Does Facebook’s $19B purchase of WhatsApp make sense?

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logo-color-verticalMost of me wants to say no. Only for two reasons.

One, WhatsApp would be in kindergarten if it was a child, and its entire staff could fit on a Greyhound bus. Seeing them valued at the same market cap as a company like Sony makes my brain hurt. Oh, and they make about as much revenue as a bag boy does at the local Kroger.

Two, I’m jealous. I’ll admit it. How can I not be? A valuation of around $500-million per employee is any startup’s dream. If our company hit 1/10 that valuation I’d have a grin glued to my face. Fortunately, I’d make enough so that I could afford surgery to restore my face to normal.

But after I thought it, I don’t think Zuckerberg is insane. While there’s no revenue model in the world that can justify that price for a service that barely brings in revenue (and certainly isn’t profitable), I think that Facebook was more likely to be asking themselves, “How much is it worth to keep someone else from buying WhatsApp?”.

Yes, Facebook is the world’s largest social network and is already a bit more Orwellian than most of us would like. But it’s no longer the place to be, especially among teens. Facebook even admits that:

Just a year ago, 42% of teens surveyed told pollsters they preferred Facebook to all other services; by spring, that had fallen to 33%, and now stands at 23%.

In other words, Facebook can’t assume that younger people will continue to see its service as the de facto place to share selfies. Teens have Instagram (which Facebook bought), SnapChat (which they tried to buy), and WhatsApp (bought). And let’s not forget Twitter, WeChat, Line, and Viber (each with at least 200 million users) competing for market share. With over 450 million users on WhatsApp, Facebook would take on a huge penalty should it fall into the hands of a Google or a Yahoo!.

Facebook itself only took a handful of years to go from dorm room project to international behemoth; what’s to keep another social network from displacing it in short order? That full discussion is probably worthy of a separate blog post, but the short answer is not much. At this point, Facebook has to be just as defensive (by keeping other large networks from coming under the control of a competitor) as it is offensive (by continuing to pursue both user and revenue growth).

Is $19 billion the right amount to pay for that defense? We’ll never know for sure, but if it keeps Facebook relevant with teens and holds off a challenging social network from displacing it for a few more years, the answer is yes.

Don’t Pay Me for Using Facebook

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If there’s a movement to force social networks to pay content creators, let’s kill it now. New York Times columnist Joe Nocera recently outlined a book called “Who Owns the Future”, by Jaron Lanier. In it, Lanier argues that,

“people should get paid whenever their information is used. …creators of content — whether a blog post or a Facebook photograph — would receive micropayments whenever that content was used. A digital economy that appears to give things away for free — in return for being able to invade the privacy of its customers for commercial gain — isn’t free at all”

In practice, a company like Instagram would pay you a few cents for a photo of that latest sushi dish you tried; WordPress, maybe a nickel for your most recent rant about the continuing escalation of violence in schools.

I haven’t read Lanier’s book, but the premise is interesting. What would a digital economy look like in social networks were required to pay content creators?

I don’t think it would exist much at all.

Walt and Skyler actually made all their money by posting pretentious Instagram pics of fancy food.

Why? Nearly every major social network has thrived by investing in product, user experience, and growth first, and worrying about monetization much later. Forcing payments into the mix early on would only keep new social networks out and reinforce the position of incumbents.

Let’s start by looking at why new social networks operate this way:

First, scale has to come first. A social network with doesn’t really add much value until it can help its users connect with others in a meaningful way. This only happens when millions of people are using a service.

Secondly, asking users to pay for access, especially early on, is unrealistic. Early adopters aren’t going to open their wallets to try out the latest way to share photos with a few other early adopters. A pay wall would dramatically stifle growth, putting a huge damper on reaching scale.

Third, social networks don’t offer ad products or other monetization channels early on, because they need to focus their energies on a great product that will scale quickly.

Because of this, social networks almost always operate on a limited- or zero-revenue business plan for years. As a result, nascent social networks don’t even have revenue available to give to content creators, even if they wanted to.

Now, imagine that a system that required such payments. In order for a new, disruptive, social network to thrive, it would have two options: (1) use its precious startup capital to begin paying content creators from day one; or (2) force itself to adopt a monetization strategy well before the product was fully evolved. In either situation, the startup would find itself at a severe disadvantage in competing against big dogs like Facebook, Twitter, Google, and the like.

Ok, you’re thinking, but what if social networks weren’t required to pay content creators until they started bringing in revenue? That would still create some major issues:

First, investors and entrepreneurs will see these payments effectively as a tax on future earnings. This makes the prospect of starting or investing in a new social network inherently less attractive, as the opportunity for profit would be hampered to some degree (and probably a substantial one of those payments are going to be worth anything meaningful to content creators).

Secondly, this would actually be worse than a tax, because it would be required even before a company reached profitability. (I cannot imagine that such a system would be calculated on the basis of a company’s profitability, since young companies often eschew accounting profits to reinvest in the business).

Third, this would open up the opportunity for profitable, scaled incumbents to simply pay slightly more than social network upstarts. This would give content creators one less reason to contribute to a new social network, as they could earn more money elsewhere. Again, this would only lessen a startup’s likelihood of success.

