Today Facebook made it official: its goal is to leverage its 25M users and platform to allow developers to build applications on top of its network, according to Fortune’s David Kirkpatrick:
The short version is that Facebook is taking its two major assets - its 24-million-members (growing at about 150,000 per day) and its strong technology underpinnings - and making them available to all comers.
The theory is grand, the potential is enormous. A lot of companies are already using Facebook’s API, taken from Business Week:
Today, it’s announcing that more than 65 developers from the likes of Amazon.com, Microsoft, Obama for America, and Warner Bros. Records are developing applications on top of its Facebook Platform. Essentially, those companies are embedding pieces of their applications–like book reviews from Amazon and photo slideshows from Slide–into Facebook itself. Facebook members, who now can include anyone with an email address, can add applications integrated with their existing Facebook services. The idea is to make Facebook even more of a utility for everything people want to do online that benefits from a social component. That’s a lot of things.
And many more will. But these companies should be careful, much like Yahoo! strengthened Google by using it on their portal, these companies are now creating a monster that they won’t be able to tackle down the road. By making Facebook the social utility, they will all become beholden to a powerful company that will sooner than later be competing with them, much like Google competes with everyone, everywhere, at all times.
Been there, done that? Not quite
Facebook’s strategy is the opposite of other companies in a major way.
Traditionally, it goes like this: Over two years ago, Yahoo! opened up its search API to one-up Google amongst search afficianados in allowing them to build applications on top of their search infrastructure. I vividly recall the euphoria and “gentlemen, let’s start our engines” feeling amongst the developer community.
I’m not developer, programmer, coder, etc., but as someone who was thinking about vertical search, I thought it was a great (read: cheap) way to test out my little theory about vertical search results yielding high-quality, authoritative results from best of breed publishers in a contextual manner from a subset of domain specific sources. I was right about that.
But quickly, I realized that only a fool would use another company’s API to build much. Immediately after launching MetaMojo.com on Yahoo!’s API, we turned to Nutch, an open source search software to swap out the Yahoo! index for a more proprietary one.
It’s a Money-Mad Mindset Again
Today’s announcement from Facebook will - and should be - greeted by the developer community with great joy. But while I don’t see much valuable applications really seeing the light of day, especially after the Photobucket/MySpace brouhaha and mainly, episodes like Alexa/Statsaholic, to name but one, many companies will rush to Facebook due to its huge size and reach. This is very dangerous, because they’re strengthening Facebook and forgetting how Google came to be.
Facebook’s API strategy is a reverse strategy, which is what is brilliant, but it makes it twice as dangerous, in that it sucks people away from other sites and keeps them even longer on Facebook. What makes this a brilliant move for Facebook but a dangerous one for bandwagon-jumpers is that the future of online ads will be driven by how long people stay on your site… and yes, having users play with your widgets on Facebook is nice, but MySpace/Photobucket showed the perils of such a strategy (more on the “future on ads” below).
Moreover, what makes me, and should make anyone wary of is the fact that unlike Yahoo! and most other tech companies, Facebook is not just any company, it is a company that is arguably the fastest growing in the social networking space (if not any space), as manifested by Facebook’s explosive growth:
It is also a company that just last year turned down subsequent offers of $800M, $1B and $1.6B by Viacom and Yahoo! Investor Peter Thiel has come out and thrown out an $8B valuation. Judging on reports that social networking will garner $2B in ads bby 2010, we projected a valuation of $2.35B by 2010 last fall, and have since revised that projection upwards quite a bit, though many prognosticators say that social networks’ time has passed, in favor of ad networks. The M&A deal pipeline this surely supports that, but we don’t really think that Facebook is on the M&A radar anymore, having priced itself out of that market, with an IPO all but certain come 2008.
The Real Highlights: Facebook’s size, retention and growth
What really mattered today in Facebook’s spiel, was some of the results that ambitious CEO Mark Zuckerberg laid out, taken from Tech Crunch:
- the 25 and over age group is the fastest growing segment on the site
- It is growing 3% per week, or 100,000 new users per day
- average pageviews per person: a whopping 50 (!)
- 50% of registered users come back to the site every day.
- Facebook is generating more than 40 billion page views per month. That’s 50 pages per user every day.
- 6th most trafficked site in the U.S.
- More page views than eBay. Says they are targeting Google next.
Evolution of Advertising: What’s Next?
And that last part is key. eBay and Amazon were masters of transcational commerce, and this helped paved their way to rich market caps in the late 1990s. Yahoo! followed suit as the portal to the Web, garnering ad revenue. As the ad market changed, Google pioneered clicks better than anyone.
What’s next? Well, while many are quick to call for the demise of the pageview, the truth is that the pageview is still king with media planners and buyers. Pageviews, in fact, drive ad impressions… and as F500 advertisers and global ad agencies spend more money online, they won’t be giving up the impression metric.
Clearly, Facebook is becoming king of the impression, and user time spent on a site.
