I was one of the panelists at the TiE event Opportunities in the Web 2.0 Ecosystem, and moderator John Cook asked whether a new startup ought to build their company around the new Facebook platform or choose to build their own platform and network effect.

For a while there (after May 2007, when the platform first launched), I kept getting questions from investor-type people asking me if I was going to build a facebook app — there seemed to be a lot of “enthusiasm”. We chose not to, for a variety of reasons. It’ll be tough to ever know whether that was a bad decision or not (it’s not like the opportunity is forever gone), and clearly there are many companies building their business around a facebook app.

But in my opnion, the value of a facebook app is as mere advertising and/or a feature, not as distribution, a standalone product or a business. Here’s why:

• When you’re offering a free service within another free service, it’s damn hard to arrive at a sustainable business model. The advertising revenue model with Facebook apps is still unproven.
• You don’t own your facebook app users, facebook does. Users/customers form the core value of a business, and you’re not going to have any unless you get a facebook user to register separately for your service.
• The biggest value to web 2.0 products, besides users, is the network effect — which is more valuable than the sum of all users. With facebook apps, you don’t own the network or any of the connections between the users, facebook does.
• Facebook is free to compete with your app, shut you down, etc. They are already doing so.

As a startup, a core value in your company centers around your distribution — your users. Jeremy Liew wrote a good post on how to value a social media company, and # of users is his first variable for good reason — assuming they’re YOUR users. I guess maybe I’m just old-fashioned and want to build my company earning my own users instead of someone else’s (who can be taken away from me within 24 hours). I just wouldn’t do a distribution deal unless it added tangible value to my core business.

Now there are times when a facebook app makes sense to me, such as:

• As a feature of your core product/service, which is offered across multiple channels. Any social media company is going to have a percentage of their users on facebook, so why not make it easy for them to use it within their fb community?
• Promoting your core product/service. Just as widgets ought to be viewed as advertisements promoting your company, a facebook app ought to be viewed the same.
• Optimizing your viral coefficient. Startups need to continually hone their messaging and features in order to improve their viral capacity. Doing this on a closed network can be very effective for ongoing iteration/testing.

The companies that focus on a core product/service, earning their own user base and network value, utilizing Facebook (or any other closed platform) as just one channel of promotion and testing will be in the best position to create real shareholder value. The companies that are defined by their Facebook app incur a greater risk that they end up creating no shareholder value at all.

Jordan Mitchell, the author of this post, is the CEO and Founder of Others Online, his 4th Internet startup. Others Online helps Web site publishers and networks better understand, target and monetize their audience through the use of proprietary affinity profiling software. Jordan blogs regularly and tweets even more!

Tags: facebook apps, online advertising, viral

This entry was posted on Tuesday, November 27th, 2007 at 11:31 am and is filed under Distribution. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.