From Knowledge at Wharton
Most industries do not begin on a single day, but it's easy to see Facebook CEO Mark Zuckerberg's presentation on May 24, 2007, as the starting gun in an entrepreneurial race that some have dubbed "the Facebook Economy."
On that day in May, Zuckerberg announced that the privately held social networking site he founded in 2004 would open to third-party developers, transforming itself from a popular Web site to a platform on which other businesses can operate. Eight months later, more than 14,000 applications from third-party developers are live on Facebook, allowing users to do everything from flirt to browse for books. The most successful are raking in profits from ad revenues.
Is Facebook becoming the social operating system of the Internet, poised to support a whole new generation of businesses? Or is this new industry of applications leaning too heavily on the quixotic popularity of a single Web site?
For the moment, Facebook is "king of the hill" as a social networking platform and will be for some time. While MySpace is bigger, it has not yet opened to third-party developers (although owner Rupert Murdoch has announced intentions to do so).
What makes Facebook attractive as a platform for businesses is obvious, says Kendall Whitehouse, senior director of IT for Wharton. "It brings in this huge audience from the get-go and you have a built-in infrastructure (for online interactions), so you get the network effect in spades." The payoff for Facebook? Rich interactive content that keeps eyeballs on the site, and an entire world of developers competing with each other to create newer and better applications, says Whitehouse.
With the floodgates now open to developers of every stripe, from Facebook-addicted teenagers to major public companies, entrepreneurial excitement is reaching a fever pitch.
There's no doubt that Facebook's platform, known as "f8," has spawned a fledgling industry, says Peter Fader, a Wharton marketing professor.
Jayant and Rajat Agarwalla are typical in many ways of Facebook entrepreneurs. The Kolkata, India-based brothers first created a Web site for playing an online version of the word game Scrabble several years ago "just for the love of the game," says Jayant. The Web site attracted about 3,000 regular players. When an American user suggested the brothers launch a Facebook version of the game, they spent 10 days cooking up the application and then launched it in July 2007.
With this small investment, the brothers were suddenly owners of one of Facebook's biggest hits: Scrabulous. As of late January 2008, more than half a million Facebook users play Scrabulous daily, with four times that number having added the application to their Facebook profiles. Because third-party developers can keep all the revenue they generate, the Agarwallas are currently pulling in about $25,000 a month from advertising, according to Jayant, resulting in a "decent profit" after expenses like hosting, labor, and server costs.
But the Agarwalla brothers may become victims of their own success: In mid-January, Pawtucket, R.I.-based Hasbro, which holds the Scrabble trademark in the U.S. and Canada, asked Facebook to remove Scrabulous because of copyright infringement.
The Agarwallas' entree into viral superstardom demonstrates the business opportunities inherent in the Facebook platform, according to Wharton's Whitehouse. Launching an online application is "not like cranking up a manufacturing plant," he says. "The barriers to entry, while not trivial, are relatively low -- basically the cost of a clever programmer's time."
"Scrabulous has created value for the product in a way Hasbro would have never thought of doing," says Wharton's Fader. "Hasbro's challenge is to call off the lawyers, do better business development and come up with an online version of the game people will like even better."
Because the majority of Facebook application developers are individuals or small companies, major companies "who are used to hiring ad agencies with $100 million budgets are only now just beginning to work with microdevelopers," says Rodney Rumford, CEO of Gravitational Media. A few major brands have made it big on Facebook, like Red Bull, the energy drink produced by Austria-based Red Bull GmbH, whose Facebook application "Roshambull" offers an online version of the classic children's game "Rock-Scissors-Paper."
But many more major brands may be falling behind. Rumford's Gravitational Media launched a greeting card application on Facebook as a lab experiment, to give its programmers a chance to play around with the f8 platform. "We didn't intend to make any money on it, but now we're beating out Hallmark's application by 10 to one," says Rumford.
In spite of such tremendous growth for application superstars, Kevin Werbach, professor of legal studies and business ethics at Wharton, asks whether the Facebook economy will remain on a micro-level for some time to come. "If you are starting a business that needs only a small revenue stream to support a few people, you can do that on Facebook, but to build a business that would become a public company, valuable enough to be a major acquisition -- it's not clear today there is enough opportunity," says Werbach.
Those bullish on the Facebook market predict that people will conduct more and more of their online lives through social networking venues like Facebook.
"The apps currently on Facebook only scratch the surface of what's possible," writes Salil Deshpande of the Menlo Park, Calif.-based Bay Partners venture-capital firm. Deshpande, together with colleague Angela Strange, created AppFactory, a fast-track venture capital fund targeted solely at Facebook application developers.
One key to scaling up the industry is "interoperability" among social platforms. With Facebook taking the lead, industry participants called on other social networks to make their platforms compatible with Facebook's so that developers can deploy their applications on multiple platforms with a few clicks. Such compatibility may be essential for application developers to break into non-U.S. markets where Facebook is a less-known quantity.
For the moment, however, Wharton's Fader sees Facebook commanding a mass market in a way traditional forms of media no longer do. "Even TV does not have the same level of engagement. Right now, Facebook is unique."