Why Facebook Opted for Platform Growth Over Platform Monetization in 2008

When the Facebook Platform launched in May 2007, many speculated on Facebook’s various opportunities for revenue generation on Platform. However, while there has been much talk of Facebook’s revenues throughout 2008, Facebook has focused the majority of its monetization efforts on direct advertising and virtual gifts sales. Why hasn’t Facebook focused more on Platform monetization?

Based on everything we’ve seen this year, Facebook has been primarily focused on growth. On Platform, that has meant 1) trying to find a sustainable balance between application developer and user interests, and 2) expanding the Platform’s reach through Facebook Connect. In the end, 2008 will be remembered as the year Facebook opted to build for the long term growth of the Platform instead of focusing on immediate Platform revenue opportunities.

Yesterday, there was a lot of discussion after we noted that Facebook has not launched the Platform payments system that was announced over one year ago. (The post was updated to clarify that Facebook has not made any new announcements regarding the future of the program; the payments system has just been apparently deprioritized while Facebook focuses on other initiatives.) In the comments of yesterday’s post, Dave McClure laid out an argument as to why Facebook’s delay in launching a payments system is “the biggest error in Facebook strategy & execution over the past 2 years.”

But is it? Here’s another take:

Let’s take a look at the current state of the transaction economy on the Facebook Platform. I’m not going to speculate on numbers here, but for the sake of argument, let’s consider the three widely varying cases that 2008 Platform transactions totaled a) $50 million, b) $150 million, and c) $250 million. Without going into too much detail, let’s quickly approximate that Facebook could net 5% of sales through an integrated payments solution.

At the end of the day, those fees might have added around a) $2.5 million, b) $7.5 million, or c) $12.5 million to Facebook’s top line, not accounting for the lift in transactions that would likely have arisen from a more frictionless payment option. Based on popular estimates of between $250-$300 million in Facebook’s 2008 revenues, a platform payment system could have reasonably boosted total revenues by 3-5+% this year.

Other Platform monetization possibilities (i.e. a Facebook-operated ad network) and operational costs aside, let’s compare the ballpark characteristics of that option to what Facebook decided to focus on in 2008 instead.

1) The first half of 2008 was focused on redesigning various elements of the Facebook Platform and profile, because Facebook was concerned that the user experience problems being created by some applications would negatively impact the health and viability of the Platform as a whole. While developer reactions to the changes were very mixed, Facebook’s overall virality and engagement metrics have continued to increase. And as for apps, many “widget-only” applications have experienced a big traffic decline since the profile redesign, but many social applications have continued to thrive. 50+ developers currently engage over 1 million people per month, while 400 applications currently reach over 100,000 people monthly.

2) The latter part of 2008 was focused on the launch of Facebook Connect, Facebook’s broader strategy to extend the Platform off Facebook.com (see our previous thoughts on Facebook Connect monetization). Unlike previous off-Facebook product launches, with Connect, Facebook took a much more deliberate approach toward explaining the value proposition of Facebook Connect to the market and working with early adopters to both ensure a good user experience and maximize ROI for Connect partners. As a result, dozens of sites have launched Facebook Connect implementations so far, and there have been no major privacy issues. Overall, Connect is off to a solid start.

Given that Facebook is likely fairly well positioned with cash on hand and (from what we hear) healthy sales going into the new year, there’s a pretty good argument that Facebook was right to prioritize focusing on longer term Platform growth over nearer term Platform monetization opportunities in 2008. Besides, it’s not as though current third party solutions like Paypal, Zong, and Spare Change aren’t working well. (And many developers are doing very well with offer networks like Offerpal and Super Rewards that offer a variety of third party payment options.)

In the end, Facebook is very likely to develop its own in house systems for monetizing the Platform at some point. However, Facebook has the luxury of taking a somewhat longer view toward the future of its business and does not need to prioritize efforts like platform payments in the immediate term. For now, Facebook seems to be focused on bigger strategic issues that will more significantly affect its revenue growth in the coming years.