In short, the environment for creating a new social network would be less favorable, and we’d see fewer and less interesting startups in this space as a result.

Mr. Lanier’s view might be more palatable if there were no new social networks, and our society was only concerned about “Big Brother” level companies like Google and Microsoft extracting wealth from ordinary folks without offering enough in return to society. If such a system is ever going to work, we’ll need to find a way to keep encouraging new companies to disrupt the space and add value in unique ways.

Some challenges for Facebook’s Graph Search

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Facebook’s upcoming Graph Search feature has already been plenty hyped, even though its weeks away from a significant portion of the public being able to try it out. But in order for Open Graph to be meaningful, it’s going to have to tackle some significant barriers.

Let’s take one of it’s core promises – that users will have powerful search tools for local businesses available to them, by tapping into data about what one’s friends have Liked. Ostensibly, a user could utilize the recommendations of his friends to, say, find a good restaurant in a town he’s visiting. “Social curation” is the idea. But in order for this to work, let’s break down what has to happen first.

Let’s say I plan to visit Atlanta and want to find a suitable place for dinner. I have a handful of friends there (I live in KY), so this is a viable scenario. I search for “Restaurants my friends in Atlanta have Liked”. In an idealized world, I’d have a nice little list of places my friends have visited, and a few moments later, I’d have made a reservation and moved on.

OK, but not so fast. How many decent recommendations am I likely to get? I’m not sure it will be many, if I look at the filtering that has to happen first:

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I’m going to do some back of the envelope math here. I don’t have any data on this, so this is just pure guesswork. Let’s say I have 30 friends who live in Atlanta. 5 are ultra concerned about privacy, so they’ve kept most of their Like data private. Another 12 use Facebook regularly, but don’t care about Liking or Checking In every place they visit. I can’t expect decent data from them. Down to 13. Let’s say that 7 of the remainder don’t really share my tastes – they’re acquaintances, in-laws, or people who simply enjoy different things that I do. OK, so I’m now left with all of 6 people who have Liked restaurants on Facebook in Atlanta. But I’m not done yet – Atlanta is a big place, if a recommendation is across town, then forget it. And what if I have a recommendation for a fast-food cajun place nearby, but I’m actually looking for something upscale?

You get the idea. Even though the amount of information Facebook has in aggregate is mind-bogglingly massive, the amount of useful data that an individual user can obtain through her friends is quite different. Presented with the scenario above in real live, I’m still going to turn to something like Yelp, Urban Spoon, or TripAdvisor.

All of this isn’t to say that Graph Search won’t work or be useful. It could be tremendously useful. But in order for that to happen, Facebook is going to have to provide users with more of a reason to share data about where they visit and what they do. Otherwise, I’ll take the recommendation of 500 strangers over 5 friends any day.

Will Facebook’s new Open Graph change the way people support causes?

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Last week, Facebook announced some sweeping changes to the way it interacts with social applications. Here’s one: instead of requiring users to “Like” content or manually post updates each time they want to share content, applications can now write directly to a user’s profile without needing separate authentication. A user simply grants the application the permission once, and voila! – activity within that app automatically becomes part of that user’s Facebook data.

The Washington Post Social Reader app is a great example of how these changes can be applied:

It’s a subtle change, but it really opens the door for more online activity to be tracked on a user’s profile. You probably get the gist of it, but if you want to learn more about these changes, read the articles here, here, and here.

While it’s far too early to gauge the true impact of the new Open Graph, it does signal an important shift. Previously, Facebook has been more focused on what users are doing recently: where Bob went for a run today, what artist Jane is listening to this afternoon, the photos from Rick’s camping trip last weekend. Events that happened weeks or months ago have generally tended to get lost.

However, the Facebook experience will now allow users to build more of a retrospective “scrapbook” of events that a user feels is important to his or her identity. By allowing activity from a site to recorded automatically, the user can easily look back and see, for example, all the artists he’s listened to on I Heart Radio over the past year.  In fact, one of the new features they’re rolling out along with the Open Graph is called Timeline. In essence, Facebook is extending the definition of identity to include what has happened over the entire course of a user’s life.

So what does this mean for causes? Let’s think for a second about one of the main reasons people support charity. Altruism? Perhaps. Guilt? Maybe. How about recognition? We probably don’t like to admit it, but most of us wouldn’t mind getting a little credit for supporting a good cause. Ever turn to the back of a non-profit’s annual report to see the individuals who’ve donated at different levels? Or seen the bricks on a new football stadium impressed with the names of top supporters? Recognition is a powerful way of reinforcing charitable support.

Now imagine that all your charitable support was automatically posted and stored on your Facebook profile. If you could look back and see how you’d supported causes over time, it would be a powerful way to gauge and demonstrate your dedication to philanthropy. Vanity aside, there could be some real value here: creating a sense of accomplishment, being able to track which causes have been important to you, seeing if you’ve met your giving goals – all of these are great reasons to track charitable support in a single location. Think Memolane for philanthropy. Such an experience hasn’t been built yet, but Facebook’s Open Graph certainly takes us closer in that direction.

What do you think? How else will Facebook’s recent moves change the way people interact with causes?

For another perspective, read Causes.com founder Joe Green’s take on the recent changes.