Developers Repeat After Me: App Platforms are Not Your Friend

Remake of Apple's 1984 Super Bowl commercialThe numbers speak for themselves- apps are popular. Facebook now has over 350,000 active apps on its platform with 70% of Facebook’s users engaging with these apps on a monthly basis. Apple recently announced that the number of downloads from its App Store had surpassed 2 billion for the 85,000 applications on its platform. Add in 30,000 apps from Google-backed initiatives Android and OpenSocial, and over 11,000 apps being built off of Twitter’s API, you have nearly half-a-million apps out there across the most popular social platforms!

Consumers have benefited greatly from the entertainment and utility value provided by developers on these platforms, propelling applications to the forefront of the user experience for many of these services. The value to these mobile and web platform providers has been evident in the accelerated user growth these services have seen since opening up access to developers.

Developers for the most part haven’t shared a comparable level of success as these platforms though. With VentureBeat pegging the value of Facebook’s app ecosystem at approximately $500 million this year, similar in size to Facebook’s expected 2009 revenues, little opportunity is left for the remaining 350,000 applications once you get past the success of Zynga, Playfish and Playdom, the leading developers on Facebook and OpenSocial platforms. A similarly distorted distribution of applications and success exists on Apple’s platform where the size of the app economy has been projected as high as $2.4 billion per year by GigaOM. Based on this optimistic projection and assuming only 50% of downloaded apps are free, there still isn’t enough money for the average developer to prosper over the long-term. The opportunity for most developers in the long-tail of the App Store is further skewed when you consider some of the outsized success stories from the most popular apps on the platform. Because Android’s ecosystem is relatively young and Twitter lacks its own business model, it’s too early to see if developers can make a living off of these platforms.

Even the virtual goods sub-economy that has been allowed to emerge on centralized platform ecosystems like Facebook and MySpace, which Inside Network has valued at $1 billion in the U.S. this year- even before Apple’s announcement of in-app purchasing capabilities for all App Store applications, the opportunity is disproportionately concentrated with the most popular applications and largest multi-app, multi-platform developers.

Making matters even more difficult for developers is the not-so-friendly actions being taken by platform companies in wielding power over their ecosystems:

So why do developers keep building apps for these platforms? Because of the effort (low development threshold and time commitment  to launch) and opportunity (built-in, captive audiences) compared to building a stand-alone business. Fortunately for developers who want to build their own audiences, and not be reliant on a particular platform, there are two primary ways to leverage these mobile and web services for their own benefit:

  1. Port your success. If a developer has been fortunate enough to find success on any of these platforms, they should convert those users into visitors of their own domain or service like LivingSocial has done. LivingSocial was a big benefactor of Facebook’s redesign of their home page back in March, vaulting LivingSocial into the top 10 most popular developers on the platform in the month following the change. The company was able to turn some of those users into customers of LivingSocial.com, which saw its unique visitors to the site almost triple between March and April of this year.
  2. Port the platform. Foursquare have leveraged social graph data from Facebook and Twitter via Facebook Connect and Twitter OAuth respectively to enable users to build their own unique social graph on Foursquare.com. Additionally the mobile service encourages its users to send notifications of their whereabouts into their Facebook and Twitter streams, which results in free exposure and viral marketing for Foursquare’s service.

Though the threshold for success will vary for developers, based on whether or not they have taken institutional funding, the risks associated with developing on another entities’ platform or costs associated with developing for multiple platforms remain the same- the long-term value of a product or service cannot be maximized when its business success relies on a platform it can’t control or pay for service level assurances. Look no further than MySpace’s acquisition of iLike this past summer, for a small premium to its invested capital, for market validation of this. While these social platforms should absolutely be leveraged as part of any web or mobile strategy, remember that each platform’s goal is to maximize its own value and not that of the application developer. Luckily, as Andy Weissman, founder of Betaworks, points out, some of the most successful applications can and do become platforms themselves, so a bigger opportunity awaits those developers that understand the ecosystem relationship.

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Ad-Supported Facebook Applications Are In For A Rude Awakening

Rude Awakening

Dear Facebook developer, if you’ve banked your livelihood on banner ad-supported applications get ready for a rude awakening. The deceptive advertising practices that have increasingly permeated Facebook applications, and driven effective CPMs on banner ad units to double-digit levels in some cases, are starting to get noticed outside of Facebook (Nick O’Neill of All Facebook has done a great job of covering this topic), which is leading to involved parties being shut down in the process. The longer-term ramifications of this put into question the business viability of many developers on Facebook’s platform.

