Facebook's Widget Middleman

Business Week:

Facebook was clearly onto something when it started letting outside
software developers create applications that can be added to users'
profiles: The social network has seen a surge in site traffic and
registered users in the months since the announcement. And users are
reveling in the newfound availability of programs that let them do
everything from rate music to build a family tree to count the days
until President George W. Bush leaves office.

What's less clear is whether and how many of these outside developers
will make money from their inventive applications. Matt Sanchez wants
to change that. On Aug. 13, the 25-year-old chief executive of online
video service VideoEgg announced his company will sell ads for any
outside developer creating interactive, shareable programs—known as
widgets—for Facebook. For small widget makers, many of whom run
several-person startups without an ad sales team, let alone VideoEgg's
20-plus person sales force, the potential partnership is an
opportunity to turn their fun creations into profitable businesses.
Funding Widgets with Ads

Sanchez sees connecting widget makers with advertisers as the next,
inevitable, step for Facebook. Once an online hangout exclusively for
college students, Facebook opened its site last year to the Web
surfing community at large and in May, announced its open-access
policy (see BusinessWeek.com, 7/23/07, "The Next Small Thing").

Since then, the company has been evolving from a social network second
to News Corp.'s (NWS) MySpace into something akin to a Web portal à la
Yahoo! (YHOO) or, even, an online operating system. "The platform
represents a really important shift to where social networks are
going—moving more to this operating-system model where people develop
rich applications and tools for the site," says Sanchez.

The only thing keeping Facebook from becoming to the Web what
Microsoft Windows is to the personal computer, says Sanchez, was a way
for the majority of third-party developers to build profitable
businesses off of Facebook. "A key piece of the ecosystem that needed
to emerge was an ability for application developers to make money,"
says Sanchez.
Facebook Encourages Piggy-Backers

VideoEgg is already working with about 50 application developers
including Rock You!, Flixster, and Scrabulous, which allow users to
share photos and music, show off their favorite movies, and play
Scrabble, respectively.

Ads are shown on "canvas" pages—the Web page that loads when a user is
installing a new application on their personal page. Some early ads
include movie ads that play trailers of films such as Beowulf and The
Bourne Ultimatum when a user mouses over a video screen embedded in
the ad. Facebook does not allow third parties to place ads on users'
personal pages. VideoEgg shares the advertising revenue, giving 60% to
the developers.

For its part, Facebook is fine with developers using its platform to
spread, and make money from, their programs. At the company's recent
F8 press conference, executives stressed that they would not ask for a
share of the advertising revenue. The Facebook team sees its payment
in the ability of third-party applications to draw in more users and
encourage established users to spend more time on the site. The more
time users spend on the site, the more likely they will see Facebook's
own ads.

Plenty of Ad Money to Go Around

Since adopting its open-access policy, Facebook has grown to 35
million active users, up from 8.9 million users in September, 2006
(see BusinessWeek.com, 8/6/07, "Fogeys Flock to Facebook").

Through a partnership with Microsoft (MSFT), Facebook places
interactive, poster-like ads on the left and sometimes on the bottom
of users' personal pages. The site also sells its own flyer-like ads
that can be posted to particular networks, and it places sponsored
info in its "news feed" section, which updates users on the recent
activity of others in their network. News-feed ads are capped at one
per day, says Facebook spokesman Matt Hicks. The company also develops
Facebook pages for particular brands and campaigns. But it's not in
the business of placing ads on behalf of outside developers. That's
where VideoEgg comes in.

Facebook isn't worried about third-party developers cannibalizing
demand for its own advertising. There is plenty of money to go around.
According to an Aug. 9 report by eMarketer analyst Debra Aho
Williamson, advertisers will spend $900 million on social networks
this year. By 2011, that number will reach more than $2.5 billion.
Facebook and MySpace, the leading social networks, will grab more than
70% of that market, according to Williamson. "Social networking is
proving to be a true revenue driver," said Williamson.
Will Users Balk?

While Facebook may be embracing advertising—even when it doesn't
directly get a cut—it's not clear that its users will respond
favorably to an influx of ads. After all, groups of vocal users have
fought changes as seemingly benign as automatically updating friends
about their recent activity (see BusinessWeek.com, 9/8/06, "Facebook
Learns from Its Fumble"). Such users may not want to listen to more
words from their sponsor during their online social time.

Sanchez, for one, isn't worried. He believes that most users
understand that the trade-off for a great free service is ads. "It's
part of the implicit contract there," says Sanchez. "The ads just have
some level of entertainment and engagement value."