Jonno [10.25.07 02:36 PM]

Nat, do you own google shares?

  Mark [10.25.07 02:46 PM]

Nat,
I couldn't agree with you more! This fad is going to implode back to reality. Do not get me wrong. They have a lot to offer, but they just are not the answer all. The nitche market is going to eat away at them as time goes on. Add in the future of truly open sites and having the ability to have various social sites communicating with each other and that will eat into number of users as well.

  Dan [10.25.07 03:32 PM]

'how do you find the useful and interesting apps in the ocean of zombie dross that has already emerged?'
Right on! I keep saying Facebook needs a good spreadsheet app, but people keep looking at me like I'm some sort of geek or something.

  LivePaola [10.25.07 03:42 PM]

So where's the "Kremlinology" promised in the title? I was expecting a post on obscure shifts in the power balance within Facebook, infighting among the top management team, fratricidal feuds among employees, back-stabbing in the cubicles, leaked internal communications memos.
Well, thanks for the business analysis anyway.

  John Minnihan [10.25.07 04:40 PM]

I'm scratching my head on the valuation too. Without ads, what exactly is driving revenue at fb? Anything at all?

What happens if/when the ad networks determine that click-through (or rather pay-per-action) is not what was expected? The whole thing will suddenly look like what it really is: a glorified address book.

The more I think about this, the most rational scenario I can envision is one where Google has played fb against Microsoft. Microsoft is having a serious mid-life crisis, and in an effort to remain relevant has made some bold moves over the past few years.

No doubt Xbox & Halo were smart moves. Will this one be looked upon as favorably when it is sufficiently in the rear-view mirror?

I think it won't.

  David [10.25.07 04:41 PM]

I think there is room for both niche social networks and a "mass market" social network on the web. The question is how you define utility on the part of the consumer - do you derive some sort of intangible, emotional benefit from your favorite social network, do you obtain practical information from it, or perhaps both?

Part of the value that I think that the consumer perceives in Facebook is its appeal to your narcissism. There is a powerful attention- and affirmation-seeking dimension to many of Facebook's features (the news feeds, link sharing/commenting, posting photos, etc) that I don't think should be overlooked. Similarly, other related factors (some of which are quantifiable, others of which are not) may affect the perceived social status of the "friend" within the network. Of course, certain behavior might improve/damage one's social standing... As the size of the network grows, I would think that these effects would become more powerful, because as your individual "reach" increases, the ability to assert status within the group is amplified. A more focused/niche social network might have a more limited effect in this area.

Furthermore, on Facebook IMO there's a feeling of inclusion and of being connected to other people that isn't present on other platforms.

This is not to say that Facebook is invincible, far from it because anyone could borrow these features and adapt them for their own uses, although the size of Facebook's user base and the connected-ness of its social networks might act as a barrier to entry. But I think that any analysis of Facebook's value needs to address the intangible factors that affect its users, many of which might have very significant implications for advertisers, who would probably rush to associate themselves with something that might promote narcissistic thought and behavior.

  gnat [10.25.07 06:51 PM]

@Jonno - Alas, I have no Google stock.

@LivePaola - good point. I should lexically analyse Zuckerberg's press releases for signs of dementia, monomania, or multiple personality disorder. Now THAT would be a post!

@David - you missed a perfect opportunity to use the phrase "narcissistic praise junkies" :-)

  Christine [10.25.07 10:29 PM]

The valuation is giant and MSFTs choice to invest curious. We may all agree there, but now let's look at the numbers:

100,000 new users EVERY DAY sign up for facebook and that is with:
-little to no mainstream advertising
-largely word of mouth / friend invite/ media buzz growth

50% of users visit every day

Think about that. if you have ever run a social web product of any kind (old school community or even a more current 2.0 network) that is phenomenal usage/ loyalty given their scale.

People use facebook to keep up with friends and check out what other people are doing. It taps into very natural human behavior (voyeurism) as well as some generation Y tendencies (they are a.k.a. the reputation and recognition generation)

The facebook hype is all about possibility given the growth and loyalty.

