A Quick Ditty on Free – Part 3

When a topic is fun. Its fun. So why not write some more about it.

Im guessing that write now some kid is writing a facebook clone, that probably uses FaceBook Connect and tell his or her friends that it will be just like FaceBook, except that you have to be in school.  You have to use a .edu email address in order to be able to take part in this new social network.

No parents.  No grandparents, no aunts or uncles out of school. Your boss from McDonalds cant peak, and best of all, when you graduate, those same people wont be able to see any of the stupid pictures you posted when you were drunk.

Of course the irony is that this is exactly how facebook got started. You had to have an edu email address until a few years ago.

In the world of free, today’s products are tomorrow’s product features. You have to keep growing and growing so that your advertising revenue covers the company’s growing expenses and expectations rather than accepting the product lifecycle and using it to your financial advantage.

Here is a question for you. Which choice would have created the greatest return for Facebooks Investor’s, staying focused on the .edu subset of users they started with, or being on the growth treadmill that has required them to raise who knows how many hundreds of millions of dollars ?

21 thoughts on “A Quick Ditty on Free – Part 3

  1. I say the growth treadmill. Let’s face it, by opening up Facebook to everyone they have generated a bigger audience. Bigger audience means more browsers, having more browsers makes advertising more attractive to potential customers. I think Facebook sky rocketed over the past year or so and still is. I know many people including myself enjoy the layout much more than MySpace etc…

    Comment by performancepartsj -

  2. It’s probably just me, but having your mom’s friend from high school ask to be your friend on FB kind of ruins the fun… It’s weird. It’s like everyone can sign up + join, so there’s no selectivity [for lack of a better word] in it… everyone has one.

    dominica

    Comment by thekidd -

  3. I hate facebook and twitter is for TWiTS.
    Cause they get paid and use the information to sell products and hmmm try to put you into a category.
    WEll no thanks.

    Its hard to believe that now at least 30% of people are marrying by people they meet online. Is that a good thing?
    People nowadays are to afraid to meet people in person and have the Confidence to ask someone out for fear of rejection.

    I think I am changing my whole mindset. Sports I am even fading away from to a new mission a more important goal. The stock market I just finally said MERCY.

    God is healing me from society’s addictions one by one now I am going to start living. I will fear no man but God. I will care more about the Ducks Unlimited then the Anaheim ducks.

    People can change and I still owe you what I promised for Seven years but I am far from Texas. So I will enjoy this Stampede here I reckon.

    Good Luck
    Trip KINGS
    Mark Farwell.

    Comment by whitewoody -

  4. I feel that the way facebook could really help its members in the “business” market is to enable them to “collaborate” on a more direct level. This can be enhanced with online labs, setting up of project teams; establishing special forums to discuss alternative ways to get financed, establish strategic partners; and connect with people who want to help you!

    At my new company “the Bize eXpress” @ http://talkbizexpress.blogspot.com/ discusses these things and more. Our goal is to create social and face-to-face opportunities for entrepreneurs to collaborate and maximize their time in getting to the right people and using the best resources.

    Comment by bizexpress -

  5. I would have left it like it was, as an .edu site only.

    It would be used as a traffic generator for money sites as the population ages and is thrown over the wall of the walled garden.

    To have that many users at the beginning of the consumer life cycle is a gold mine if you hang on to them. Don’t expand the free site so they park there forever.

    As they age and their needs change, send them to FacebookJoeShmoe for their early working years. Monetize with resume services, job listings, etc.

    As they get married and build families, move them to that life stage…FacebookMarriedwithKids then on and on until they get to FacebookNursingHome which is monetized with everything age related.

    Some users would start right off as a free user with facebook and would need a growing period. They’re you’re freebies-soon-to-consume.

    They love you so much on facebook that when they’re older, more mature, yet still want to hang on to that college thing you’re there. With advertisers, products, etc. By then, they aren’t broke college kids using beer bongs as stemware.

    Basically, use facebook like most websites use Google. As a giant on-ramp to the money sites.

    Comment by sophiemwt -

  6. Free: The Future of a Radical Price — Chris Anderson
    Read It Mark, unless you already have.

    Comment by cambronhardaway -

  7. Pingback: Bill Gurley on the “Free” Business Model « abovethecrowd.com

  8. Mark, love your commentary. Perhaps too technical an answer, but…

    Not sure if this is rhetorical question or not. The short of it is it depends on the owner’s ambitions vs. the business model. Obviously we know where FB netted out and so their model has set sail.

    Colleagues ask me where I see FB netting out and I truly have no idea compared with other internet services. Had they just focused on college students, though students would have grown older and outgrown the service that was tailored, maybe jumping to some modified LinkedIn or Doostang, who knows.

    As you well know, there are two ways to monetize online, performance advertising and brand advertising. I think the challenge I see with Facebook is their inability to match their product focus with the type of revenue focus they want in the short term.

