I know its old news, but I’ve still been thinking about the Facebook PR misfire from a few weeks back. A few people I’ve spoken to lately have asked me to write some more strategic material, so I’ll take one more hack at it here before writing about something else (I don’t want to bore people!). I can’t take credit for the central idea below though; a fellow by the name of Jay Gould used to do this a lot back in the 1800s, and it probably predates him too.
Its pretty obvious that Facebook considers Google to be its primary competitor, and greatest strategic threat.
Essentially the conflict boils down to the control of information.
You can search for a great many things on Google, but you can’t find people’s social graphs from Facebook (although their basic profile information often does show up).
Facebook has accused Google of attempting to “scrape” this information and index it.
Google has also made significant investments in building its own “social” functionality.
Conversely, Facebook has been attempting to take advertising revenue away from Google, and has built infrastructure to target users with relevant ads.
Facebook’s greatest strength is also a fairly significant weakness. They’ve built a set of APIs that are, in my opinion, a wonder of the software world. These APIs have allowed a robust economy of application developers to arise, including some large players.
The issue, as I’ve previously mentioned here, is that platform vendors always have some tension with their ecosystem, particularly if some of the players are large enough to have clout.
Aside from this tension, having a relatively open API also provides a backdoor for competitors.
Google’s acquision of Slide, one of the larger builders of Facebook apps, is a prime example of this. Many users come to Facebook solely for the purpose of using third-party apps, and having a major competitor like Google as a primary app developer may cause Facebook grief.
Aside from the fact that these apps are too popular to cut off without losing huge amounts of traffic, they also allow Google to collect information about users inside of Facebook’s curtain wall.
If Google seriously wanted to hurt Facebook, they could easily apply the following strategy. There are three possible outcomes, and Google wins in each of them.
Step #1: Make a highball offer for the largest independent app company. In this case, its probably Zynga, who are looking to do an IPO anyhow.
Step #2: Ensure that the offer leaks. It probably would anyhow, if it is sufficiently ludicrously large enough. This should be sufficient to put the company in play.
The three possible outcomes are as follows:
1. Google succeeds in buying said company. Yes, they overpaid, but now they have Facebook on the ropes. When they iterate the process, you can bet that Facebook will react differently. See below.
2. Facebook counters with a larger offer, and wins. This means that Facebook, which has far less money in its coffers, has overpaid tremendously, and is now even more susceptible to iterating the plan (or any other financially onerous attack).
3. The company repels the attacks, or is bought by a third party. In this case Facebook will still be vulnerable to further iterations, and will be nervously watching Google’s next moves. Furthermore, some other idiot will have overpaid, and that will probably push them out of play for the next couple of rounds.
Once this round is done, Google could then iterate with the next largest app developer. And so on and so forth until Facebook capitulates or goes bankrupt.
I think there’s a few things we can conclude from this.
1. Facebook needs to IPO sooner rather than later. They need much larger capital reserves if they’re going to have a protracted battle with Google.
2. Facebook ultimately will be under strong pressure to merge with another larger company. Maybe not today, but in the next few years. Unless they’re able to find new revenue sources that don’t bring them into direct competition with the 800 lb gorilla in the room, they’re going to find themselves continually fighting this battle.
3. They’re also going to be under intense pressure to get a handle on their app ecosystem. I don’t know how that will play out, but I expect they will be experimenting continually with how much they try to control the app builders. Facebook Credits is only a small part of this equation. Expect to see some developers publically kicked out for contravening the TOS (and then possibly quietly allowed back in later on). Also expect to see them get serious about privacy issues. Not because they care about the end-user’s privacy, per se, but because they can’t allow the developers to become even more powerful.
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