It’s Time to Pay Attention to Facebook

Considering how big and successful Facebook is, it gets surprisingly little respect in Silicon Valley. Although everyone acknowledges the company’s size, it’s usually viewed either with hostility (among the small but intensely vocal group that cares deeply about privacy) or mild indifference (by everyone else). It’s not usually seen as a leader capable of changing markets, let alone driving the cutting edge of anything. The widespread dismay over Facebook’s purchase of 3D goggle maker Oculus VR was a great example of this attitude: the company’s not viewed as a good home for innovation.

So I was very interested when Facebook laid out a strategy for mobile last week that is not just adequate, but actually sounds quite smart, and could potentially make a big difference in the mobile industry. Of course the success of any strategy depends on how well it’s implemented; the history of the Valley is littered with cool-sounding strategies that failed or were never seriously tried (link). But if Facebook’s actions match its words I think it could change the competitive dynamic in the mobile industry, and in the process make life a lot better for independent app developers.

Facebook’s problem

The mobile tech world is dominated by proprietary platforms. Apple and Google both run controlled ecosystems in which they decide the key features and reserve the right to remove other companies from the field of play. Apple is a bit more controlling than Google, but they both manipulate their platforms to maximize their profits and prevent other companies from becoming too powerful.

This is nothing new in computing history. On personal computers, Windows and Macintosh are both proprietary platforms. In fact, one of the few recent examples of a huge open platform in tech is the web. No single entity controls the features of the web or who can play on it. This helped produce a host of big web companies, like Google and Facebook and Amazon, and a wide array of customer choice. The downside has been poorly coordinated user experiences, and platform innovation that moves at a glacial pace because it has to go through standards committees.

The proprietary mobile platforms have been great for users and developers in many ways. Apple and Google push each other to add new features and device categories, and the app stores on both platforms have led to an explosion of third party software. However, there’s a downside, especially for developers. They have to spend heavily to adapt their products to iOS and Android. Their apps are commoditized by the structure of the app stores. Apple and Google both take an excessive cut of the revenue the apps do get. And if an app category starts to become too popular, there’s a very good chance that Apple or Google will build it into the platform and crush the third parties.

As a result, the app economy in mobile is far smaller and weaker than the web economy on the desktop. To a big web company like Facebook, that’s very threatening. Facebook’s business on the web depends on it being the hub of your social interaction, which it analyzes to target advertising customized for your interests. On mobile, Google is working hard to build its own social features into Android, and the whole idea of a single social hub is threatened as social features are built into a wide range of mobile apps. Although Facebook’s latest apps on mobile have been far more successful than its first efforts, it’s still at risk of being walled off by the platform vendors on one side while it is nibbled to death by a hoard of developers on the other side.

So the question for Facebook is what its fundamental role will be in mobile. Can it find new ways to capture social information for use in ads? Can it create standards that give it a stable power base against the platform companies? And can it find a way to leverage the swarming strength of the little app companies?

The Facebook Platform

At the F8 developer conference last week, the company announced a series of new services and APIs for mobile developers that could give it a much deeper role in the mobile app ecosystem. The announcements included:

The Audience Network, an ad network that’s supposed to let developers tap into Facebook’s mobile advertising revenue stream. App developers are hungry for revenue, so this could be very important if it works. I’ll come back to this below.

–An API called AppLinks that makes it easy for mobile apps to pass commands and data between each other, and to and from web servers. I’m still learning all the API can do, but I think it has the potential to let mobile apps work together in a variety of creative ways. As some others have pointed out, it also lets Facebook’s mobile apps integrate more seamlessly with other social sharing apps, potentially positioning Facebook as a hub for mobile social activity (link).

–A mobile Like button that developers can easily integrate into their apps. This will help developers publicize their apps, but it also gives Facebook data on what sort of apps you use. That can be mined to target advertising (are you seeing a pattern here?).
Hosted developer services, under the brand name Parse, that help developers store data, compute, and process notifications in the cloud. Parse offered those services before, but the free tier has been expanded, in some cases by as much as 70x. It would be great for developers if Facebook set off a wave of price competition among back-end service companies.

