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Open To Buy
The Gotham Gal started out her career in the retailing business and spent time as a buyer at Macy's. The way that job worked was she'd get her "open to buy" report and then go into the market and buy. I always loved that term. It meant it was time to go shopping.
Facebook went open roughly a month ago. And now VCs, web companies, and media companies have opened their pocket books and are going shopping for Facebook apps. It's actually a bit of a feeding frenzy if the reports I am hearing are to be believed.
Yesterday was Facebook day in the office. We started off with an awesome meeting with the Jarvis father son duo. Not sure who I learned more from. But if you want a Facebook app, you can hire Jake. The first two Facebook apps I installed (last.fm and flickr) were built by Jake so I can vouch for the work he does.
Then I spent time with a good friend who I don't think wants to be outed on this blog who is building a very interesting facebook oriented business. And he's in the market for apps. He's open to buy.
And at the end of the day, I spent time with an entrepreneur who made a smart buy early in the Facebook craze and now is sitting on a bunch of apps and is now raising money to build a business on top of that foundation. He's done his buying for now.
Then I came home to see back to back posts in Valleywag pissing on the Facebook app craze. Phew, someone is throwing some cold water on this fire. Gotta love Nick Denton. Always the contrarian.
So let's look at some of the facts I learned yesterday.
Facebook apps sell for the number of users who have installed the app. The price was $0.10 per user last week. Now its $0.25 per user.
The CPMs that Facebook apps are getting are what you'd expect. Less than $1.
The churn rate is high. Some apps are down as much as 60% in the past week. 20% weekly churn is pretty typical.
You can build a Facebook app in an afternoon. Maybe the more complicated ones could take a man week. So let's just say the cost of building a Facebook app isn't that high. Certainly less than $10,000.
There are a total of 1,131 apps. Of the last 500 to be approved, only 5 have over 100,000 members, and none have over 200,000. This fact came word for word from the Hypebusting post on Valleywag.
So what do we have here?
A marketplace where the early entrants were able to amass a large user base quickly but where new entrants are having a much harder time. So the early birds have something that everyone else covets. And they are now monetizing it. That makes senses.
But what's the right price to pay for a popular Facebook app? Let's say you have a million users. Let's say the average user visits the app page once a day. [I have no idea if that's a good assumption. Some help here please]. That's 1 million PVs per day, 30 million per month. Let's say that there's a single banner at the bottom of the Facebook app page, which is what I've typically seen. So at $1 cpm, we are looking at a $30,000 per month revenue stream for a one million user app. That's $360k/year. But that is with no churn. It seems like the lifetime of a typical Facebook user is less than a year. Maybe less than six months.
So these prices of $0.10 per user to $0.25 per user make some sense to me. It's not entirely nutty. But the churn is concerning. And I really have no idea what the right assumption is on average user visits per day per app. And I bet it varies wildly from app to app.
Markets are fascinating. And this Facebook app market fascinates me. I don't know if VCs should be participating in it. I don't know if our companies should be participating in it. I don't know if it's a bubble or a bargain.
But you cannot ignore what is going on in Facebook. It's a hyperactive development platform on the web in the middle of a community of 27 million (May comScore numbers) people. It's like nothing I've ever seen before in my 20 years in the VC business and I think you have to get your head around it and soon.
To that end, Union Square Ventures is hosing a Facebook Developers Meetup next Monday, July 2nd. I'll be there.
June 29, 2007 Venture Capital and Technology | Comments (12)
Comments
This is not something that can be ignored for sure. As a student who walked in May, I was one of the first adopters of Facebook when it opened for business at my school, after a month of waiting for them to add our .edu address.
I have many friends who say all these applications are too much, that they are getting away from the core, of facebook, however they continue to use Facebook and have adopted the applications over the last weeks.
I think these applications are a great addition and have definitely added value to the site. I also think these applications have room to grow for they are so new, and many people are just adopting them.
