Why Facebook Opted for Platform Growth Over Platform Monetization in 2008

When the Facebook Platform launched in May 2007, many speculated on Facebook’s various opportunities for revenue generation on Platform. However, while there has been much talk of Facebook’s revenues throughout 2008, Facebook has focused the majority of its monetization efforts on direct advertising and virtual gifts sales. Why hasn’t Facebook focused more on Platform monetization?

Based on everything we’ve seen this year, Facebook has been primarily focused on growth. On Platform, that has meant 1) trying to find a sustainable balance between application developer and user interests, and 2) expanding the Platform’s reach through Facebook Connect. In the end, 2008 will be remembered as the year Facebook opted to build for the long term growth of the Platform instead of focusing on immediate Platform revenue opportunities.

Yesterday, there was a lot of discussion after we noted that Facebook has not launched the Platform payments system that was announced over one year ago. (The post was updated to clarify that Facebook has not made any new announcements regarding the future of the program; the payments system has just been apparently deprioritized while Facebook focuses on other initiatives.) In the comments of yesterday’s post, Dave McClure laid out an argument as to why Facebook’s delay in launching a payments system is “the biggest error in Facebook strategy & execution over the past 2 years.”

But is it? Here’s another take:

Let’s take a look at the current state of the transaction economy on the Facebook Platform. I’m not going to speculate on numbers here, but for the sake of argument, let’s consider the three widely varying cases that 2008 Platform transactions totaled a) $50 million, b) $150 million, and c) $250 million. Without going into too much detail, let’s quickly approximate that Facebook could net 5% of sales through an integrated payments solution.

At the end of the day, those fees might have added around a) $2.5 million, b) $7.5 million, or c) $12.5 million to Facebook’s top line, not accounting for the lift in transactions that would likely have arisen from a more frictionless payment option. Based on popular estimates of between $250-$300 million in Facebook’s 2008 revenues, a platform payment system could have reasonably boosted total revenues by 3-5+% this year.

Other Platform monetization possibilities (i.e. a Facebook-operated ad network) and operational costs aside, let’s compare the ballpark characteristics of that option to what Facebook decided to focus on in 2008 instead.

1) The first half of 2008 was focused on redesigning various elements of the Facebook Platform and profile, because Facebook was concerned that the user experience problems being created by some applications would negatively impact the health and viability of the Platform as a whole. While developer reactions to the changes were very mixed, Facebook’s overall virality and engagement metrics have continued to increase. And as for apps, many “widget-only” applications have experienced a big traffic decline since the profile redesign, but many social applications have continued to thrive. 50+ developers currently engage over 1 million people per month, while 400 applications currently reach over 100,000 people monthly.

2) The latter part of 2008 was focused on the launch of Facebook Connect, Facebook’s broader strategy to extend the Platform off Facebook.com (see our previous thoughts on Facebook Connect monetization). Unlike previous off-Facebook product launches, with Connect, Facebook took a much more deliberate approach toward explaining the value proposition of Facebook Connect to the market and working with early adopters to both ensure a good user experience and maximize ROI for Connect partners. As a result, dozens of sites have launched Facebook Connect implementations so far, and there have been no major privacy issues. Overall, Connect is off to a solid start.

Given that Facebook is likely fairly well positioned with cash on hand and (from what we hear) healthy sales going into the new year, there’s a pretty good argument that Facebook was right to prioritize focusing on longer term Platform growth over nearer term Platform monetization opportunities in 2008. Besides, it’s not as though current third party solutions like Paypal, Zong, and Spare Change aren’t working well. (And many developers are doing very well with offer networks like Offerpal and Super Rewards that offer a variety of third party payment options.)

In the end, Facebook is very likely to develop its own in house systems for monetizing the Platform at some point. However, Facebook has the luxury of taking a somewhat longer view toward the future of its business and does not need to prioritize efforts like platform payments in the immediate term. For now, Facebook seems to be focused on bigger strategic issues that will more significantly affect its revenue growth in the coming years.

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