Strategy for Facebook (Part 1)

As Facebook gets closer to an IPO (and corporate maturity), we’re starting to get a clearer picture of where they are aiming, and what their actual competitive landscape looks like.

The recent (silly) spat with Google is an indication that they view the folks in Mountainview as their primary competitor, but there are also other, less visible tensions – for instance the difficult that they’re having in persuading app companies to adopt Facebook Credits. These are likely to come to the foreground as Facebook strives to increase its revenue (and profitability) once it goes public.

The following is a look at some aspects of what might be a big picture strategic roadmap for Facebook. Some of the items below are fairly obvious (or have been written about elsewhere), in which case I’ll gloss over them.

1. The Challenges

a) Growth: Facebook is still growing rapidly, but for fairly obvious reasons (i.e. there are only a certain number of people in the world) that growth at some point will tail off and more closely resemble overall population growth rates (like any mature industry). It isn’t clear to what extent Facebook is relying on rapid growth, and whether a more sedate pace will be an issue. Let’s bookmark this item and look at it again in a couple of years.

b) Usage: The vast majority of active Facebook users are on the site primarily in order to play games (I’ve seen surveys, but can’t find a link right now). There are several implications to this:

  1. Potential for boredom to set in, resulting in loss of users
  2. Difficulty in further monetization (more on this below)
  3. Difficulty in moving into enterprise market (again, more on this below)
  4. There are also implications in terms of the types of verticals that will advertise on the site

c) Direct competition: Facebook appears to be positioning itself primarily as a competitor to Google as the primary repository of information about social graphs.

Google is attempting to build several products that compete with aspects of Facebook, although it remains to be seen how successful they are.

In addition, there are several attempts to build “open” social graph systems that do not lock people’s profiles and information into one specific website (Open Social is one example of this; also see this regarding distributed social networks). The success of a system of this nature would potentially draw large amounts of traffic away from Facebook, resulting in lower revenue.

d) Indirect competition: the sites that will inevitably pose the largest competitive challenge to Facebook (or any other technology company for that matter) will likely not be directly comparable products (i.e. a “better Facebook”), but rather something that makes it outdated or less interesting, or that requires more of people’s spare time. Examples could (for instance) come from the gaming platform industry (i.e. a better time-waster), from the brick and mortar world (economic climate leading to less time online; people suddenly taking up exercise; a new and better “internet” etc) or from left-field. This will also be discussed in more detail below – see the section “poisoning the wells”.

d) Privacy and security: recent issues with privacy, if not addressed, could lead to a regulatory landscape that is less favourable towards companies that store personal data. It could increase user’s resistance to contributing personal data – a trend that it already very much in play.

e) Business model: Facebook primarily makes money through advertising. While the overall online advertising industry is still growing, there’s going to be some finite limit on the market size at some point, and there are many other large companies (not just Google) that have grabbed big chunks of this market. Either Facebook will need to beat (or acquire) competitors for ad dollars, or they will need to find other revenue models – which isn’t necessarily easy to do (see Twitter’s ongoing difficulty in establishing a reliable revenue stream).

2. Strategies

a) Poisoning the Wells

I’ve read many articles that comment on the large number of services that Google has launched that have ultimately flopped, or the wide range of free services that they continue to offer that do not appear to contribute to their profitability.

Ultimately what they are doing is making it harder for new competitors to succeed.

Think of it this way:

Google was started because the founders saw a need – a pain point that wasn’t being addressed. Today that pain point has been solved, which is why (with all due respect to Microsoft’s  Bing) there are no new (or at least successful) search engine companies being started.

In order to make it even less likely that somebody would try, they provided the world with free APIs so that anybody who wanted to could use Google’s search engine for their own purposes, rather than having to go to the trouble of building their own.

They did the same thing when they launched Google Maps – how many people are still using whatchamacallit, um, what’s it called again? Mapquest? Yes, I know about Bing. Let’s face it though, that entire market is no longer a competition. To make it even less likely, Google built Google Earth, Streetview etc etc. You get the picture.

This strategy is referred to as “poisoning the wells”, in other words putting something into place that makes it difficult or unlikely for a competitor from an adjacent market (i.e. not even a direct competitor) to either start in the first place, or make a decision to move into that market. I’m not sure how many billions of dollars Microsoft has spent on building Bing and related systems, but they’re on the wrong track entirely if they want to beat Google.

Bringing things back to Facebook – they’re going to need to take a very hard look at some of their adjacent markets to see where potential competitors could arise from, and to try to take steps in advance to prevent that from happening.

For all of their recent grouching about other companies “scraping” profiles off of Facebook, the process of building out APIs for portable profiles and social graphs may actually be helping them strategically. If startup companies simply rely on existing APIs for this information, it makes it far less likely that they will build a product that will eventually become a real threat. In addition, this may help stall the growth of the open social graph movement. Clearly they need to tweak this to prevent “leakage” of users, but I don’t think its necessarily a trend that is detrimental to them.

b) Competing with their own platform

Facebook’s growth has – in many ways – been due to their platform, which allows millions of small (and some not so small) companies build products that run inside of Facebook.

There’s a certain tension in this (not unique in any way – most platform companies are competing to at least some extent with their vendors) in the sense that a dollar spent inside of a Facebook app is going to the app developer, not to Facebook.

This is the reason why Facebook banned most forms of banner advertising inside of games.

It is also the reason why they have (not particularly successfully) been trying to force game developers to use Facebook Credits (i.e. people purchase the credits via FB, and they take a cut) instead of their own in-game currencies that are typically relying on PayPal. There has been a tremendous amount of blowback from the larger game companies – particularly Zynga) regarding the usage of Credits, and some of the larger ones are actually big enough to push back at this point. I’ve heard claims that Zynga might well be the most profitable company in percentage terms on Earth. They’re not going to be happy about sharing their take with Facebook, and given that Facebook needs their traffic, there’s a limit to how hard they’re likely to push them at this point. Zynga has built independent versions of some of their games in order to further prove this point.

What is likely to happen though is that Facebook will eventually make it much harder for the smaller vendors to avoid using Credits. If they do this right – i.e. provide easy payment interfaces – the smaller game companies may well play along with this, because it addresses several pain points (security, simplicity of creating new apps etc) for them. I suspect that Facebook will need to sweeten the pot for them though – i.e. if a company implements Credits, then Facebook will help promote them.

Overall, I think that we’re likely to see a lot of tweaking of the platform and APIs in order to try to resolve some of the implicit tension involved in this sort of competitive imbalance.

What we may also see is Facebook trying to consolidate their position by actually buying out some of the larger app companies. This is more likely to happen after an IPO. It also isn’t clear whether or not having Facebook own some of the apps in the platform will wind up driving away many of the developers who helped make this successful in the first place. Could happen though.


In part 2, I will discuss how Facebook can look at some adjacent market spaces for new revenue streams. To be continued…