The Case Of The Enveloping Platform

All of the discussion about Facebook’s lousy earnings last week brought to mind a little story about platforms that I wanted to share with you.

Once upon a time in early 2004, there was this computer genius of a guy named Mark Zuckerburg. He had a really good idea. That idea was to basically take the sheets of papers containing profiles of all of the students on the Harvard University campus that were distributed to incoming freshmen and turn them into an accessible web site. We’ve all seen the movie and so know that within 24 hours, 1,200 Harvard students had signed up and after a month, more than 50% of the undergraduate population had too.  Zuckerberg quickly expanded to other Boston universities, then all Ivy League universities, all universities, and then anyone with a registered email address in 2006.

This really good idea launched about six months after MySpace did. It is easy to forget now that MySpace was the big dog in social networks for about five years. In fact, from 2005 to 2008 it was the most visited social networking site on the planet. It made news in 2006 when it overtook Google as the most visited website in the US. It was also the platform that launched Zynga’s online social gaming applications (remember Mafia Wars??) as well as a number of musical artists. It was also where lots of movies premiered and where movie studios paid millions of dollars to “take over” the MySpace sign in pages hyping the movies and playing trailers to drive box office sales. In fact, that was among the MySpace calling cards, which made it hip and happening and interesting to visit. It was all about discovery and user creativity and freedom of expression so everyone’s MySpace profile page looked different. They wanted it that way. And, unlike Facebook, MySpace encouraged users to create relationships with people they didn’t know and didn’t even require users to build profiles around their real identities.

It didn’t take long for Facebook to leave MySpace in the dust. Remember, it wasn’t until 2006 that Facebook was available to anyone with a general email address – so if social networking was your interest, there was only one game in town.  In April 2008, about four years after its launch and two years after it opened the platform to non dot-edu addresses, Facebook handily beat MySpace in terms of unique visitors worldwide. And it never looked back.

After a number of issues that included allegations of user privacy violations and predatory behavior on the MySpace platform, Facebook was viewed as better and safer place for friends to hang out together online. And, since Facebook was about connecting with people you actually knew – or whom you could invite into your network – it minimized the risk of having sketchy people stalk you while there. Facebook also did one other really important thing: it courted a developer community. It knew that in order for people to want to spend a lot of time on its platform, it would have to give them things to do while there. And, more people hanging out on the platform and spending more time there meant more opportunities to monetize their eyeballs. So, in 2007 it announced it was opening its platform to developers and giving them tons of access to efficiently reach its user base – which at the time was about 20 million users.

That was all but the death knell for MySpace. It tried to follow suit in 2008, but by then, the reverse network effects had taken hold. Users were fleeing to Facebook, so were developers – certainly not the network effect you want if you are a platform.  Today, MySpace has about 25 million users, or just about as many as Facebook had back in 2007. And, it literally happened overnight. I remember this well since we were working with a client at the time that was working with the MySpace team on a very clever scheme to create and monetize a new content/user initiative they were working on with a big content provider. At the time this project started, MySpace was still doing well, but being challenged by Facebook. Within five months, the buzz was so bad that no one wanted to touch it with a 10-foot pole.

Ever since, the big burning question has been, so who can do to Facebook, what Facebook did to MySpace? I remember there being some talk about that being Google+ when it launched. The rationale was that, after all, Google has deep pockets, a strong brand and a desire to develop and monetize another killer application beyond search. But, me and my colleagues at MPD, thought that was pretty unlikely. By the time Google+ had launched, Facebook had nearly 800 million people on its platform. It hardly seemed plausible that given all of the entrenched relationships and social networks anchored there that they would all of a sudden flee to another social network that was just, well another flavor of a social network.

Turns out that it wouldn’t be another social network at all that Facebook would have to watch out for, but a whole different platform competitor. Enter this story’s protagonist – mobile.

[Yes, here is where I am finally getting to the point of the piece…]

Over the last 7.5 years, Facebook has done what all good platforms do – work really hard to ignite its platform and then continue to add new features to keep existing users sticky and new users interested enough to try it. The more of that they could do, the less likely it would be that those people would abandon the platform, even if something new came along.  The end result is nearly 1 billion people on the platform – a pretty big number to try to move to a new social platform who spend about 8 hours a week on the platform and more than 25% of all internet time.

But, their blind spot was mobile. Sure, everyone and his mother-in-law read the tealeaves that said mobile was going to be an important element of the social networking experience. But, few really understood the implications to Facebook and its user base. It’s not just that Facebook sucks today as a mobile advertising platform. If that were its only problem, Facebook with all of its assets could probably figure that one out.

The real issue is that the hundreds of thousands of developers who had done such a great job of developing applications for the PC/desktop Facebook environment lost their ability to reach the mobile audience. The iOS display is a mess and applications are hard to find. It also turns out that apps developed on the Facebook platform simply don’t work on the mobile device. So, a user might be checking her news feed on the iPhone and sees an update and a call to action from a brand she has “friended.” She does that on her PC and she gets the desired response. She does the same thing on her mobile device and absolutely nothing, nada, zippo happens. The app acts like it is broken, well, because it is on the mobile environment.

At the same time, Facebook changed its algorithms to favor the discovery of new applications, catching quite a few old, established guys off guard. Zynga was one of them. And, it is bleeding red ink all over the place because of it. Its stock has lost 40 percent of its value since it announced its 2nd quarter earnings. