It was a brilliant idea, one that with hindsight becomes even more so. Facebook decides to open up their service to
outside developers. What others have done with an API to extend their content and data to other sites, Facebook did for its own site. There are now legions of developers creating new and innovative applications for Facebook members. They have created a system that allows others, on their own dime and computing power, to launch a staggering array of additional services. In the process making Facebook a much more enriching customer experience at minimal cost to themselves.
The coolness of being able to build an app that is used by tens of thousands if not millions of people is unquestionable. Facebook provides a much more direct path to scalability than could otherwise be accomplished through standard marketing techniques.
Although, it is by no means a certainty. It is becoming even less so, with the sheer quantity of apps available on Facebook. With the numbers exploding as they are, a new app has to compete just as directly for awareness of Facebook users as a site would need to with the larger Internet community. The one benefit is that Facebook has millions of users and very clear viral marketing mechanisms that aren’t available quite so easily on the web as a whole.
Once an app has reached a significant users, in this case lets say >100,000 users, is there an opportunity to monetize the application to reward the developer for their time, effort, and computing resources (for hosting the app)? However, before we answer that question, what are the options for generating revenue with a Facebook app?
Advertising – whether a Google Adwords CTR campaign for a CPM banner approach
Fee – can a developer charge users for using the app
Marketplace – is it possible to create liquidity for products or services (or even apps for that matter)
Advertising is allowed within the apps as per the Facebook App Guidelines with certain limitations of course. Based upon a rough calculation, I would assume that a CPC campaign would get between 0.3% and 0.5% as the advertising would be a minimal component of the app, would be one of many links on the site, and the psycho-graphic of the user base would not lead to a propensity to click on advertising as a whole. Social networking sites also have notoriously low ad rates, as the user base is quite generic.
Freemium (fee) models have a lot of potential as well, with one major drawback. How to get people to purchase? Also, I wasn’t able to find any guidelines / limitations on fee based services within the Facebook developer’s Terms & Conditions.
The benefit of advertising and fee based models is that they could potentially support an app only company. As long as the user base is large enough in both cases.
An interesting idea, is in creating liquidity in products and services and in essence hosting a marketplace for Facebook users. One example is ZuckerBucks. Disclaimer, I know the creator of Zuckerbucks. It is a fascinating idea, and one with a lot of potential to create a viable marketplace for products and services with a unique measure of worth, the ZuckerBuck. Creating a marketplace is a unique way to monetize a Facebook app, but I feel that advertising and fee based services will inherently support far more apps than anything else.
Say a developer is able to monetize their Facebook app, what are the potential costs for them to continue to host the app? Currently (09/19/07) they must only pay for the hosting of said app on their own servers. However, Facebook reserves the right to charge fees in the future, and may do so at any time:
Section 3. Fees
We reserve the right to charge a fee for using Facebook Platform and/or any individual features thereof at any time in our sole discretion. If we do charge a fee for using Facebook Platform or any feature thereof you do not have any obligation to continue to use Facebook Platform or the applicable feature. However, if you do: (i) we reserve the right to specify the manner in which the fee will be calculated, the terms on which you will be invoiced and charged and the terms of payment; and (ii) any and all fees payable by you pursuant to this Agreement are expressed exclusive of all taxes and duties, including Value Added Tax (“VAT”) or any similar applicable sales tax. In addition to such fees payable, you will pay any sales, use, value-added or import taxes, customs duties or similar taxes that may be assessed by any state and/or jurisdiction (collectively, “Taxes”) that Facebook is legally required to charge on the applicable fees under this Agreement. If requested to do so by Facebook, or as otherwise required by applicable law, you will supply your VAT identification number to Facebook. We may also change the fees or fee structure for Facebook Platform or any feature thereof at any time in our sole discretion, and in such event your continued use of Facebook Platform or such feature constitutes your agreement to such change (provided, that you will not have any obligation to continue to use Facebook Platform or such feature).
If they do begin charging a fee then the question becomes, can an app generate enough revenue to cover the hosting costs and what I would call “access fees” that Facebook may charge? It depends on the type of fee; whether it be a flat fee, a proportional fee, based on the number of users, etc. I do not think that Facebook will begin charging for access as it may hurt the growth opportunities. However, they may charge apps that present advertising, charge a fee to users, or monetize in some other way. When an app developer begins making money on their app, a strong case can be made that Facebook could be losing that revenue…
If they do begin to charge, then will we see the ego motive continue to drive companies to develop applications? If so, how will that affect the types of services as a whole?
Another key issue with developing a Facebook app is who owns the user. A number of sites have been very successful in having their apps utilized by millions of Facebook users. iLike is one example. Their issue is that the app is a standalone service and doesn’t integrate with their site. They do not own the users and have created no long term relationship (as far as I am concerned). If a developer is going to create an app, I would highly suggest that they build it in such a way that it integrates, adds to, and builds on services and features that they offer on their own site. You want your entire community to benefit when you grow your user base. I encourage developers to see Facebook as an extension of their current community / projects.
Before any startup decides to build a Facebook app, they need to run the numbers on potential users, revenue potential, resources required to build and host, and what type of integration will it have for their current site and with their current user base to determine if it makes sense for them. These numbers won’t be accurate, but the process of thinking through the ramifications and potential opportunity will help you understand if this is your biggest priority, or lower on your list.
(images included in this post are owned by Facebook)
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Nathan Kaiser, is the CEO and Co-Founder of nPost, a site devoted to promoting tech startups. nPost features tech startup jobs, interviews with entrepreneurs, and tech networking events.
About nathan kaiser
Great write-up Nathan. I agree that about 100K users is when you can start seriously monetizing your app. One great thing about the apps is that they allow you to collect users with a particular interest (and show more targeted ads). Lastly, I can’t emphasize enough that the “viral mechanims” are the *only* significant mechanisms to spread your app within facebook, and act as much as a filter or barrier as much as they are a carrier for your app.