While in the past i've offered fawning geek praise for the Facebook Platform & even paraphrased Ballmer by suggesting they might one day "f*#%# kill Google" (i'll probably regret that one), the biggest problem for the company is not whether Open Social eats their lunch (not for awhile), it's not whether they're worth $15B (another year, sure no problem Lee), and it's certainly not whether they have a privacy crisis on their hands (sorry mike, i don't agree).
Nope, none of those are a big deal.
Facebook's #1 Problem? It ain't Privacy. It's Monetization.
While Facebook annual growth at 130%+ is impressive, as is pulling in $300M in cash for just 2% of equity, the fact that Facebook really hasn't figured out where its core future revenue stream is coming from is a problem. It's a problem for the company, for its growing developer community, for the advertisers it's working so hard to get, and ultimately -- if it doesn't figure it out -- for its users.
Now before we go any further, note that i may be posting this warning a little early in the game. Google took nearly 3-4 years to figure out its monetization engine (AdWords), a long time after it started to get serious traction with users & search. It's certainly possible given more time, Facebook will discover how to tune its recently-launched-i-mean-upgraded Facebook Social Ads & get it to monetize better. Or it's possible they sanitize Beacon & incent retailers / users to monetize transaction info published into the News Feed. or maybe they just wait until some 3rd-party ad network figures out how to make money & just gobble them up. maybe... maybe not.
Still, it's not too early to worry about how Facebook Platform makes money, and how to enable other platform participants to make money too.
Historical Note: It's not a REAL Platform™ until it
makes MINTS MONEY.
Specifically, the choice of the word "Platform" for Facebook begs the question -- how does it make money? Historically every other world-dominating monopolist platform vendor worth their salt has demonstrated market-crushing dominance to use their platform to
make a load of money print money like the fucking US Mint. For Microsoft, it's Windows & Office. For Intel, it's chips. For Cisco, it's routers. For Google, it's Adwords & Adsense (& tho most folks don't realize it, also Analytics). For Facebook, it's ______.
Fill in that blank correctly, & you got Mr. Zuckerberg's attention all day long.
So why is it important for companies building platforms to make boatloads of cash, and to make that clear to other people building on their platform?
1) it says "we're sticking around"... the platform is working, it's making money, and we're going to continue to support it. and if you want to ride this wave with us, get on board NOW.
2) it says "here's where we make money, and here's where we [d/w]on't" -- which also says, "here's where *YOU* can make money". ahh, sweet music that is to the ears of the channel.
For developers, these two points are essential statements of platform ecosystem viability. The first point helps people understand how & why the parent company is making money from the platform, and why they're unlikely to abandon it. In turn, this provides a horizon of stability for developers to invest their time & energy to build on the platform, without it falling apart or dissolving before they reach payoff.
Tuned in to WIIFM?: Platform Participants Also Need to Make Money
The second point lets people know where *they* can expect to make money on the platform, and why the platform vendor won't step into that area and cannibalize their efforts.
This is where the first point is incredibly important -- if it's not clear where the parent company is making money, then every other platform ecosystem participant will be looking over the shoulder wondering if the platform parent is going to eat their lunch as soon as they start making some moolah.
For over 20 years, Microsoft partners, vendors, developers & solution providers have made tons of money helping sell Microsoft core products (DOS, Windows, Office, etc), and shipping their own solutions and/or selling their time & services to help fix... cough, cough... i mean, customize them. And Microsoft has done a terrific job creating programming tools & evangelizing on how to use their platform so other folks can create their own Microsoft-based products & solutions and make money (disclosure: i was an independent software developer & Microsoft Solution Provider back in '92, founded a small company doing MS-based internet solutions & ecommerce in '94/'95, and sold in '98 to a larger company doing more of the same).
Over the past 5-6 years, Google has been making a killing on paid search on AdWords. And they've also created a great opportunity for their channel to make money pimping AdWords, by having independent publishers & website owners & bloggers use AdSense, and by fueling the creation of an army of SEM professionals out there making bank helping Google sell paid search to tons of companies. They continue to do well on the core revenue engine, and although sometimes i fault them for a lack of product evangelism education and channel opportunity, they still pretty much kick ass all over the place.
Hey FB & Platform Partners/Developers: Where's the BEEF?
Right now, neither of the 2 points listed above have been made clear by Facebook. All the astonishing Facebook App growth & adoption aside, it's not clear how FB benefits from this monetarily in the long run, and it's not clear how app developers monetize in a way that isn't built on short-term bubble spending from other developers & VCs trying to buy installs & traction.
