Yesterday, Facebook released a roadshow video ahead of its IPO. The video highlights Facebooks’ opportunity to win more advertising dollars, and also points out the company’s role as a social platform. I’ve been thinking a lot about Facebook lately, so wanted to use this opportunity to jot down some notes.
First, Facebook has the potential to win a bigger chunk of the global advertising market. According to FB, brands spend about $600B on advertising per year. Global advertising spend is a slow-growth business; according to ZenithOptimedia ad spend will grow 4.8% from 2011 to 2012, which is roughly in-line with global GDP growth. Since the overall pie isn’t growing, FB needs to win ad spend from other areas, like television, radio and print. Will they be able do this? Hell yes. People are spending an increasing amount of time on Facebook, at the expense of other media. (Remember, the hours in day are static so time spent on FB equates to less time spent elsewhere.) And what is everyone doing during this time? They are watching videos, reading articles and listening to music. So without even factoring in that FB campaigns are extremely effective, FB will have no problem growing its advertising revenue.
The second opportunity is best described with a riddle: What is the only thing on the web that is unique and ubiquitous? Give up? It is your Facebook page. If you’re like me, you have three active email accounts and two phone numbers. But you only have one Facebook page. Thus, developers building social products have no choice but to integrate with Facebook.
I found this out the hard way. When we first designed Spottah, which is currently being reviewed by Apple, we decided not to use Facebook Connect. We thought integrating with Facebook would diminish our value proposition of sharing photos among only close friends and family. So we decided to connect by email or phone; after all, close friends would know your email address. We pushed a beta. It was a disaster. No one knew which email address their friend signed up with. For example, I’m registered using my @spottah.com account but everyone was trying to connect with my @gmail.com account. We looked at our sharing process and realized we needed a purely unique identifier. It became immediately obvious that Facebook has a monopoly on unique identifiers and that we would have to integrate Connect.
To my knowledge, Facebook has no plans to directly monetize Connect and Open Graph. The goal is to create an ecosystem in which independent developers create great apps that increase the value of both companies. While this makes sense, I could also see a world in which Facebook charges a small amount for Connect and Open Graph. As a developer, I would pay for this. When we started Spottah, I did not think twice about whipping out my credit card to buy computing power from Amazon, analytics from Mixpanel, and smarter email from MailChimp. But all of these are worthless without customers, which Facebook provides. Yet, customers acquired from Facebook are free.
The idea of Facebook charging developers is controversial. Many would point to Microsoft as a parallel example. Microsoft never charged its independent developers. A strong supply of programs designed for Windows meant more sales of Windows. This in turn increased the demand for PCs, which Microsoft capitalized on by grabbing the largest chunk of value chain.
Microsoft and Facebook are not parallel examples, however. Microsoft had greater control. For Microsoft, the better the ecosystem the greater the sales of PCs. Plain and simple. Facebook, on the other hand, does not have as great of control. Instagram is the perfect example. Facebook enabled Instagram’s rapid growth by improving connections and spreading the word via Newsfeed postings. In the end, Instagram became so compelling that people were visiting Instagram before Facebook, and also spending more time on the app. Realizing this, Facebook bought Instagram, proving that Instagram captured the lion’s share of the value.
Instagram will not be the last company to capture a greater portion of the value than Facebook. The key for Facebook will be designing a structure in which they foster independent development but are also able to capture their share of the value created.
As 2011 comes to a close, I want to celebrate the blogs that caught my attention, made me think, and taught me a lesson or two. So without further adieu, I present my favorite 5 blogs of 2011.
5. A behemoth competitor entered your space? Here is a textbook response.
The Sincerest Form of Flattery, by Matt Brezina, CEO of Sincerely
When Apple launched Cards, an app for sending physical cards, my heart sank. My close friend of more than 10 years had just launched Sincerely and its flagship product Postagram. Apple entered the exact market my friend Matt was creating.
Before turning in for the night, I checked Twitter one more time and saw that Matt posted this blog. I read it. By the end of the post, I realized Sincerely wasn’t scared of the competition; on the contrary, it was energized by it.
So, if you’re running a company and a bigger competitor enters your space, use the opportunity to change the conversation. This post does three things particularly well.
