Will Facebook Start Investing More in Its Own Apps Again?

[Editor’s Note: The following article is from Inside Facebook Gold, our new data and analysis membership service tracking Facebook’s business and growth. In addition to monthly data updates, Inside Facebook Gold presents weekly in-depth analysis articles exploring the most critical developments impacting the future of the Facebook ecosystem. Click here to learn more.]

Over the course of the past three years, we’ve seen a tremendous amount of innovation on the Facebook Platform. Thousands of new applications are built every year, and many of them have grown into successful, and in several cases, quite large, businesses. Lately, the vast majority of those are social game developers.

But is this what Facebook envisioned when it launched the Platform three years ago – and is it even what it really wants now? As Facebook crosses $1 billion in revenues this year, the role the Platform plays in revenue generation is increasingly coming into the limelight. Is Credits, Facebook’s universal virtual currency, going to be the primary vehicle through which Facebook generates revenues on the Platform? What is Facebook’s ultimate vision for how Platform fits into what it’s building?

A Peek Into Facebook’s Platform Vision: fbFund Winners

Facebook has always used broad language to describe its vision for the Facebook Platform and Connect: Facebook wants to make a variety of online experiences more social, from travel to education to games to enterprise software.

As such, two years ago Facebook created the “fbFund,” a seed-stage grant program (in year one) that became an investment incubator (in year two) designed to cultivate startups building rich social applications congruent with Facebook’s vision. Looking at the types of things fbFund chose to fund and incubate gives you a sense of the diversity of applications Facebook hopes will thrive in the long run on the Facebook Platform:

  • Commerce (RentMineOnline, RunMyErrand, Workstir)
  • Communication Tools (GroupCard, NutshellMail, Plancast)
  • Content/Media Discovery (Navify, Photos I Like, Sortuv)
  • Dating (Thread)
  • Faith (MyChurch)
  • Fashion (Weardrobe)
  • Games (HitGrab, Funji, Gameyola, Paradise Paintball)
  • Health and Fitness (RunThere)
  • Marketing Services (Wildfire)
  • Non-Profit (Samasource, Vittana)
  • Publishing (Networked Blogs)
  • Security (Life360)
  • Travel (TravelBrain)
  • Wedding (Weddingbook)

This list represents a diversity of web apps that Facebook hopes access to the social graph can fundamentally improve versus existing solutions. While Facebook has only built core applications (like Photos and Events) itself, it’s relying on the developer community to build the apps that fulfill this vision by building sustainable businesses in many of these areas.

What Have Other Investors Funded?

Although fbFund has been active in seeding a diverse group of startups that hope to leverage the Facebook Platform and the social graph to improve upon existing consumer web apps in a variety of industries, other investors have been putting the lion’s share of their bets on games.

For example, here are a few notable venture investments from around the fourth quarter of 2009:

Sources: Inside Facebook and Inside Social Games

While LivingSocial and Thread are examples of companies building on Platform/Connect outside the games category that received funding in the fourth quarter, and there have been a variety of other angel investments in Facebook-related companies, no other category comes close to matching the overall amount of investment that games and the games ecosystem has seen. (The most notable other category to note is the enterprise marketing tools companies, like Buddy Media, Context Optional, Wildfire, and Involver, who are helping brands build an integrated Facebook presence. This is becoming an increasingly competitive area as more companies enter the space.)

And that leaves us with two questions: 1) Who’s going to build everything besides games? And 2) What will become of fbFund?

If Investors Are Funding Social Gaming, Who’s Going to Build Everything Else?

Since the Facebook Platform launched three years ago, social games monetizing through virtual goods have proven to be the hottest area by far. As a result, we’re seeing a lot of traditional gaming companies getting increasingly interested in deploying their own services on Facebook, as well as generally increasing investment activity in the social gaming space.

But what about everything else? Facebook has always hoped that there would be a broad set of products and companies with business traction on the Platform, but given that investor interest in games is overshadowing most other areas, it may be time for Facebook itself to step back in.

