Facebook Monetization Talk

Two GSB alums, Tim Kendall '06 and Megan Marks '07, met with us today to discuss monetization strategies at Facebook, as well as give general advice around joining startups. Tim has been with the company since it was an 80 person startup (now Facebook employees around 600 people).

First I would like to briefly discuss some advice he gave the group surrounding startups. The first is the importance of engineers; while it may not seem that important who the first engineer is that you work with to develop your site, if that person stays on then they (along with the founder) will drive the culture of the company. So don't make that decision to quickly.

Second, think about joining startups that are in the 50-100 employee stage with $50 MM in revenue. According to Andy Rachleff (who is a lecturer at the GSB), these companies have mitigated a significant amount of risk yet are still growing quickly enough that there is a lot of upside in joining them.

Now on to the Facebook specific conversation. Tim identified three areas that need to go right for Facebook to be "the franchise company of this decade." They are:

1. increase user base (currently around 70 m)
2. develop a better product
3. figure out how to make money

Not a ton of insight at the macro level here, but he did dig deeper into all of these areas. For the first, he discussed how growing internationally has been a huge focus, and that the app platform has actually made it very easy for the company to internationalize because the apps are being created by the local developers. Additionally, Megan mentioned that it has been easier to acquire older demographics outside the US because the Facebook brand is not associated with being a college website.

As for the second point, clearly the app platform was developed in part to address this issue as well, though some people argued that it might hinder the product given the clutter and confusion surrounding the multitude of applications out there. Additionally, Tim talked about how reducing latency is a major goal for Facebook, and that they have observed a huge increase in engagement for only very small (millisecond) improvements in latency. Finally, one area where there has been a lot of innovation that I was unaware about is the algorithm behind the News feed. It actually looks at your social map and interactions between your friends to predict what info you are most interested in receiving. Therefore, even as you add more friends, your news feed shouldn't change significantly over time. I am wondering how long it takes for the algorithm to learn, however, given that I am still receiving a lot of info about friends of mine that are only acquaintances at best outside of Facebook.

For the third point we talked about the growth of advertising revenue over the past 3 years; $10 MM in 2005, $50 MM in 2006, and $150 MM in 2007. This growth hasn't even come close to user growth, however, so there is still a lot of room for improvement (which goes without saying if they truly are valued at $15 billion!). So what are some of the creative ways that Facebook is starting to grow revenues? The most obvious is taking advantage of the social graph--a great predictor of the products and services you are interested in is your friends. A couple examples that Tim mentioned (one actual and one hypothetical) is from the Wall Street Journal and Amazon. Supposedly, you can actually go to the Wall Street journal and click on a link that says Most Read Articles and see what articles have been ready the most by your friends (in aggregate). A similar example could be a Barack Obama page on Amazon, where you are able to read only the reviews that your friends or network have written. Clearly there are a lot of privacy issues surrounding these ideas, but the monetization potential really can't be argued with.

Another monetization problem Facebook currently is suffering from is the revenue share with third party applications. Currently, third party apps drive a very large proportion of total pageviews throughout of the site. Yet, Facebook can only show ads on a very small portion of the app's page (the canvas area is reserved solely for the use of the app). Tim mentioned a very large BMW campaign that was launched last week by Federated Media (a third party app advertising agency), Microsoft (who has an agreement with Facebook to provide ads on the site), and Graffiti (popular third party app). The problem: Facebook saw exactly $0 in revenue from the campaign. What does Facebook do about this? Clearly it is a conflict of interest given that third party apps allow Facebook to accomplish 2 of the 3 goals mentioned above, yet hinder goal number 3. While we came up with some minor suggestions (sell more targeted ads for BMW, for example), we couldn't come up with a great answer in the short time we had today.