I do not by any stretch think the valuation is reasonable, nor am I the type to blog every thought in my head (who cares!?) but, facebook is the one app ( or collection of apps) that I can honestly say has drawn in my most, and least, tech savvy friends. Its the google of social networks

  Ewan Gunn [10.26.07 01:43 AM]

Finally! Someone that isn't blinded by the nonsense that gets spouted all over the place about how be-all-and-end-all Facebook is. Just now I use it because I consider it the best of a bad bunch - like you said, the user experience is terrible (I can't customise very well the information that I see, I can't even provide my own CSS sheet for my page). And yes, I haven't found a single useful app amongst the nonsense out there - I don't doubt they exist, but completely swamped by the rubbish, even if the rubbish can be a mild distraction.

I'm just so glad someone can see through the hype and religious doctrine people are spouting about how wonderful Facebook is - is best of a bad bunch, and on the right lines, but it's not there yet.

  Mark [10.26.07 04:28 AM]

I agree with all your observations, but I think the role of innovation on the web is important to consider too... There's no reason at all why Facebook (or the Facebook platform, or OS, or whatever it turns into) will out-innovate everyone else, and there's no strong allegiance by those 41 million subscribers which might prevent them hopping onto the next hot idea.

Internet businesses need to be valued on much shorter lifespans than traditional businesses: they can grow fast, of course, but they can disappear fast too. Anyone remember Altavista?

  Mike Olson [10.26.07 07:20 AM]

Great post, Nat.

So far, all of the big social networking sites we've seen on the Web have been transient. Remember when LinkedIn was coming at you from all your friends' address books? If I were Microsoft -- hell, if I were Facebook -- I'd be huddled in the dark, sweating, wondering whether today was the day that the new flavor of the month came out. I just don't see any way to defend this space.

I don't believe in the platform plan. I don't think there's room enough for anyone to really make money, and so to invest in long-term, sustainable subscriber growth by recruitment, when Facebook owns the platform.

  Josh Patterson [10.26.07 10:15 AM]

I don't think this buy was ever about MS controlling facebook, it was about stemming google's influence by preventing them from getting into facebook. They essentially buy the advertising rights and lock google out for 240 million, and recoup most of that or more through advertising. Facebook gets to "make money" off the deal by finding someone to give them a ridiculous evaluation which then forces other entities to buy in at around that level. So they subverted their competitor's plans without significant capital outlay, essentially for their purposes "controlling" an asset for a fraction of its valuation.

  dave mcclure [10.31.07 09:18 AM]

Seriously gnat: i'm astonished at the elitism & ageism inherent in this post.

Ripping on Zombies & Facebook is like ripping on Halo & the Xbox -- *YOU* may not find them your cup of tea, but it's undeniable that millions of people are using those apps & platforms in ways that they enjoy. I'm reminded of all the Apple elitists in the 90's who ripped on Microsoft for being the evil empire -- meanwhile, they did a tremendous job delivering app development tools & platforms for the mainstream consumer audience, while Apple nursed along a Blake Commagere -- one of the authors of Zombies, Vampires, Werewolves, and also of the non-profit app Causes. Blake is one of the smartest developers i know, and his understanding of both viral distribution techniques, psychology of human behavior & user experience applied to social networking platforms is WAY more advanced than most people i've talked to. if anything, he's the solution to app clutter & poor user experience, not the problem.

While i will agree there is a big opportunity for Google to compete with Facebook as a social platform, i find it a bit hypocritical to position the GOOG as some kind of "open standards leader", after they've been as transparent as mud on putting the OpenSocial API together, and historically have done an absolutely terrible job on product education & platform evangelism.

I'm continually astonished at how many people choose to beat up on Facebook, a company of ~300 people, and vilify them for not being more open... meanwhile they've shown tremendous technical leadership & vision in building a platform & distribution mechanism that has CLEARLY demonstrated massive user adoption & benefit for developers.

I teach a class at Stanford on building Facebook apps, and in LESS THAN ONE WEEK one of our 3-person teams built a simple little app that attracted over 50,000 app installs and over 10,000 daily users -- i dare you to show me an example of ANYTHING even close to that level of user adoption in such a short period of time.

Can Facebook benefit from improved features & user experience? Of course. But seriously, the Facebook platform is about 6 months old, and they've been iterating furiously in that time period -- far faster than any of these other web platform juggernauts who've been stuck in their own bureacracy for the past few years.

whether or not they're worth $15B is surely up for debate. but what is certainly NOT up for debate is that a relatively small company with a few smart engineers have shown technology leadership and innovation that has arguably forced the biggest sea-change in how we think about computing on the internet in years... and the responses of Microsoft, Google, and others puts proof to that statement.

- dave mcclure
http://500hats.typepad.com