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27 Responses to “Why Facebook Opted for Platform Growth Over Platform Monetization in 2008”

  1. Daniel James says:

    (I was just replying to Ali on the earlier thread, so I’ll just pick it up here):

    Facebook can take a much bigger piece then 5%, because it’s not a level playing field. App developers are paying up to ~50% for many ‘convenient’ monetization avenues like SMS. Combine FB’s identity play with a trusted stored value currency and you blow all the other payment options out of the water; you could command something more like Apple’s ~30%, because given the choice between CC/Paypal/SMS/Prepaid Card/Trial offers and FB Payments, I believe the customer will choose FB (which will aggregate all the others conveniently), every time. Stored value, trust and being already logged in are very powerful.

    Now then, $90M at 30% of $300M is not to be sneezed at, particularly if you think that the business could grow to billions because FB have an army of app developers working on the hard bit, which is getting people to fork out at all.

    A healthy scepticism about FB’s monetization via advertising helps make this look attractive; your estimated $100-300M is real money, not fake guaranteed ‘ad revenue’ from M$. I don’t doubt that ads will become a good revenue stream, but it might take a long while.

    I agree that identity is the bigger play. However, implementing and operating a wallet system is not that hard. We (Three Rings) did it, back when we were a ~ten person company four years ago. They don’t even have to do the heavy lifting; there are at least five credible partners or acquisition targets.

    I am all for focus, but surely a company with hundreds of employees and hundreds of millions in cash and revenues can execute on more than one thing?

    As I speculate in the other thread, I suspect that they hit a significant prospective fraud problem with their original Paypal-like system, and have had to go back to the drawing board. I think we’ll see FB Wallet released this year.

    Why wait and keep a dirty big fork stuck in the ability of app developers — y’know, those folks who are helpfully making content for your platform — to make money?

  2. Not Coming Soon: Facebook Indefinitely Holding Off on Plans for Platform Payment System? (Updated) says:

    [...] Update: For further analysis see our 12/30 post Why Facebook Opted for Platform Growth Over Platform Monetization in 2008. [...]

  3. The Lovable Rogue says:

    I’m a little sceptical of whether Facebook really does have the luxury of pushing back the platform monetization issue. We mustn’t forget that growth requires funding. Whether the degree of long term growth which Zuckerberg and co. are referring to is viable in the absence of a strong revenue creation model is questionable.

    The social network industry will always be led by the organisation which meets the user’s needs most innovatively. More often than not, this will be the result of access to capital. I cannot help but wonder what would happen if an organisation with greater financial resources than Facebook focused their attention on developing their own network.

    Will critical mass ever truly be recognized by the social networks? Again debatable, but I think that the case of Facebook and MySpace suggests that users are willing to migrate to competing platforms if greater value is perceived.

    TLR

  4. Joe Dawson says:

    Even if we don’t see ‘Facebook Wallet’ released next year I’m certain that they have a long term objective for monetization. With Google Friend Connect being labelled as Friendsense (Google insiders) due to the expected changes that will include ads, Facebook are well positioned to adopt this as well.

    Especially as people see Facebook as a trusted brand on the Internet and will embrace Facebook Connect for their sites. Connect provides a method for friends/readers to comment and a provides another outlet for their sites through Facebook!

  5. Dave McClure says:

    good post & reasonable analysis.

    perhaps it’s a bit dramatic to call it an error, but my questioning the priority on getting payments out the door wasn’t focused so much on short-term revenue as long-term strategy.

    indeed growth over monetization *is* probably the right call at the moment, however it’s also possible that delay on getting a payments solution together could provide enough time for a 3rd-party solution to get traction. while it’s not the end of the world for FB if a 3rd-party owns this space, i’m sure they’d prefer to control their own destiny in that area.

    i agree with daniel they should be able to execute on multiple fronts, and this isn’t new territory but rather one they’ve already staked out more than a year ago.

    ultimately managing growth, user experience, and getting Connect right were arguably higher priorities for 2008, but it still seems like this should be high on their list in 2009.

    in any case, criticisms aside i still think FB is generally doing a pretty good job juggling priorities & steering the company forward. perhaps i’m just a bit impatient for the promise the future holds.

  6. Brian Verkley says:

    Is anyone here in business at all?