Although Facebook doesn’t develop many of its own applications, it does still manage a few key ones, including Photos, Events, Groups, and Video. The importance of Photos can not be underestimated, as Facebook has become the largest photo sharing site in the world by far, and photos have become a key content type that strengthens Facebook’s socially-reinforced identity (when friends tag each other). As such, Photos is in some ways a “one-off” app, yet at the same time a gargantuan one-off that has become near and dear to Facebook’s core.

Facebook is working on improving its set of core applications this year. But what about health, finance, and travel? Aren’t these areas that are very important to e-commerce in general, that should be pretty ripe for social improvement but are progressing comparatively slowly? Might Facebook jump back into the game and build more applications itself – or at least provide a more customized set of services to developers in those traditionally well-monetizing verticals – to accelerate the development of the ecosystem? And what about education – a vertical in which Facebook used to operate its own application itself, but has since left to third parties?

What Will Become of fbFund?

The second question recent investment patterns bring up is what exactly will become of fbFund. In 2008, fbFund made five $250,000 grants to startups (GroupCard, Kontagent, HitGrab, Weddingbook, and Wildfire). It broadened that to 20 smaller investments in 2009, coupled with an incubator program run by angel investor Dave McClure.

Given all the investment interest in games, could fbFund become an incubator purely for social game developers? Possibly, but we doubt it. Given that there appears to be a broader charter for fbFund, that’s unlikely.

We haven’t heard anything about what will happen in 2010 yet, and we think it’s possible Facebook could actually hold off on further fbFund investments until the investment landscape becomes clearer. Regardless, Facebook is increasingly relying on its Platform and Connect marketing teams to coach third parties on how to integrate Platform and Connect into their Pages, websites, and other devices.

Microsoft is to Office as Facebook is to… What?

Although Microsoft makes a killing off of its operating system platforms, its Office productivity applications business actually generates more profits than any other segment of the company. While Facebook has established a strong advertising business based on its core social graph, it’s not year clear what Facebook’s “Office-like” applications business is going to be, if any.

In terms of how the Platform is contributing to Facebook revenues, the social games explosion presents a clear opportunity for Facebook to participate: by creating Facebook Credits, Facebook has the chance to facilitate virtual goods purchases inside Facebook apps and take a significant cut of the revenues (30%). From what we hear, Facebook is pretty pleased with how this is going so far.

But based on the way Facebook’s leadership thinks, we doubt Facebook will be satisfied with just taxing game developers and calling it a day. While we think Credits will become an increasingly important revenue stream for the company, we think it’s also in Facebook’s DNA to want to build stronger business models around more of its core services.

What could those applications be? Photos and Events are possible candidates, but the business model around either is not clear at the scale Facebook would need to make a meaningful impact. (There was a rumor recently that Facebook would outsource Events ticketing to Eventbrite, but we’d be pretty surprised if they decided to give this business to a partner.) It’s possible that we could see some new offering from Facebook in “high value” verticals like health, travel, or finance, but those would be entirely new exercises. Location, a new area that Facebook will be adding more support for soon, could also produce new opportunities for monetization.

Of course, Facebook could simply expand its advertising and payments platform to any partner that has implemented Facebook Connect. In this scenario, Facebook would try to spread its monetization tentacles further throughout the web by building on the core value proposition Facebook Connect provides – identity and content distribution – and adding revenue generating services on top.

However, we think that both adding social ads and Facebook Credits to Connect sites, or attempting to monetize Photos or Events through relatively traditional e-commerce product lines, will take a while for Facebook to build up into meaningful revenue streams over time – at least two years.

As Facebook is crossing $1 billion in revenues this year, it’s getting more questions about the role the Platform plays in revenue generation. We wouldn’t be surprised to see new experiments like these coming over the next several months. Developers operating in those verticals should take note – and media companies trying to figure out their relationship to the Facebook Platform, both in terms of social games and traditional content distribution, should always be keeping in mind Facebook’s overarching long term goals.

This article is from Inside Facebook Gold, our new data and analysis membership service tracking Facebook’s business and growth. In addition to monthly data updates, Inside Facebook Gold presents weekly in-depth analysis articles exploring the most critical developments impacting the future of the Facebook ecosystem. Click here to learn more.

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