–A promise of API stability, which would make developers more willing to invest in Facebook technologies.

Expanded user controls over the information that is shared when someone uses Facebook Login. This may reduce the number one fear that users have of Facebook Login: fear that the app will post unwanted messages on your behalf.

–A big, no-obligations offer of free services for small developers, with free ad credits and other services from Facebook plus other services from several third party companies. (Full disclosure: one of those free offers is from UserTesting, where I am the mobile strategy guy.) If you’re a small developer I think you’d be foolish not to take advantage of it. To learn more, go here.
The overall message was developer love from Facebook. As Mark Zuckerberg put it, “my goal for our culture over the next ten years is to build a culture of loving the people we serve....We want to build a platform that's reliable for you.” (link)

Will it work?

Taken as a whole, the announcements are a coordinated effort to make mobile developers more successful, and at the same time give Facebook a much more central role in mobile computing. But that’s just a story at this point. I’ve seen many great tech strategies fail utterly in implementation. What matters is the details of how Facebook will pursue its plans, and how hard it will try to make them work. Here are four key issues to watch:

How well will the Audience Network work? Facebook claims that its mobile advertising is double the effectiveness of other mobile advertising. Basically, Facebook knows you better than anyone else, so it can target ads more precisely, making advertisers pay more money for them. The new Audience Network will let third party developers place those targeted ads in their own applications. So if a Facebook member uses an app that’s in the Audience Network, he or she will see Facebook-selected ads in that app. Developers can also customize the look of ads to match their applications, making the ads less jarring for their users.

In the desktop world, many websites and web apps succeeded because there was enough advertising money available to support software and content companies. That hasn’t generally been the case for mobile, because the payments per mobile ad are low and because overall spending on mobile advertising has been depressed. If Facebook can change that dynamic – a huge if – it might change the economics of mobile apps fundamentally.

I cannot overstate how important that would be for mobile developers. Today they struggle with commoditization in the app store, and freemium pricing policies that too often feel like bait-and-switch schemes. A stable, substantial advertising revenue base could change everything. But it depends on many unknowns: Can Facebook convince advertisers to pour more of their ad budgets into mobile? Will the targeting work? And most importantly, how much of that ad revenue will Facebook share with developers? Facebook wouldn’t answer that question at F8, so I can’t tell if the Audience Network is a potential breakthrough or a tease.

Will Facebook stay committed?  Facebook’s execs said all the right things about supporting developers – we’ll maintain our APIs, help you grow your business, meet with you regularly, and so on. It’s everything a developer could wish for: a big powerful company that’s agnostic about OS and wants third party developers to thrive.

It all sounds great, but hearing Facebook talk about developer commitment is a bit like hearing a French president swear loyalty to his wife. Facebook embraced developers once before, when it encouraged them to build games and other apps on top of its desktop platform. The resulting surge in Facebook apps helped to crush MySpace. But once that battle was over, Facebook gradually lost interest in developers. The company didn’t even hold developer conferences in 2012 and 2013.

So it’s reasonable to ask: Is Facebook committed to the long term this time, or is this a tactical maneuver that’ll end as soon as Facebook is more established in mobile? I think in this case Facebook’s long-term interests are more closely aligned with developers. But does Facebook itself understand that?

Will Facebook become a predator in apps? Microsoft once had an incredibly vibrant third party app economy on Windows. But in its drive for revenue growth, the company eventually turned predator, trying to take over almost every major app category: graphics, antivirus, accounting, etc. That strangled application investment on Windows, and drove developers into the web. In many ways, you can trace the decline of Windows to the time when Microsoft turned against its own developers.

Here’s Mark Zuckerberg on his attitude toward developers, in a conversation with Wired:

“We’ve always believed that there were going be a lot of different ways to share content, and that we were never going to build all of them ourselves. We try to build the most important ones. But on top of that, you’re going to see dozens of other apps that developers build that each use the Facebook login, Facebook to share, the mobile “like” button, push notification from Parse, app installs through Facebook, and Facebook monetization tools in order to turn their apps into businesses.”