    The bigger question to me now is how does Facebook scale into brand advertising, assuming they continue lift the bar on their performance CPMs. It’s a challenge that MySpace, eGroups, many others couldn’t figure out and I’m still at loss to suggest why Facebook would be any different.

    My only other point would be with access to economies of scale so easily online and barriers to entry so small, in my experience it’s easier to defend the small barriers erected around vertical businesses (advertising mix, single unique product configuration, etc) over horizontal businesses that have to scale across multiple advertising groups. Hence, perhaps, edu.

    Expedia is still with us; as is Autobytel.
    If you’re going to be horizontal, you better be sure their is necessary transactional element and necessary-utility-to-the-user component to your business (a la Amazon, eBay, Google, not MySpace, eGroups, etc.).

    Comment by matthewsf -

  9. What sense would it have made for Facebook to stay small and focused on college students? It was a good way for them to gain a foothold in the beginning and make the change from 0 users to millions, but it’s not viable long-term strategy.

    From a logical standpoint, people who join the service in college will eventually graduate and go into the workforce, so you can’t keep it college-only forever. What happens when these older Facebook users want to invite their friends to events, groups, etc but their friends still aren’t allowed to join the site? A college-only Facebook would eventually lose out to some generalized megasite that simply let anyone join.

    I also don’t understand why it would be harder to target ads if your site has more people. It’s still easy for Facebook to differentiate between the college students and non-college students on its site… simply having more people doesn’t limit their ability to target certain demographics.

    Comment by courtlandallen -

  10. It is not a difficult question. Its about generating PROFIT. Facebook relies on advertising dollars to make a profit. The greater the total number of potential buyers, as well as the broader demographic ranges covered will generate significantly more revenue, than paid adds targeted to one strict demographic. The infrastructure and product was already developed, it was just time to get it in as many hands as possible. Their growth has declined in certain areas, but overall growth is still increasing.

    Comment by techrip -

  11. @Herschel – I just read your comment, that is a great idea for facebook. I have always thought that that is the only way twitter will be able to make money, by charging companies for analytical info about the tweets they issue. Only thing is, the whole fan system needs to be reworked so that in can provide a more useful promotion vehicle for the actists, I think that feature is kinda lame now, myspace has a better feature for that imo.

    Comment by M.Wanzer -

  12. I think facebook should have continued to focus on the market the were serving initially. Part of what made facebook so great, opposed to myspace, was that it was a walled garden, it was exclusive, that exclusivity drove up demand for facebook at universities all accross the world. To piggy back on what markcaseyonline said, facebook never really mastered making money when they were the managing the walled garden, did they think it would be easier when it let the whole world in?

    When you really think about it, the domain of college students is pretty huge in itself, and you have a clear target audience of people that are somewhat college educated (I say somewhat because everyone does not graduate), and you have tons of info about them such as major etc, I tend to think they could have made a great deal of money propperly serving that niche through numerous services that college students need.

    Granted some of the commenters on here are right, that more users can generate more VC and more opportunity to make money, but all of those users comes with a high price, and I feel that they are only paying that price through artifical money (VC, Major Investors, etc), what happens if all these investors start to decide hey, this Billion dollar valuation is phony, you get no more money from me, then what? Can they really support themselves based on the money they make on their own? I mean their user data is worth a lot, but everytime they try to make changes to their privacy policy, the whole community gets up in arms. Sad thing is that they still had a lot of room for financial growth in the initial market.

    Now facebook is just like myspace with a sligtly less cluttered look. I definitely think they should have focused on making money with their initial target audience rather than trying to reach the whole world.

    Comment by M.Wanzer -

  13. Obviously there are two ways to look at social media, which stands independent of other websites in that they disregard appealing to a particular niche in exchange for appealing to as broad a userbase as possible.

    The first way to view it is as a standard website — Facebook could fast-grow, and then try to sell ads based on demographic information and a fairly weak targeting system, and they have done exactly that. This fast growth will always produce better returns for initial investors because the difference between Facebook now and Facebook 4 years ago is vast.

    But as a solid growth strategy, and therefore long-term return strategy, it’s flawed. Why wouldn’t advertisers simply choose to purchase Google ads and present themselves to the hundreds of millions using the whole internet rather than the hundreds of millions using Facebook? They can and they do. It has better keyword targeting and niche advertising capabilities.

    So, to echo an earlier comment, Facebook needed to monetize what was at the time a highly lucrative community — college students — when it had the chance. It didn’t, and now they’re finding it much harder to get a handle on 200+mm random people.

    This is the second (better) way to look at potential social websites — as you would radio stations or TV networks. These people provide “Free” advertising-based content to niches. Sure, American Idol is a money making machine, but it’s much easier to make money and earn stability with a targeted show with a predictable demographic — MTV Reality shows, for example, or affluence-based 30 Rock — than it is to create a Idol-style mega-hit.

