For part 1 of this article, see here.

In part 1, we looked at some of the issues that may effect Facebook’s future growth and profitability, as well as some of the strategic decisions they could make to counter them.

c) Adjacent Markets

There are two fairly obvious adjacent markets to Facebook (in addition to any number of less noticeable ones) – social commerce, and enterprise.

i. Social commerce: this includes things like coupon sites (hence Facebook’s recent launch of a partial competitor to Groupon), although it isn’t necessarily limited to that. Facebook’s marketplace is another good example of this sector.

It looks as if there is going to be a significant amount of froth in social commerce in the next few years, given Groupon’s success.

Expect a large number of startups that add tweaks to the general business model, followed by rapidly following competition.

Facebook’s huge user base could give them some serious leverage here, but it isn’t at all clear who the winners in this game will be.

One strategic play might be to create APIs that allow new startups in this space to build on Facebook’s platform – i.e. take the wind out of the sails of some potential threats ahead of time.

ii. Enterprise: The enterprise social market is currently dominated by LinkedIn. There’s a lot more to this sector than just “business profiles and networking” though, and it is worth looking at it in more depth. Aside from company Pages (and obviously mass market B2C advertising campaigns), Facebook doesn’t do much in this space.

One interesting development was the recent funding of BranchOut (a Facebook app that essentially is just a job matching service) by VCs to the tune of $31 million. There’s currently only a small number of Facebook apps for the business sector, and few of them are really aimed at “enterprise”. I’ve looked at building apps in this area myself over the past two years (couldn’t get sufficient funding to make it worthwhile), and I think that this is going to be a serious area of growth – IF some of the obvious issues can be resolved (i.e. why would I want my staff working from Facebook? Too many distractions!). It is, in my opinion, sufficient proof of concept that Facebook should take a look at the enterprise area itself.

Some areas where Facebook could move into enterprise include:

• Beef up its partnership with Microsoft, and build out further integration with Microsoft’s Exchange/Sharepoint/BI stack.
• “Facebook Pro” – various additions to profiles (for a price), in addition to enhanced and more granular privacy settings, some new features etc.
• Private corporate social graphs – i.e. a completely separate private version of Facebook that is only accessible to a particular company’s staff (I believe there’s a few competing companies in this area, none of which have Facebook’s massive feature buildout)
• Specialized app section for enterprise apps – this would require greater attention to privacy issues, as well as some cooperation regarding billing cycles; I have a number of ideas in this area, but I’m not ready to share them on a public forum.
• M&A with existing companies in this sector

iii. Open Source: Facebook has an admirable record of support for the Open Source community, and has released a number of internally developed applications under open licenses. The standard model for making money in Open Source is to create “pro” versions of the software, for which companies can pay for enhanced functionality and support. It might be worthwhile for Facebook to spin off wholly owned subsidiaries to capitalize on this.

iv. “Intrepreneurialism”: I’m fairly certain that Facebook already has some significant incentives internally for staff to come up with new products. Again, it might make sense to spin off some new products as separate companies (i.e. to avoid too many internal distractions) and capitalize on those new revenue streams.

v. M&A: Another obvious point, which is more likely to happen after an IPO.

In summary, there are several factors that are likely to force Facebook to adopt some of the above strategies in the next few years – a slowdown in growth to match overall population growth, the rise of competitors, as well as difficulty moving ad revenue out of some existing verticals (B2C mass market, and the game industry).

In order to overcome these issues, Facebook will have to find new revenue sources and find ways to fight off both existing and upcoming competitors.