October 10, 2007

The Facebook Economy

Facebook is clearly the new darling of Silicon Valley. It's the "new Google" (based on traffic growth); it's the "new Microsoft" (based on its Platform); and its estimated valuation is a staggering $15B for a company less than three years old.

Some quick Facebook stats from its site:
  • >48MM active users (20ok new registrations every day)
  • 6th most traffiked site in the U.S.
  • 54B pageviews per month
  • Over half of its active users visit the site daily; average daily time spent is 20 min
  • Over 5,000 applications added to its Platform within 5 months since launch (100 new per day)
For me, the last stat is the most striking one. Opening of the Facebook Platform, that now allows 3rd party developers to build applications for the Platform and leverage site's massive user base and its social graph, is one of the most exciting developments on the Web today. It has spurred creativity and innovation in a capitalist-style free-for-all manner that has been unprecedented in its speed and success. A vibrant developer community has evolved with dedicated blogs called Developer Garages where participating developers and others share their insights and information. The Platform has quickly become the most efficient user acquisition channel on the Internet. Several startups have shifted 100% of their resources to the Platform. "What is your Facebook strategy?" is a question every firm in this space (small or big) is asking. For several VCs, it's now a pre-condition for funding. Below are related developments that illustrate the resulting frenzy:
  • VCs have started funds specifically for Facebook application development: Bay Partners, a Silicon Valley based VC firm, has created AppFactory, a fast-track program for entrepreneurs developing applications for the Facebook Platform.
  • fbFund: Facebook announced its own $10M fund (open to expanding it further if required) that will provide $25k - $250k grants to developers for building Facebook applications. Developers can apply through, of course, a Facebook application built for the purpose (after the initial application process thru e-mail did not work out).
  • Buddy Media, a NY-based startup plans to make money by building a business around Acebucks, a virtual currency for the Facebook platform.
  • In order to monetize Facebook applications, at least three dedicated ad network experiments have started, valuing each application user at $0.30 (in contrast, the company valuation of $15B translates to $375 per active Facebook user).
  • Global wealth creation: Developers around the globe now have an opportunity to earn a living thru the Facebook platform. The Wall Street Journal reports about one Agarwalla brothers team in Kolkata, India, that has built Scrabulous, an online game that resembles the traditional Scrabble. Since its Facebook debut in July, Scrabulous has grown to about 950,000 players, 36% of which are daily active users, or people who have logged in every day over the last 30 days. In contrast, only 7% users for Facebook's top 50 tools and games are daily active users. The game is generating $18k per month in advertising revenue for the Agarwalla brothers, a very good amount from Indian standards given country's low cost of living.
  • Multi-million dollar valuation for popular Facebook applications: Lee Lorenzen, a VC in Monterey, CA, who describes himself as “the first Facebook-only VC,” started a $25 million Facebook investment fund this summer and introduced a Web tool, Adanomics.com, that lets you track application growth, activity, and valuation. The tool applies a stock-market-style analysis, using variables like the number of users, frequency of use and advertising revenue, and assigns a monetary value to Facebook applications. Some popular applications like Where I’ve Been (lets users show which countries and states they have visited), Texas Hold ’Em Poker and What’s Your Stripper Name (suggests what you and your friends would call yourselves on stage) have been valued at around $2 million each.
Despite the above facts, I'm still not convinced about the sustainability of these businesses built on top of the Facebook platform. In the long run, any such business will compete with Facebook itself, which can easily replicate popular applications or own their development thru its fbFund.

Then, there is this whole debate about sustainability of the Facebook platform itself. We know that the Web is the ultimate platform. It's open. It's not owned by a corporation or a government, and it provides a common standard for innovation to everyone around the world. The history of closed, proprietary platforms tells us that such innovations, while may be ground breaking at the time, succeed only during the temporary period taken by alternative/replicating innovations to be developed on the open Web. Anil Dash from Six Apart provides a detailed account of this theory on his blog. He eloquently argues:

Think of the web, of the Internet itself, as water. Proprietary platforms based on the web are ice cubes. They can, for a time, suspend themselves above the web at large. But over time, they only ever melt into the water. And maybe they make it better when they do.

As an example, Anil cites two proprietary innovative platforms launched in mid-90s by the Internet trailblazers of the time to create rich online experiences, both of which were ultimately taken over by similar/better innovations on the Web: Blackbird by Microsoft and Rainman by AOL.

Having worked at AOL, I can elaborate on Rainman, its proprietary platform that was used to create the walled garden Web experience provided within AOL's desktop client (remember those free AOL CDs you'd get in the mail). I was at AOL at the time when we sunset Rainman, and in my opinion it should have been done much earlier. Several old-timers within the organization kept insisting that AOL's desktop client built on the Rainman platform can stay as a differentiator for the company. It worked wonderfully during the early Internet years in mid-90s when standards for organizing information on the Web were either non-existent or awfully pre-mature at the best. However, by early 2000, innovation on the Web had made Rainman unnecessary and inefficient. AOL dragged its feet with Rainman until 2005. It finally had to adopt HTML (open Web standard) and re-write all of its content. AOL's content built on Rainman did not show up on Web search results - a significant and increasingly important source of traffic for the publishers by that time - a proof that innovations on the open Web platform (search engine spiders, in this case) force out proprietary closed platforms in the long run.

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