    Facebook has created a mega-hit, and it will be profitable due to sheer volume. But for the start-ups, copycats, and BlackSwans in its wake, they would do well do focus on the predictable rather than the massive.

    Comment by markcaseyonline -

  14. Mark, if you owned facebook what would you do differently?

    Comment by starwinar -

  15. Did anyone really think Free could last so long? With the number of people who have been calling themselves “internet marketing consultants” over the last few years, everyone has gotten wise to the Twitter, Facebook Linkedin barrage… Now it’s just the new junk mail…

    http://whowhatwherewheny.wordpress.com/2009/06/16/youtube-going-broke/

    Comment by Devin -

  16. @Herschel: note that the first commercial radio stations appeared in 1920, providing free content (initially to make purchase of radio sets more attractive, but with an advertising model in place by the mid-1920’s). I’m sure there are other examples of “free” before that. Certainly a lot of people made a lot of money from “free” in the broadcasting industry over the last 90 years.

    But I thought this post was about “when do you settle for good-enough returns to maximize ROI for early investors, and when do you swing for the fences with an eye towards maximizing NPV of future cash flows?”, not the inevitable problems people have understanding the relationship between marginal cost and incorporating free into a business model.

    Comment by Brooks Talley -

  17. I’m still convinced that the way sites like Facebook and Twitter can make good revenue is to create a powerful toolset for businesses to use to market to those consumer users of the site. Granted, Facebook does have their advertising platform, but they also have a very crippled “fan page” system that doesn’t do much at all to help businesses better represent themselves on the site. Imagine being able to pay a monthly fee (maybe per fan bracket?) that allows you to demographically target your fans in any network no matter where you are? That’s powerful.

    Businesses will pay, consumers won’t.

    Comment by ddemchuk -

  18. I guess free is good if you can make it work for you for a while.

    But, I think, after a while, the fad will pass and people will realize that “someone has to grow the tomatoes” and that ain’t free.

    I think there’s always been a “free” come-on from retailers. The thing with the Internet and digital products is that the real product that makes money takes a good bit longer to get to in the customer-vendor purchasing cycle.

    Gene Roddenberry thought of free 50 years ago. The luxury of a science fiction writer is that he never really had to explain the dirty details of implementation.

    Comment by Herschel -

  19. In brief, FB should have focused on the .edu group until they figured out how to monetize in a meaningful way, and then scaled in a more calculated manner.

    Comment by mjsenno -

  20. Timely post Mark, latest news: youth flight from FB: http://www.readwriteweb.com/archives/facebooks_own_estimates_show_youth_flight_from_sit.php

    Clearly a case of trying to be all things to all people not working.

    Comment by chetanchawla -

  21. Percent return for a few investors? Staying small, of course. It’s likely they could have parlayed small (say, $1000) investments into good returns (say, $10000).

    Dollar return across all investors, though? Let’s say aggregate capital contribution is about $1B through 2010, and the company is profitable after that, with ROE in the 10% range. Yes, it’s a huge assumption, but let’s still work the math.

    Scenario 1: You invest $1000 for 1% of Facebook in 2004. They decline to grow very much and pay dividends instead, netting you a total of $10k by 2008, when someone who was growth-focused comes along and annihilates them. You turned $1k into $9k over four years, for an IRR of 200%, or an NPV at the time of investment of $5500, assuming 12% risk adjusted rate (very very low)

    Scenario 2: You invest $1000 for 1% Facebook in 2004. They pursue the path they have now, with total investment of $1B and an approximate valuation of $4B in 2008. Your 1% would have been worth $40m undiluted in 2008, but of course that’s unrealistic. How diluted would you have to be to be in the same boat as scenario 1? You’d have to be down to 0.00023% ownership, or to have been diluted at 444,000:1. That’s fairly unlikely.

    Of course, part of the problem here is the illiquid nature of private companies — what if you really needed that $9k in 2008, and thought a 9x return across 4 years was good enough?

    But rather than arguing that market-dominating companies should forgo growth, I think the answer is those private equity exchanges that are springing up. Especially in social media, where being #3 is awful, and being #5 means you’re out of business, I don’t think I’d argue against growth.

    But, suppose you’re right? Would you argue the same thing for Microsoft? Should they have settled for MS-DOS and the returns it produced, which were substantial? Or is there something special about service businesses, or internet businesses? Should Google have pursued a slow-growth strategy?

    From MC> All good points except you dont take into account the continuing need for capital to push growth in an ever expanding free model. You need more servers, and you need to upgrade the servers you already have, add people, add services, the more users you need , the more you spend. The more users you get, the more you spend. MicroSoft on the otherhand has been getting paid for Dos/Windows since the 1970s, so they can continue to invest their profits rather than raising money. And dont forget, MicroSoft paid a 30Billion or so dividend to shareholders a few years back.

    Comment by Brooks Talley -

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