Will Facebook tax the Platform?

Facebook shook up the social networking world in May when it announced the financial terms of doing business on the Facebook Platform: not only did Facebook give third parties unprecedented APIs and opportunities for viral growth, but it also agreed to let developers sell advertising and conduct transactions for free, keeping 100% of the revenues generated by their applications.

This laissez-faire approach to the Platform economy stood in stark contrast to the command-and-control philosophy of MySpace (and others), and consequently spurred massive entrepreneur and developer interest.

But will free last forever?

Platform developers and others who are familiar with the Facebook TOS know that Facebook protects its “social graph” dearly: Facebook disallows developers from retaining member profile or relationship data in their databases. Facebook wants to always own the fundamental human grid on which the myriad of social applications are developed; without exclusive ownership of that grid, applications would have much less reason to exist within Facebook.

However, while developers agree not to retain Facebook profile and friend data, they still have temporary access to it during application use, and are finding ways to use that information to serve better targeted ads. (It’s what one VC I spoke to recently called “profile-enhanced” targeting.) By combining profile-enhanced targeting with more traditional contextual and behavioral targeting approaches, Facebook developers (and ad networks) may be able to deliver new significant value to advertisers.

Based on how protective Facebook has been of the social graph, many are beginning to doubt that Facebook will continue to allow developers free use of profile data for long. It’s a potentially significant value leak that Facebook could plug in a number of ways:

  1. Prevent developers from passing along supplementary profile data to advertisers. However, this could be quite difficult to manage.
  2. Require all developers to use a yet-to-be-created Facebook advertising marketplace for any profile targeted ads. This would keep Facebook in the middle of advertisers and all premium Facebook inventory.
  3. Tax developer queries on profile data. While sure to scare away some developers, Facebook could charge for queries that access certain profile fields, thereby capturing some of the margins of third parties selling profile-targeted ads.

As the initial bonanza matures, how long do you think Facebook will be able to maintain its hands-off approach to the Platform economy?


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5 Responses to “Will Facebook tax the Platform?”

  1. Paul Malin says:

    indefinitely… I hope.

  2. Charles Hudson says:

    I don’t think there is much risk to Facebook if they choose to impose some form of tax for access to their platform. I think it’s a fair thing to do – they have every right to benefit from what they’re offering the developer community. As long as what they choose to tax makes sense, I’m sure they can make it work – it’s in their developers’ best interest to see the platform in as healthy a state as possible.

  3. dave mcclure says:

    interesting article & excellent observations.

    i think many issues like this will remain unsettled (and unsettling) until Facebook figures out its core revenue stream & settles into it.

    while Facebook obviously is creating a hell of a lot of value, it’s monetizing it in very unclear & unpredictable ways. this makes for a lot of uncertainty in their developer community & channel.

    unlike Google in the past decade, and Microsoft in the 90′s, FB has yet to clarify this situation. monopolistic or not, those 2 companies have had clearly defined monetization opportunities, and as a result have created tons of value & motivation for their channel (pc software developers for Microsoft; PPC-based advertisers & publishers for Google) by making it easy for everyone to understand where they could make money — and not step on each other’s toes.

    while Facebook has done a great job creating a rich & vibrant community & platform, their lack of a clear revenue channel / monetization focus continues to be a deficiency in their communication & strategy.

    until they figure it out & show everyone what it is, the channel will be kept off-balance & guessing.

    - dmc

  4. Alexander van Elsas says:

    @Dave, I agree with you totally. I also believe that the current advertisement schemes, even when enriched with profile information will not work. The reason is in my opinion that when users start spending so much on-line time in updating their profile they will see this as their personal space. Too much ad pressure there will annoy the user. And of course, as everyone is trying real hard to make their on-line identity very different from their real-life identity, using profile info will lead to bad results too. I’ve seen an excellent article on this subject by Kevin kelly, and have written some thoughts about it myself. if you’re interested, the references can be found at:

  5. Adam Crowe - links for 2007-09-27 says:

    [...] Inside Facebook – Will Facebook tax the Platform? “Facebook disallows developers from retaining member profile or relationship data in their databases. Facebook wants to always own the fundamental human grid on which the myriad of social applications are developed…” (tags: facebook socialgraph applications platform advertising businessmodel dataming data identity tax api) [...]

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