How Did We Get Here. As recently as the 2nd half of last year Lookery, a Facebook ad network at the time, was guaranteeing developers a mere $0.15 CPM for their application inventory. The combination of inexpensive banner ad inventory and access to Facebook users’ friends (via the social graph) was all savvy direct marketers and ad networks needed to test converting Facebook users into unknowing subscribers of mobile services (among other things) costing upwards of $20 per week. These very well integrated ad experiences that imply your friends’ usage of certain applications and services (as in these examples) QuizCrushare converting well enough on a an impression basis to generate upwards of $10.00 effective CPM for many large Facebook developers. Several ad networks have beem more than happy to deliver these ads since they are in turn getting paid roughly $15 to $25 CPMs by the underlying advertisers. It’s rather amazing actually that in the midst of an overall global recession that has seen the broader U.S. market indices fall around 30%, the effective CPMs Facebook application developers have received has grown upwards of 6500% over the same timeframe!

What’s Going to Happen Next. Before getting to the ‘what’ we need to understand ‘why’, which is actually quite simple- Facebook wants to go public. For this to happen, Facebook needs to show potential Wall Street investors that it has a growing, sustainable business model (so the stock price will go up) and that it runs aclean operation (so as not to make the stock price go down).

From a business perspective, among other well publicized initiatives, Facebook needs to get traditional brand advertisers to spend some of their $550 billion in global ad dollars on its platform in an effort to fuel revenue growth and justify what is sure to be a high earnings multiple it will trade at. As long as there is a perceived risk of tarnishing a brand’s image by placing ads on the same website where deceptive offerings are being run, agencies won’t allocate brand ad dollars to Facebook. In terms of its operations, investors need to feel comfortable that Facebook can effectively monitor its platform and ecosystem to avoid any potential public relation embarrassments or legal issues (privacy concerns aside) that could adversely affect the company’s profitability and trading mutiple.

In terms of the ‘what’, Facebook will become increasingly active in policing ads, networks and advertisers in their ecosystem in an effort to eradicate any potential issues that could affect the ‘why’. A prime example of this was the recent banning of ad networks Social Hour and Social Reach from advertising on Facebook applications. Facebook might even consider launching its own ad network for developers, to ensure the quality of advertisers remains high, at the expense of other ad networks.

The result of these types of actions will be a significant decrease (over 50% in many cases) in revenues seen by developers as the remaining ad networks on Facebook will have to deal with an increase in application inventory in conjunction with a decrease in advertiser demand (as deceptive advertisers are removed from the site). While I am definitely not suggesting effective CPMs will crater back to Lookery guarantee levels, like the stock market, there will be a reversion to the mean for ad prices. Regardless of where CPM rates eventually settle, there will be a flight to quality from an advertiser, as well as user, perspective. Bad experiences with certain applications will drive ad dollars and users away from applications that continue these practices, creating a death-spiral scenario in some cases (the situation where fewer users lead developers to place more ads on their applications to make-up for the lost revenue, which in turn leads to a further decrease in users due to a worse user experience, and so on).

What to Do. If you’re a developer, here are your options:

  1. Stay the Course. Continue to accept these deceptive ads in an effort to make as much money as possible until these ad practices and/or networks are shut down by Facebook. If the user and/or platform backlash doesn’t kill your application business, then try one of the remaining options or follow these ads and networks to the next social platform for exploitation.
  2. Go Virtual. If it makes sense, incorporate virtual goods into your applications. Game developers like Zynga have built successful businesses around the selling of virtual items to their user base, which alleviates the need for, or at least reliance on, banner ads for revenues.
  3. Try Fremium. This option is more geared towards utility-based applications, but up-selling features and functions for your applications (especially if you can tether it to a service or experience outside of Facebook) makes a lot of sense since it establishes a recurring revenue stream.
  4. Get Professional. Build a great application experience that makes users want to use your applications over the long-term. Work with established, reputable ad networks that have broader web reach than just Facebook applications (like Rubicon Project), inventory rep firms (like Appssavvy) or gain access to individual engagement opportunities (through the like s of my company Clearspring) to build credibility with advertisers and increase the perceived value of your applications’ ad inventory. Once you have the user base and operational scale, consider building out your own sales team (like Watercooler) to get a larger percentage of campaign CPMs.

Let’s hope Facebook application developers take the high road on this one.

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