I would feel so much better if he’d said “hundreds of thousands” of developers instead of “dozens.” But maybe he doesn’t want to sound threatening to Apple. Which brings me to the fourth issue:

Can Facebook walk the tightrope with Apple? Google and Facebook are mortal enemies. The Facebook Audience Network reinforces that; both companies want to be the dominant ad supplier on mobile, and only one can win. But Facebook’s position relative to Apple is much more ambiguous. Today Apple is willing to cooperate with Facebook, allowing it to operate more or less freely on iOS, and partnering with it when appropriate. Mostly the two companies stay out of each-others’ way. With Facebook now advocating cross-platform APIs and positioning itself as a powerful hub for mobile advertising, will Apple continue to take a benign view of the company, or will it start to systematically restrain Facebook on iOS? If that happens, it’ll be much harder for Facebook to establish standards. To use a military analogy, Facebook really shouldn’t get itself into a two-front war. It needs Apple as an ally, or at least a neutral.

I think there’s a good case for Facebook and Apple to work together against Google, but that would require both companies to restrain their egos. That’s not easy to do in Silicon Valley. Mark Zuckerberg’s next big test may be his diplomatic skills.

The bottom line: Will Facebook be a facilitator or a predator in mobile?
What is Facebook’s vision for its long-term role in mobile? Does it want to be like Amazon Web  Services, facilitating a robust ecosystem with lots of apps, and taking a small revenue cut from many of them; or does it favor the Windows model, in which it treats developers like a field of vegetables, to be harvested as soon as they start to ripen? We can’t tell today, and Facebook itself may not know yet. So it’s too early to judge what Facebook’s new strategy will mean for the industry. But I think one thing is clear: what Facebook’s doing in mobile is important, and it could change the rules. The company can’t be ignored.


Rob said...

Somewhat off your main topic - but I have to argue with your statement that 'Apple and Google both take an excessive cut of the revenue the apps do get.'

You can compare the revenue share that stores took on Palm OS (mostly 40%-60%). (Palm's own store launched with a 50% revenue cut).

Or just look at the cost of any payment-only solution; Paypal takes a little over $0.30 per transaction. I'm guessing that most app sales are $1, so that's equivalent.

Apple and Google offer _Much_ more value than the old Palm stores, or the payment processors. They provide a smooth payment/install process, a clean functional store, and a fabulously successful job of convincing users to browse the store and download/install stuff.

Apple doesn't expose itself to competition - but Google does. Developers could easily roll their own paypal-based stores, or set up a competing cheaper store (perhaps with a lower percentage for higher-priced apps), but I don't know of any cases where that has happened. I think that speaks to the reasonableness of google/apple pricing.

If Palm had created a slick store which got 80% of Treo users downloading apps (without needing to get a zip file, unzip, drag to hotsync, connect over usb and sync, then enter a hotsync-id-based regcode), then Palm OS might have done rather better out of apps!

Michael Mace said...

Good comment, Rob! Thanks for posting.

>>You can compare the revenue share that stores took on Palm OS (mostly 40%-60%). (Palm's own store launched with a 50% revenue cut).

Those revenue cuts were ridiculous, and incredibly short-sighted by the companies involved.

>>Or just look at the cost of any payment-only solution; Paypal takes a little over $0.30 per transaction. I'm guessing that most app sales are $1, so that's equivalent.

Yeah, but do you think Apple or Google has to pay that sort of cut for processing transactions? They get huge volume discounts, and ought to pass some of them along.

>>Apple and Google offer _Much_ more value than the old Palm stores, or the payment processors.

True, the right comparison is to look at them versus retail storefronts in consumer electronics. Those stores typically charge a 15%-20% markup -- and they have inventory costs, store overhead, shipping, etc. The app stores are vastly more efficient; they can’t justify a markup 50% higher than retail. It’s just greedy.

>>Developers could easily roll their own paypal-based stores, or set up a competing cheaper store

Yes, but how do you get that store bundled on device? The Google and Apple stores are more or less monopolies, and they charge accordingly.

