Thursday, December 6, 2007

Facebook's Open Platform : Master Stroke or Big Mistake

The conventional wisdom is that facebook making itself an open platform was a stroke of genius. However, over the last few weeks, some data+news and some thinking has led me to question the conventional wisdom, especially from the point of view of facebook being a business wanting to drive up revenue in the coming years.

I am gonna divide the discussion into 2 scenarios. In both scenarios, the starting point is the same i.e facebook is already a well-established social networking site, growing very fast. Scenario #1 is what facebook has done so far and the path it will have to follow given it's action so far. Scenario #2 is a hypothetical one i.e "what if" facebook would not have made itself an open platform.

Scenario I:
# Facebook starts focusing its time and resources on building a platform with open API(s), client libraries, guidelines, building a very flexible and extremely scalable architecture with caching etc.
# Facebook launches its platform and makes it available for developers. A lot of time and energy is spend on working out the kinks.
# Tons of apps are launched increasing the need for facebook to scale up its system ( hardware and software )
# New problems/issues surface. Apps are spammy and facebook has to spend a lot of time/energy fighting feed/notification spam.
# Facebook also launches an ad system based on profile-based targeting. An amazing feat given all the other challenges they have been facing.
# However 2 huge issues with the ad platform :
(1) eCPM is extremely low. I have heard of and myself experienced eCPMs of a few cents ( less than 10 cents ). On the other hand, high monetization verticals like autos have eCPM of ~$20 ( with a single ad unit ).
(2) privacy concerns.
# So now, facebook will be spending a tremendous amount of time and energy trying to increase their monetization. It is definitely not easy to have a good monetization engine based on profile and some user action/messages. Remember that the canvas page now belongs to the app owner and not facebook.
# For a given vertical ( say movies ), there are multiple applications available. If things on facebook work out the same way as it does otherwise, we will see 2-4 big players in each vertical. Now, this means that although you and your friends are on facebook, you might have installed different apps but of similar nature. This would mean that information that your friends are sharing in 1 app will not come to you at all and vice-versa. Isn't that the same problem that exists on the internet today ? And yes, it exists because the internet is an open platform and web sites are application and the same effect will happen since facebook is now a platform and the apps are the applications.
# Users become unhappy about the spam they get or the useful info that they do not get in their news feed.

I am not suggesting that facebook is doomed in this scenario. It's still doing extremely well. But the question is for themselves to prove their valuation and increase it. Seems like in scenario I, facebook did increase it's pageviews and user enagagment ( as well as spam ) but they have paid a huge price for it. In a certain way, they are hosting the internet ( part of it ) and will be unable to extract tons of value from it. And at the same time, they have created islands within facebook itself which do not talk to each other, leading to bad user experience.

Scenario II:
# As mentioned, Facebook has already solved the hard problem of building a large social graph.
# They still create a platform on which apps can be built internally ( or selectively with partners, a la Apple's iPhone ) since it's a good model/architecture. However, they do not have to worry about a lot of things, including scaling very rapidly, fighting feed/notification spam, etc.
# Instead, they spend time/energy on building killer apps themselves and along with partners, one for each vertical or functional area rather than multiple ones, which is the case today.
# Pageviews/Engagement grows ( maybe not as fast as it has grown by opening up the platform ).
# However, facebook is now able to monetize at much higher eCPM. It owns/partners on all the app pages and targeting is easier, examples being a travel app where a page is about boston or a car app where the page is about an audi.

Bottom line, in scenario II, user experience is much better, no spam and no multiple applications even amongst friends leading to isolated islands. More importantly, facebook would have been able to spend it's time and energy on a path leading to much higher monetization and revenues.

Your thoughts ?

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1 comment:

Anonymous said...

Nice...Very Nice thinking strategy...