Facebook and the end of the Web

This week Facebook released a barrage of announcements that reveal a stunning level of ambition.  You have to ask, are they really the next Google, but with evil?

I can’t speak to the question of evil, but I do have a mental benchmark for the next Google, and it isn’t simply about being the next giant tech company.  The next Google would have to create an entire sector of economic activity, keeping a dominant position worth many billions of dollars while also creating many billions of dollars of value for other companies.

Before Google, the commercial Web was motley mix of emerging media, with some interesting economic opportunities in portals, ecommerce and auction.  Google created and dominated search advertising, but the utility that search brought to the Web was a major driver in the overall economic growth of all advertising on the Web, including display advertising.  Today the entire commercial Web runs on advertising, and Google helped create many more billions of dollars than it captured for itself.

If Facebook merely becomes the world’s best ad network, they would not be the next Google.  They would simply be the biggest winner in the economy that Google helped create.  They could even suck all the oxygen out of Google’s room and thereby kill Google, but that wouldn’t make them the next Google any more than John Wilkes Booth was the next Abraham Lincoln.

I think Facebook’s ambitions go far beyond advertising.  I’ve got no crystal ball showing the future, but the analogue from the past that seems relevant to me is television.  TV was once a wondrous new technology, giving rise to a new world of entertainment and news media.  Businesses quickly hooked the economic engine of advertising to the media of television, and decades of fantastic growth followed.  It once seemed a given that television would hold a central place in our media lives forever, and that it would always be free.

And then cable TV came along.  You might not remember this personally, but cable TV was initially a terrible affront to consumers.  People had become accustomed to getting a huge amount of media for free, and now these horrible new companies wanted outrageous fees every month for the same kind of media.  This could be very painful for a consumer with devotion to a particular kind of content, for example a sports fan seeing important sporting events disappear into the hole of paid TV.

Could the same thing happen to the Web?  An entire generation has become accustomed to Web media as free media, and assumes that will be true forever.  But cracks in that assumption have appeared recently.  We’re seeing a new wave of paid content efforts on the Web.  More importantly, we’re seeing platform owners make good money from Web-like content, like Amazon with Kindle and Apple with iPhone/iPad.

Amazon and Apple have shown that you can make money from digital content if you own all the important parts of the value chain, from digital content rights to an ecommerce store to a payment service to a physical device.  Facebook could be about to find out whether you really need the last link of that chain.  They might not need control over the physical device, because they have something even better in the social graph and identity management.

Facebook knows who you are and knows who your friends are, and they own that information in a way that no one ever has before.  Add in the right content relationships, a payment system, and a universal interest indicator, and that becomes a complete enough platform to enable more paid content on the Web.  A hidden key may be that their payment system is a prepaid credit system, which allows small transactions that would otherwise have burdensome costs and usability barriers.

That may sound a little abstract, so I’ll offer up this fanciful example:  I go to visit Pandora for music, and Facebook and Pandora immediately know it’s me.  They know what kind of music I like, and they know what kind of music my friends like, so they are able to recommend some really great music for me.  Right there I have already participated in a content transaction:  I have offered my valuable tastes and contact information to Facebook, who handed that info over to Pandora – you have to think that Facebook gets paid for that.

And Pandora was glad to pay, because I really like that music they recommended.  In fact, I liked it so much that now I’m going to sign up for a Pandora subscription.  I’m about to reach for my credit card when I realize, hey, I can pay for this with Facebook credits!  Oh, I see I’m a few credits short.  No problem, I’m going to go this this Facebook game, SheepWorld, and rack up the extra FB credits I need – then back to Pandora to pay.

A bunch of little transactions happened in that scenario, and none of them actually involved me pulling out my wallet.  In fact, it seemed like fun, it didn’t seem like I was paying at all.  I was able to participate in a new economy because I’m a Facebook user, and now I’m getting used to paying for premium content.  And when the New York Times puts up its paywall, I’m not going to care so much because I’ll be paying with Facebook, which separates the media consumption experience from the payment experience.

