In a recent article titled “In Facebook, Investing in a Theory” at the NYT has some interesting insights into Facebook App arena. Here are just a few nuggets:
Yet there are questions about the ability of these Facebook-inspired businesses to create sustainable revenues. Developers are restricted to placing advertising on their “canvas page” — the portion of the site through which users install and interact with an application. Facebook does not allow developers to advertise on users’ profile pages, where the applications themselves are imbedded.
I wrote a post earlier about the viability of Facebook apps and whether a developer should actually build one… The above is an interesting requirement, especially when you take into account the number of people that actually will ever land on a “canvas page”. The numbers are not large and then you have to determine what the CTR will be for adds on the page… It isn’t looking good for advertising as a way to support Facebook apps.
Several companies have created networks to funnel advertisements to canvas pages, and Facebook itself has indicated it will soon introduce its own ad system for developers.
All of these ad networks suffer the same problems, which is simply not enough exposure. As long as developers are limited in their ability to generate revenue then Facebook Apps as a standalone business will be hampered. Some companies, such as iLike, which have an affiliate type model can work, but again that is only if the users are able to click from the application to purchase directly and don’t have to land on the canvas page.
Andrew Chen, an advertising executive and adviser to the Silicon Valley investment firm Mohr Davidow Ventures, “…Facebook users click on ads significantly less frequently than elsewhere on the Web. And Facebook members who add applications to their pages can just as easily remove or ignore them“
This is another problem… Because the site is a content and communication platform, the propensity for people to click on advertising is lower than it would be on a search results page (obviously). The key question is simply, will the CTR create enough advertising revenue to compensate for hosting and bandwidth costs and support sustainable businesses?
The answer is YES, if you happen to be Facebook although they aren’t there yet at least in terms of profitability (disclaimer, this is my assumption). They are offloading development, hosting and bandwidth costs to the app developers and not having to pay a single penny! Brilliant actually. They reap all of the rewards without any of the associated costs.
Obviously, they are also feeding the hype. Without any proven success cases investment funds are being created and launched targeting Facebook app developers. Nothing like a few hundred grand to get people to sit up and take notice.
Nevertheless, Silicon Valley venture capitalists are creating funds devoted entirely to investing in Facebook tools. Internet entrepreneurs are shifting their businesses to focus on the social networking site. Some of the most popular applications are being sold, sometimes for hundreds of thousands of dollars — but only when buyers’ and sellers’ ideas about the potential of Facebook are similar.
Is this sustainable, I don’t know, but I don’t really think so. I definitely think a number of app developers can survive and thrive, but they will need to find new an innovative ways to monetize their app distribution/adoption/utilization. I don’t think advertising will generate enough revenue to build a sustainable business around.
And finally, this is simply scary! Bubble 2.0 anyone? Reminds me of the good ole days when companies would take mutual investments in one another and each would count that as revenue, or when they would purchase the SuperBowl adds…
Several companies have created networks to funnel advertisements to canvas pages, and Facebook itself has indicated it will soon introduce its own ad system for developers. So far, most of the ads on canvas pages promote other applications whose creators are seeking exposure.
That last sentence is of course not sustainable. I look forward to seeing the sustainable models that emerge and hopefully there will be more than a few!
About nathan kaiser
I’ve read a couple of your posts on Facebook just now, Nathan — you’re certainly feeding the “realism” instead of the “hype”, which I think is important.
There were several companies included in the initial launch of the platform whose apps spread like wildfire — because they were first. And they also served as poster children for “how fast you can grow too!” But then FB greatly tightened their viral mechanism and now it’s not only tough to monetize your app, it’s also tough to grow your app.
I wrote recently on the value of a Facebook app at http://kickstand.typepad.com/metamuse/2007/10/the-value-of-a-.html. I think there is some value but I don’t consider it to be distribution, revenue or the basis of your business.