Now don't get me wrong: i'm pretty bullish on Facebook in the long run, and as a platform for viral customer acquisition it's nothing short of astonishing. i know a few top app developers are making decent money from advertising; and in fact several students from our Stanford class who have million-user apps appear to be covering their tuition with app revenues... hell, at least 4 teams have created their own LLCs to collect the cash, and a few are selling their apps for 5 and even 6 figures!
But to be clear: none of that money is coming from facebook directly, it's coming from third-party ad networks. and while i'm sure there are a few traditional advertisers in there somewhere, seems like most of that money is coming from other app developers paying for installs -- which makes it feel kinda bubbly. The Developer Install Circle-Jerk just doesn't seem sustainable to me, and feels a lot like funny money traffic barter deals from the late 90's (and we know how that one ended).
More importantly though, even if those ad networks do start to figure something out, they've all got to be nervous looking over their shoulder wondering if FB will decide to step into their market, copy their model & kick them to the curb. now maybe FB is running a grand experiment, and will just acquire whoever figures out how to make money, but certainly seems a bit like a house of cards at the moment.
to summarize: until FB is 1) clearly making from one strong & growing revenue source (ideally based on their platform), and 2) clearly providing a platform opportunity for other participants to make money as well, everything they are working so hard to innovate, build, and evangelize is at risk.
3 Wacky Ideas on how Facebook Could Monetize Better
Alright if i'm so smart, what's the solution? Well if i knew the answer there, i'd be rich... but i ain't. But even if i'm still a dumb blogger, i'll throw out a few wacky new ideas on how Facebook can make money -- who knows, maybe one of them might stick, and perhaps even help other folks make money too.
Here are 3 potential ways to get Facebook Monetization rolling & get that $15B valuation to not only be supportable, but perhaps even a real bargain:
1) FeedSense: Enable Facebook users to earn money by sharing in FB revenue from clicks on the News Feed. Create a program (similar to Google AdSense) that allows influencers to help discover & promote interesting sponsored News Feed stories and Social Ads, based on CTRs. I like to call this "Monetizing the Long Tail of Cool"... it's the equivalent of creating a million tiny Tiger Woods out there, who help create visibility around a product or service they use & endorse. There's of course potential for this to degrade into Amway or Tupperware, but also for it to become cool like Scion endorsing new music & rapper talent, only in a scalable way for businesses of any size to participate.
2) FeedSearch: Create a Search bar at the top of the News Feed that enables people to search for activity in their network by keyword or suggested example. Create sponsored & paid search opportunities (a la Google's top & right-hand results) that enable more focused & monetizable user actions. Use subsequent search activity to tune further News Feed results & suggestions. Historically users of social networks exhibit very browse-based behavior that's challenging to monetize, however if you can create more opportunities for focused keyword-targeting behavior via search perhaps that can change. Firefox seems to be doing quite well monetizing the search box.
3) FanPageApps: (my personal favorite...) Connect Developers directly with Advertisers, by allowing Advertisers to set open bids for clicks, users, or other activity that occurs via FB Apps & Facebook "Fan" Pages. Advertisers & Retailers create Fan Pages for their Companies, Products & Services (as they do now), but with the added twist that Developers can create Apps that install onto those Fan Pages, and get paid by the user install, or by the click from the News Feed stories generated by the App. Clicks on those news feed stories app then take users directly to the Fan Page (or perhaps a series of landing pages created by the App or the Advertiser), and users who install the App are added as "fans" and directly accessible by Advertisers as members of their Pages.
well those are my ideas... you folks have any others? pile on in the comments.
(UPDATE: Fred Wilson has a good summary of a variety of online biz models in his post The Long Tail of Business Models. Fred also linked to this post from his... thx fred :)
I realize these are all pie-in-the-sky / sparkle-in-the-eye right now, but maybe somewhere in here is a piece of an idea Facebook can use to begin to create more opportunity for both themselves and their platform partners. If not, i certainly hope they or others come up with some things that work, because the overall potential and promise for the Facebook Platfom is darn interesting.
All they gotta do is figure out how to Show Me The Money.
Best of luck Zuck... you had me at "F8" ;)
(and for those of you who'd like to learn more about F8, come check out Graphing Social Patterns 2008 in San Diego this coming March!)