Sound a little farfetched?  Could be.  But there was a time when I couldn’t imagine paying for TV.  Both free broadcast and paid cable television still bring in a lot of money, but cable is a much better business.  If Facebook enables new revenue opportunities on the Web for content creators, they will enrich themselves and enrich others even more.  I won’t like it, just as I didn’t like it when I started paying for TV.  It would be the end of the Web as we know it.

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still misunderstanding micropayments

Please, Shirky, don’t hurt me.

See, in the past Clay Shirky has expressed some healthy, justifiable skepticism about Second Life, or rather, the hype around SL in 2006-07.  And on a scale of one to infinity, he knows about a googol (old skool usage) more about the future of Internet and new media than I do.  So I’m loathe to disagree with him on any topic.  But I’ve got to chime in about micropayments.

The quick recap:  Shirky says that publishers are grasping at straws if they think that micropayments will save their dying business models.  Matthew Gertner hopes that publishers might still find that magic blend of quality and scarcity that allows them to charge micropayments for content.  I think both misunderstand the demonstrably successful business models for micropayments.

Shirky’s right when he says that “users don’t like being nickel-and-dimed” for content.  But that’s not what happens in the successful models, not from the users’ point of view.  Users are making small payments, but they’re not paying nickels and dimes, they’re paying significant amounts of dollars over relatively short periods of time.  They are paying for the convenience of not making micropayments while making micropayments.  Huh?

If “micropayments” means anything anymore, on a pragmatic definition it means “payment of an amount that is typically too small to justify its own transaction costs.”  Depending on volume, merchant fees and chargeback rates, the $0.99 price of a song is probably not large enough to justify transaction costs on a transaction-by-transaction basis – but that’s not how iTunes does it.  iTunes aggregates charges and only incurs transaction costs when the aggregate charge supports the costs.  This is a seamless experience for the user, and together with the presentation of a broad catalog, a pleasant user interface, and smart search and recommendations, this service is well worth paying for.

Shirky believes that iTunes demonstrates that “the only real lesson of small payment systems generally . . . is that if you want something that doesn’t survive contact with the market, you can’t let it have contact with the market.”  Ironically, the internal contradiction of this statement is that it assumes that the value is in the content.  But the value is not in the content, as many people, including Shirky, have pointed out.

The point is even clearer in Shirky’s other example, Cyworld, a Korean social networking site where users can buy each other “virtual gifts.”  Facebook introduced the same feature in 2007, quickly giving birth to a virtual economy that some estimate at $100 million a year.  Shirky says these kinds of services are a “monopoly within the environment” that “prevent[s] competition for pricing of digital goods.”

fbvirtualgoodsWhat?! Think about it, how can there be competition for pricing on goods that are worthless?  Those little virtual gifts that sell for a buck a piece – the flowers, hearts, puppies, etc. – there ain’t no monopoly on them, it’s not a closed environment as far as those goods are concerned.  I can take them wherever I want (notwithstanding copyright claims, which aren’t the point here).  You see, there they are, 21 virtual items right next to this paragraph.  Did I just steal $21 from Facebook (or worse, from Susan G. Komen)?

Nope, I didn’t.  Because nobody gives a damn about those items here on my blog.  (Well, maybe someone will make a copyright claim that I’m not making fair use of them, as I think I am, but again that’s not the point.)  People don’t pay for those little bits of clip art, and I certainly wouldn’t be interested in paying to display them here.  People who buy virtual goods are paying to have those bits of content show up on the service of Facebook, of Cyworld, etc.  They are paying to have it show up on the profile of a friend, they are paying for the social graph, they are paying for all of the reliability, usability, network effects and ego-fulfillment of those services.  And they’re making micropayments, and the services are again aggregating the micropayments in a way that is part of a convenient and seamless user experience.  The content in Facebook is not “trapped” in some kind of monopoly – the service of Facebook is in full and open competition with every other social service out there.

So that’s all I have to say about that, but I have to end with a little disclaimorama:  Second Life may have had a “virtual economy” of over $360 million last year, but that’s not necessarily where my thinking comes from on this.  I’ve been looking at things like Cyworld since I was a VC at a Korean shop, long before I joined Linden.  Disclaimer necessary because there’s whole reams of thought about whether the content on SL has value off of SL, which I am not getting into and not taking any position on here.