Lastly, it could be argued that the next holy trail in online advertising is average time spent on a site per visit. If that pans out to be true, then there is a lot of upside for Facebook, Zuckerberg, Thiel and company.
To connect the dots, by pulling this API move, Facebook is - much like Google did - sucking out a lot of value from other sites and keeping it on Facebook.
Many folks are starting to worry that Google’s omnipresence is making Standard Oil or Microsoft look like the Muppet Show… if that is the case, then they better be careful what they’re asking for with Facebook’s latest push.
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WatchMojo NewsletterValleywag asks a fantastic question in reference to an article on The Guardian: how come the Web does not yet have a micropayment system:
How come there’s still no popular micropayment service on the web? Imagine if a website could smoothly charge a cent, for instance, each time a user clicked through to read the full text of an article, or view a clip. If the cost was low enough, and the transaction sufficiently invisible, internet media could finally escape its dangerous dependence on advertising. And readers could pay for news, on subjects such as politics, for which there’s no advertising support. And why is that such a preposterous dream? Well, for one, because entrepreneurial talent and venture capital money is so drawn to increasingly marginal mashups.
This lack of micropayment system, frankly, is why subscriptions online never went anywhere, and why video download sales / subscriptions won’t either, something we covered here.
But the reason why such a thing does not exist, besides from VCs [rightfully] suffering from herd mentality, is that VCs are smart enough to know that the odds of a micropayment system working are slim to none.
Paypal was the exception, we know, and that’s why it was both one of the 13 Most Explosive Web Startups Ever and its acquisition by eBay one of the Top 10 Best Web Acquisitions Ever… but Paypal was - make no mistake about it - the last of the mohicans in an era before Google showed how profitable a company can become online.
Sure, AOL became the first company to crack the Fortune 500 list, but after its doomed merger with Time Warner, no one thought a Web company could become a stand alone powerhouse. Google proved the naysayers wrong. Biggatime.
As a result, the stakes are that much higher. You now get arguments for and against net neutrality, which while somewhat unrelated point to the potential landmines that come with any argument for a micropayment system.
After all, the stakeholders of such a eutopian system would include, presumably (though arguably not obligatory):
- financial institutions (to underwrite it all, and carry the financial risk of micropayments)
- phone carriers (we need a wireless solution, after all, no?)
- software companies (to write up the program)
- ISPs (who believe they deserve a cut since people access this financial supermall via their gateways first)
- the publishers who are the ones selling the content
- the retailers who are selling the goods and services
- ad agencies who will be designing the sites that carry such goods, services, and content.
The list, my friends, goes on and on.
The potential upside for a ubiquitous is so ginormous that its potential is its Achilles Heel.
And, don’t kid yourself, eBay, Google, Yahoo! and MSFT (via Passport as a first step) have all attempted to do something that could go on to serve as such a function.
Had Paypal remained independent, maybe it would have had a chance, as a unique, independent and reliable solution. But its own growth and potential scared eBay into buying it, making it anything but independent and impartial.
And… now that online advertising has become the ultimate money-maker online, the arguments for financing such a solution simply won’t entice too many VCs to fund something from scratch.
It will be companies - amongst those listed above - who will fight for supremacy in this space, and because they each will have their own allegiances to no one but themselves, said product will never take off.
Of course, one company has an inside lead on pulling something like this off, and that one company is Facebook, but we’ll leave that for another day. And no, not necessarily the Facebook you see today… but if you study its past, analyse its trajectory and connect the dots in its future, it has a few things that no other company has. The answer is not obvious or so obvious you might miss it…
But, does the Web really need micropayments? Maybe. But in light of us just making the case that print media should be free, how can we suddenly argue for digital media to charge micropayments? Read our case for Should Print be Free here.
The following is a question posed by an online ad guy, who’s worn both the publisher and ad sales exec. hat. I admit it might be perceived as near sighted and probably unrealistic in so many ways. After all, while “anyone” can publish online, it costs money - plenty of it - to publish print, be it newspapers or magazines. But the arguments for “why we should pay for print content” don’t add up.
How so? Read on. The following probably applies to newspapers as well, but to make my point, I’ll use the following real-life example with magazines first.
What Really Drives Revenue: Subscription vs. Advertising Sales?
Since my days studying finance, I have subscribed to The Economist, Business Week and Fortune. When I worked in men’s publishing and took on Maxim, FHM, Stuff, GQ, Esquire, Details, Men’s Vogue, Playboy, etc., I got those at the office but never subscribed to them. I used to work in a convenience store ages ago, so I did my fair share of reading, be it Rolling Stone, US Weekly, or Penthouse Forum. Yikes, did I just admit that?
So the only magazines I’ve ever paid for have been The Economist, Business Week and Fortune. But, all of those magazines have leveraged my eyeballs and demographics to advertisers and made money indirectly.
When my subscription with The Economist ended years ago, I didn’t renew. Fortune ended last year, I did not renew. Business Week is about to expire, I won’t renew. I got 3 free issues of Economist again last week by way of an online promotion but I won’t subscribe afterwards. Did I just admit that? Yep. No qualms either.