4. Secrets aren’t necessary
What Powers Instagram: Hundreds of Instances, Dozens of Technologies by Instagram
Companies are secretive. Coca-cola locks its recipe in a safe. Apple goes to extraordinary lengths to veil new products. It refreshing, therefore, when a company comes out and says, “Hey, this is how we do things.” And no company did this better than Instagram, the photo sharing mobile app that launched this year and already has more than 12 million users.
In this blog post, Instragram shares its IT strategy. Anyone interested in launching a competitive product could – and should – follow each and every recommendation. And that is the point: when you have a branded product that consumers trust – in Warren Buffett’s terms a “moat” – it does not matter if your competitors or customers know how the product gets delivered. Having the exact recipe or a head-start on a new product does not make it any more likely that Coke or Apple will be disrupted. The same goes for Instagram. Understanding how Instagram delivers beautiful photos to your mobile devices does not mean a competitor can replace them through replication. A new competitor needs to identify what Instagram is missing and then fill that customer need.
3. IPOs and private markets
IT'S OFFICIAL: The IPO Market Is Crippled -- And It's Hurting Our Country by Alan Patricof
A major story throughout 2011 was Facebook’s valuation on the private markets. As of September, the company was valued at $82 billion on SharePost. But there was a bigger story than just the billions Facebook was worth. If a global brand with profits and exponential growth had not already gone public, what did that say about the IPO market overall?
In a blog on Business Insider, Greycroft’s Alan Patricof poured onto the page the knowledge he has gained from over 30 years of early stage investing. He concluded that companies, particularly smaller ones, no longer have the opportunity to go public and as a result America is losing its technological advantage. The decline in the IPO market is the result of four factors:
2. Added to my lexicon in 2011: “Napkin Entrepreneur”
Napkin Entrepreneurs by Steve Blank
I judge a blog based on how often I reference it in my daily life. This year, I added a new phrase to my lexicon: Napkin Entrepreneur.
Steve Blank, a start-up veteran and thought leader, wrote a perfect summary of today’s start-up environment. Basically, the amount of capital required to start a business has fallen dramatically while the number customers you can reach has risen dramatically. As a result, dreamers no longer need to sketch out a plan on a cocktail napkin. Rather, they can hack the product together and deliver it to millions of users at zero cost. If the feedback is positive, keep going. If it is negative, move onto the next idea. The Napkin has been replaced with the beta product.
1. Don't worry about Marauders
Speech by Elizabeth Warren, Senate candidate in Massachusetts
(Starts at 00:48)
Last summer I took a class at NYU Stern that forever changed my perspective. The class was called Global Perspectives on Enterprise Systems and it was taught by Robert Wright. The goal of the class was to understand why some countries develop rapidly, like the United States, while others do not develop at all.
It came down to the “Growth Diamond;” Stern professors notoriously love baseball. Home plate is a non-predatory, Lockean government. In other words, growth starts with a government that protects the life, liberty and property of its citizens. Such a government collects taxes transparently, regularly and at a reasonable rate. The government also establishes and enforces reasonable laws. Note that such a government does not need to be a democracy; though they often are.
The next phase of development, or first base, is a financial system in which capital moves from savers to borrowers. First base cannot be reached without home plate; after all, the crux of saving and lending are contracts recognized by the courts established by the government.
With home plate and first base established, the economy is prepared to take second base: entrepreneurship. Individual actors are comfortable investing into a long-term business knowing that the government will not pilfer it in the night. And even if something goes wrong, the actor has faith that the slip of paper called “insurance” will be made good. And lastly, the actor has access to capital, thanks to first base. Interestingly, not all economies move equally between bases. There are countries with non-predatory governments and financial systems that have less entrepreneurship than others.
The final stage, third base, is a management system. Basically, the entrepreneurs that flourished from a stable government and access to capital eventually grow into large, distributed organizations. These organizations have the systems required to undertake large and complex markets like air travel, chip fabrication and automobile manufacturing.
So what does this have to do with Elizabeth Warren? Simple. She understands the Growth Diamond, and more than anything she can articulate it to the American people. This speech lit-up the blogosphere and belongs in the annals of great speeches made by great Americans.
I'm the Founder and CEO of Peak Support. This blog is my take on early-stage companies and innovation. Every so often, there may be a post about culture, networking, family -- you name it. After all, what is a blog if it isn't a tad bit unstructured.