    Let’s presume that Facebook doesn’t have a group of people doing nothing. That means they really couldn’t have done FB Wallet as well, but rather instead of something. What nets more money. The analysis should go like this:
    We can a) focus only on growth. We earn $x per user. If we increase the number of users by 500%, we will earn 5x more than we do now.
    or b) focus on monetization. We can earn $z more per user. Same number of users, so we need to earn 5x more with FB Wallet than we earn now off ads and gifts.

    is the total in a) higher than the total in b) ? yes, then forget about FB wallet for now. Not that it is a bad idea, just that it doesn’t net the same as growth. Oh, and FB Wallet will be also benefit from growth, so the value proposition will only increase with time.

    The debate isn’t whether FB Wallet is good or will net revenue. It is whether it is more important than growth. Facebook decided it was not, and I tend to agree with them.

  7. Dave McClure says:

    @Brian: sure growth is job #1, but a company with 700+ employees should be able to prioritize more than one thing at a time.

  8. Clyde Smith says:

    One downside of Facebook Connect:

    Given that there are so many smart people on the web and given that I don’t have a Facebook account and no immediate plans to get one, I’ll keep reading Dave McClure cause I already know who he is and where he blogs but I’ll soon forget about Daniel James who seems really sharp but doesn’t have an identity that I can readily access without taking some extra steps.

    And since I’m not doing a good job of keeping up with the folks who I already know I should be reading, I’m not going to try to track him down.

    Interesting effect but I guess the question is whether or not it’s widely shared.

  9. Mark Mayhew says:

    good post, so I should hang on to the FacebookEconomy.com domain name?

  10. Guy Gal says:

    I couldn’t agree with the sentiment of this post more.

    This is a race to a 1 billion. Capture the social networking market first, monetize second.

    Provided that Facebook can continue to bank roll their growth, they are well on their way to cementing their position. This is far more immediate than immediate revenue.

  11. Mark Rose says:

    It seems like the entire board has the same sentiment.

    The market would like to see a solution and it would be a great addition to Facebook, certainly.

    It’s just a matter of priorities. Payments is just waiting in the wings, and the market is a little impatient to get it!

  12. Jim Dugan says:

    All it takes is one company with a new idea to come along and most of all of those FB users could be swayed to move.

    Facebook is missing out on a great opportunity.

    There’s a good chance that by next year this time, Facebook could be bigger, but I think not; things are changing too fast.

  13. Josh Elman says:

    Interesting analysis and a great conversation to watch. Thanks Justin! Happy New Year!

  14. Dave McClure says:

    @clyde smith: interesting point about Connect — i’m guessing your click-thru experience goes to a stub page for Daniel (me too… in fact, i just sent a friend request ;)

    regardless, Daniel is a very smart guy and i’d highly recommend you read his stuff (even if you don’t agree with him), see http://thefloggingwillcontinue.com/

    but you bring up a good point. FB might want to figure out a better way to provide/educate users on how to present a more public identity. (then again, some may *not* want to do that)

  15. Facebook hack 2009 | Lifedork says:

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  16. Faol-Inc.Com - Education Guide » Will Social Media Tools Be Monetized In 2009? says:

    [...] has not yet monetized its site very well. Here is an excerpt from Justin Smith’s post, Why Facebook Opted for Platform Growth Over Platform Monetization in 2008: Based on everything we’ve seen this year, Facebook has been primarily focused on growth. On [...]

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  18. OPEN Forum by American Express OPEN | Will Social Media Tools Be Monetized In 2009? says:

    [...] has not yet monetized its site very well. Here is an excerpt from Justin Smith’s post, Why Facebook Opted for Platform Growth Over Platform Monetization in 2008: Based on everything we’ve seen this year, Facebook has been primarily focused on growth. On [...]

  19. Facebook Platform Payment Providers Report Strong Growth in Q1 says:

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    [...] Facebook has focused its Platform efforts over the last 18 months on growth over monetization, several payment providers have moved quickly to fill the gap by providing payment processing [...]

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    [...] has been much talk of Facebook’s… Posted on 31 December, 2008 by Riaz Kanani TweetWhy Facebook Opted for Platform Growth Over Platform Monetization in 2008 This entry was posted in Uncategorized by Riaz Kanani. Bookmark the [...]

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