I presume a lot of people are like me. Particularly men. Women still tend to buy magazines quite a bit more. Yes, that’s a generalization, but it’s probably very true. When you work 6 years in men’s publishing, there are some things you just know.
Anyway, if the choices are a) get me to read your magazine for free or b) I won’t buy your magazine… then
Why not make magazines free? Or almost free?
[A select few can continue to charge (SI, Time, etc.) but even then, I only read those when I’m at my inlaws, well, Time anyway, I haven’t read SI since my old days as a publisher of men’s content when SI was an indirect competitor. ]
The Accounting Incentive to Go Free
One reason why this makes sense is that whatever media companies report as subscription revenue is an approximation, at best. The accounting rule is:
For subscription sales, GAAP also calls for recording a reserve for estimated future cancellations (including bad pay) on bill-me orders. Cancellation rates of 20 percent to 30 percent of total subscriptions are not unlikely and in some cases may go as high as 50 percent or more for certain promotions.
The Advertising Incentive to Go Free
Between 2000-05, I was VP of Ad Sales for a certain online publisher. Maxim would “throw in” online to their print advertisers and take away any incentive for those to spend money with me. Playboy would do the same. It was frustrating. And then if that was not enough, they would [allegedly] bribe (figuratively, of course) media planners with invites to parties with scantily clad women. Over time I won accounts, but it was slow.
How Can Print Companies Reverse the Tide?
No one is saying that magazines or newspapers will disappear, but if the magazine ad market is roughly the same as online is, why not start to throw in print exposure to get more money online, where the growth is heading anyway.
In 2005, in the US, magazines garnered 11%, or $22B, while the Web garnered 5%, or $10B. I have some figures here. Yesterday we learned that online ads garnered nearly $17B, that is roughly 7-8% of total advertising dollars spent in the US… if people spend 25% online and marketers spend 8% online, what do you think is going to happen over the next years? Online advertising will be much bigger because less and less people will read magazines and print and opt for the Web.
That does not bode well for print companies, particularly magazines. Newspapers have their own share of problems. But the truth is, if it’s a) charging me $1 per issue - which I won’t buy or b) giving it away for free where they’ll add a reader, why not give it away?
If there are five dailies in my city, I won’t ask for all five, I’ll get one, my wife maybe another. You get the right demographic, but you get a lot more eyeballs. And it’s once again all about eyeballs, no?
Making People Pay for Print is Backwards!
The only way to even this out is by giving an economic incentive to read print. But if digital content is free, yet print content is not, and it’s less accessible, and not timely, etc., then why on earth must I pay for the inconvenience?
Two questions:
1 - Why would anyone pay for print content in this scenario?
2 - More importantly, why would publishers produce print content if there’s no economic incentive to do so?
The simple reality is that when digital content - which I call the new software in that profits are infinite once it’s produced - is available for free and publishers can generate ads against it forever, why would content producers not go all digital. The only way to make money for print, really, is by boosting readership/circulation so much that advertisers have an incentive to spend money with them.
It’s the Distribution, Stupid
I know what you’re thinking. What about the costs?
As a publisher of two books, I can tell you that the marginal cost of printing is next to nothing. The real cost is in distribution, and like the Economist example of me getting three copies for free shows, acquisition of users - using the Web - is relatively low. As such, the total cost of print will be far lower if the printing costs are extremely high and the customer acquisition is done mainly online. Furthermore, think about it, if print were free, would you not go after it? They would not need to really advertise to you? Print companies advertise quite a bit because they want you to spend money. But if they were free, you’d be chasing them.
Bottom Line: Publishing and Paying for Print is Inefficient
This is an disequilibrium that needs to be accepted and resolved. Only by making print free does it get resolved.
Suggesting that magazines go free is highly counterintuitive, but as a print publisher, you are fighting for a rapidly shrinking pool of ad dollars. And maybe, by going free, it’s the only way to preserve your business.
But the fundamental idea is that in a few years, will print advertising really be that separate from online advertising? Probably not. They will be further connected.
Help Wanted: Online Relevance
In fact, the main challenge for print companies is that they lack the dominance they have offline in the online space. The only way they can leapfrog the four horsemen that are Google, AOL, Yahoo! and MSN is by bolstering their offline offerings.
The only way that will happen, as my example illustrates, is by going free.
Is the Magazine = the Music CD?
What made me think of this, frankly, is that CDs are no longer the main revenue drivers for music artists and record labels. At least it should not be. A lot of bands tour to make money. I always think of the Pussycat Dolls, whom I did not even know all that well, until I saw their reality TV show. I’m sure they did quite well in tour sales, merchandising, downloads and yes, CD sales. But if CDs are now supporting everything else, should magazines follow that route?
If Business Week, Fortune and The Economist were free, and most magazines were too, we would only choose what we really wanted to read and drive up circulation.
By doing so, it would slow down the death spiral some magazines are, no?
Am I crazy?
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