facebook.

In this potential venture, though, Facebook’s biggest obstacle isn’t a turf war with PayPal but rather its own public perception. For all its success in growing a global network, Facebook has had a serious public image problem. It has not demonstrated itself to be trustworthy or reliable in matter pertaining to user security or data security. In order to become a trusted e-commerce platform, Facebook must first simply become a trusted platform in general. The only reason that its security flaws haven’t significantly affected its growth to date is because the service is free and for the most part, doesn’t undermine sensitive areas of users’ lives, such as their personal finances. It will take a concerted technological and PR effort to change the negative perception that Facebook is “not secure” enough to be an e-commerce portal.

So, how would this work? Simply put, being able to spend Facebook credits for goods and services across a growing Facebook ecosystem reinforces and expands those platform interlinks which are already spread across the Internet. Imagine paying for a Netflix streaming video with your Facebook account and password … or shopping on Amazon. com with the option to pay with either your Facebook or PayPal account … or ordering a subscription to have billed to your Facebook account each month. All it takes for Facebook to cement itself in this manner is the will, and that is something it has consistently demonstrated it has. Of course, much of this is to the credit of Facebook’s enigmatic founder and majority stockholder, Mark Zuckerberg. It’s unlikely that he will be deterred by the prospect of a turf war with PayPal – he wasn’t deterred from going head-to-head with Google in the online ad game.

In the end, stockholders expect return on investment, so the innovation and expansion dynamo must keep churning out newer and better ways to make money on each user. Suggestions that Facebook may begin charging users for its services are not unfounded but must be properly framed … Facebook can indeed offer an optional paid premium service and let its users decide if the benefits are worth the expense. The important thing to remember though is that Facebook’s users are the commodity and not the target customer – adding a paid subscription would instantly change that core principle of the Facebook business model. In addition, Facebook is already testing higher-priced ads in which advertisers can pay to inject their ads directly into users’ profiles. Sounds a lot like Google ads, in which advertisers pay (or bid) for top ad position.

The next Facebook frontier? Maybe its own media outlet: The Facebook Channel. And then, there are the ever-present rumors of a Facebook mobile phone. Actually, the phone route may become a necessity if Facebook finds itself required to keep pace with the current trend away from desktop browsing and toward mobile browsing simply because that’s where its users are. The reasoning for its own phone? If Facebook can control its own mobile environment, then it won’t be dependent on Apple or Android to accommodate its application development ambitions. Add in the revenue stream from phone subscriptions and the prospect can be lucrative for Facebook even if the goal is not to become a prime iPhone or Android competitor.