Tuesday, September 18, 2007
Research Note: The Ponzi Facebook Economy, or Pride Goeth Before a Fall
Let's spend a few mins talking about Facebook's recent fbFund.
Recently, Peter Thiel discussed how it Facebook just reached breakeven. But the majority of that cash is coming from a single, very large, and very unproven deal - with the most desperate, increasingly aggressive, suitor in the market (Microsoft).
The point is that Facebook is struggling to discover a working business model - despite it's incredible traction.
That's because Facebook doesn't have the right DNA yet. Not only does it need an Eric Schmidt - a CEO who can help shape and define a working business model - it needs new DNA to be able to think (really) strategically about the edge.
I've mentioned before that the biggest problem with Facebook is that it's deeply evil. Evil companies can't create or capture long-run value at the edges. Because Facebook is evil, it's struggling.
Let me try and recast this in the light of simple econ. Orthodox strategy teaches you to invest in complements if you're a platform owner. Complements amplify demand - and if they're free, you capture all the value.
Now, that's all well and good.
But it masks a (much) deeper problem with Facebook - and gives us very strong clues about Facebook's DNA.
Facebook has lots of traction - but very little to show for it. That's OK - unless you're evil. Good beats evil in the edgeconomy.
Now, think about all this strategically for a sec. Facebook - the hottest platform in the world - has to subsidize complements.
Why? Well, the answer is hidden in plain sight. Because complement producers can't make capture any value by making complements yet. If they could, you wouldn't have to subsidize them.
That is, there is little incentive - beyond traction - for complements guys to be interested in the first place. They certainly, at the moment, can't make any money.
The point is that Facebook's CEO and investors should not be investing in complements before they've found a working business model.
Because the two are in conflict. The more Facebook and it's investors subsidize complements, the less pressure there is on Facebook to actually discover and experiment with a working business model.
Conversely, one can run this pseudo-pyramid scheme for as long as there's (a sucker's) money in the bank - but when the money runs out, without a business model, everyone will head for the exits.
Now, why is this evil?
Well - beyond what we've already discussed - the real point is that it's the wrong thing to do for users/connected consumers. They're the real investors in Facebook - despite the overblown egos (and bad haircuts) of most venture dudes.
Subsidizing complements before learning how to really capture value is the essentially the same thing as telling these consumers that their investments only matter to the extent that they can be utilized as a strategic bargaining chip, to attract more complements - and that the long-run health of the platform (dependent on a real, working business model) is just simly less important.
Reread that paragraph if it doesn't make sense: it is the essence of good vs evil.
Look, business models happen at the edge. They need to time and space to happen. But don't confuse that with what's happening at Facebook.
Facebook's ultimate business model is gonna be simple: redefining brands and branded ads. But these recent moves have nothing at all to do with that.
What Facebook is really doing is simply playing cheesy, simple, entry-level games of pseudo-strategy - pseudo because they are yesterday's cheesy, simple, entry-level games of strategy. They are as obsolete as a rusting mainframe.
These games of strategy kill true experimentation and serendipity - exactly what's necessary for radical business model innovation.
How do we know? Well, the last set of players to play them - Microsoft, Sun, blah blah etc - all realized, in the long-run, the utter destruction of value as a result.
And today's real market leaders - Apple, Google, etc - haven't revolutionized industries by playing these cheezy, irrelevant games of pseudo-strategy.
Ultimately, from the point of true, long-run value creation and capture, Facebook's recent moves are hubris. And, as always, after hubris, nemesis.
All that said, you should also note Paul K's argument that grant-based funds can play an essential part in repairing the broken venture value chain - which is a killer point.
i love the contrarian viewpoint even if it is entirely ridiculous.
contrarian, depends on your pov. ridiculous - not even a little bit - unless you think facebook is exempt from the laws of economics :)
thx for the comment.
I'd like to see a bit more about why FB is evil.
Because they're a kind of walled garden? Because they don't have a business model for complements?
What is it makes them evil exactly?