Posted by: Austin Lutz | Jun 29, 2007 7:47:18 AM
Here is how i see it panning out, there are 2 types of apps on facebook: the profile enhancers (not much on the money making side, - i.e. extended info, or top peeps), and then the immersive ones with immense potential for pageviews (iLike, flixster) because they engage interaction. The profile ones will get sold off to well heeled investors for the mid 5-figure range is my guess (great amount for a 18 year old spending 2 weeks working on it).
man I could go on for hours. Fred, if you want to talk more about this, you've got my email... I'm actively building or involved in the advising of 3 different apps, with 3 more in the pipeline after.
Posted by: Brian Breslin | Jun 29, 2007 8:05:23 AM
Since CPM revenue is low for these applications, I think the real metric is the ability to generate transactions of some sort. Will users of a particular application be valuable to a specific company or industry? That's the best way to value a facebook app, and, imho, the real opportunity for developers.
Posted by: johnrob | Jun 29, 2007 8:08:25 AM
A great post! This has been such a hot topic for everyone the last few weeks and its great to see someone in the know put some numbers around it. Thanks.
Posted by: Michael Wood | Jun 29, 2007 9:16:26 AM
Fred,
When you say "It seems like the lifetime of a typical Facebook user is less than a year. Maybe less than six months."
Did you really mean the 'typical Facebook APP user' ???
Just wanted to clarify, because that seems pretty low for most Facebook site users that I know.
-RG
Posted by: RG | Jun 29, 2007 10:38:06 AM
I suspect you mean you are "hosting" and not "hosing" a meeting (last sentence)?
Posted by: stevelb | Jun 29, 2007 10:47:43 AM
great post.
i've been encouraging our appropriate portfolio companies to develop fb apps. Veoh launched one at the platform launch and we have another one that is going to launch a fun one soon.
since it's relatively cheap to develop fb apps, the first goal for us is about learning. Learning what's possible, what isn't.
For me, the ROI isn't about incremental ad dollars on the FB "canvas" pages though. Most likely it will be to drive (low cost) traffic back to their respective websites.
That's why my favorite fb application biz models are those that have services outside of fb as well. It will be a lot trickier if the apps only live inside of fb (at least for vc backed companies).
Posted by: bijan sabet | Jun 29, 2007 11:00:09 AM
in the same way hosting providers, open source and script libraries/dev frameworks have accelerated or commoditized a lot of the technical work required to build an internet app, fb plaform is doing the same for marketing those apps. it provides a toolkit of viral marketing features that have been successful in the past (e.g., invite a friend, notify them when you update your product, share with a friend, etc.). given their reach (27M uniques) they are getting to be almost as ubiquitous as e-mail, especially in the 18-34 demographics.
the challenge with investing in products that have outsourced so much of their capabilities on the marketing front to fb is how do you build a defensible business solely on product functionality? if they were trying to raise money in an ipo, there would be a huge section about the risks of changes in the fb platform. imho, either it has to be a pretty damn good product (doubtful to maintain this position in the long term against new entrants) or it has to build to a deeper relationship with the user by capturing its own database of user information (e.g., favorite music, network of friends) and/or drive users to have a direct relationship with the company, outside of the facebook environment, and perhaps across other social media.
on a related topic, I got an interesting post in my facebook homepage today--someone is trying to sell a facebook app in the facebook marketplace. interesting stuff.
btw, great blog Fred--keep it up.
Posted by: matt pollock | Jun 29, 2007 2:06:07 PM
Most of these apps don't do anything, really. They just sit there on the profile page. Who visits the app's page?
Right now the only interesting application developer would be the ones that are making brand-related apps. Like that Red Bull one.
I'd like to see applications that drive transactions. Buy airline tickets, that kind of crap.
Posted by: rick | Jun 29, 2007 2:23:44 PM
In case you missed this, a great post on how Facebook is the new AOL.
Posted by: Jarid | Jun 29, 2007 8:14:27 PM
Fred,
As a music fan, I think you'll appreciate this new Facebook app from Yahoo! Music...
http://www.facebook.com/apps/application.php?api_key=07977d2b7b1537e885cd56e3b98f07aa
It automatically presents videos related to your interests and the interests of your friends based on music "favorites" from people's profiles. I think we'll see more rich experiences like this emerging from the app developer community over the next few weeks.
Note: I work for Yahoo!, but wasn't involved in the development of that app... just a fan.
Rock on.
~ Joe
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