>> If Palm had created a slick store ...

Several of us tried at PalmSource. We tried really, really hard. But the project died because none of the licensees thought it was important. A great example of why you don’t let hardware licensees set the direction of a software platform. But that’s a subject for a different post...

Anonymous said...

Makes sense that Apple will tax the ad companies, as it will all wealth related agencies such as banks and credit vendors. As it will all health related agencies such as medical and fitness vendors. Why?

They will all require a superp crypto engine to secure critical info, crypto that is embedded in hardware, software, and firmware.

Apple has it; Samsung does not.

Chan said...

I am spell-bound!

Thee are so much stakes in it. Remember Mark remembers that Steve told him not to sell off, if he listned to it as it seems, I have fancy dream that he (Mark) will win this round of his diplomatic skills, not sure how much he is close to the Tim, or may be Jony. I think that is more than a affection than for Google guys.

Ahain the collage guys may still be closer. But their business do not. So there is a huge chance Apple may allow the famous guy in the vally a little bit of bargaining power to have.

FB was struggling years to make money and suddenly it has found a super way to momentize their user base with App Install Ads, it pretty effective for me, so is for the most guys I think.

I think Ben have mentioned we are in a pre-page rank in AppStores, and if AppLinks get off ground I think we will get pass that soon in App discovery, FB user data will catapol this

I am really spell-bound Mace!

Elia said...

I always love your analysis but I think you missed the biggest elephant in the room: trust.

No developer trusts Facebook and because of that Facebook's strategies are likely to fail. An example of that is their privacy policy change to Moves, announced today. There are too many cases of Facebook screwing their customers and screwing their "partners" to go back now.

I would work with Facebook as long as I don't have to trust them, meaning an arm's length advertising deal, for instance. But any deeper relationship, including trusting them to manage linking or do right by my customers? Forget it.

Michael Mace said...

Thanks, Elia, and I can't argue with you.

The advertising relationship may turn out to be the one Facebook cares about the most.

By the way, is there any big mobile platform player you do feel you can trust? I have an awful feeling you're going to say Microsoft.

Chan said...

@ Elia,

Interesting... but I guess FB is getting better on this lately, giving us more privacy settings like options..

As Mace mentioned no one has solid rapo either..

Ali Khoshgozaran said...

Great read Michael! Really enjoyed your insight.

Tatil said...

> "[...] retail storefronts in consumer electronics. Those stores typically charge a 15%-20% markup."

Are you sure about that? If you have a must-have item, such as Xbox or iPod, maybe you can talk them down, but when we were thinking about making gadgets we were told to count on 100% retail markup. (I guess that includes the distributors margin as well.) It makes sense, otherwise retailers could not possibly offer 30% off sales during long weekends and holidays or pay for their store expenses.

How about development tools? If your company wants to develop for the web, you have to pay for pricey software, such as Adobe's suite. For AppStores, platform developers offer very extensive toolsets for free and some technical support.

Hosting, load balancing and bandwidth? Customer service for refunds? Credit card fees?

Throwing around adjectives such as "excessive" when the cut is much lower than the options before hurts credibility. (e.g. Amazon used to charge 70% for periodicals for the Kindle before iPad.)

Tatil said...

> I think there’s a good case for Facebook and Apple
> to work together against Google, but that would
> require both companies to restrain their egos.

Ain't this a bit simplistic? Egos? Cross platform development encourages every app to support the lowest common denominator among all the OS and hardware options. For a company trying to differentiate itself with the quality of its OS and apps on its platform and deliberately limiting most of its services and ecosystem benefits to owners of its high margin hardware, partnering with the company who is trying to commoditize the OS would be quite dumb. This is like arguing that MS did not cooperate with Netscape only because of Gates' ego, rather than Netscape striving to make the browser the new OS.

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Eliaz Beth said...

The widespread dismay over Facebook’s purchase of 3D goggle maker Oculus VR was a great example of this attitude: the company’s not viewed as a good home for innovation. App developers in UK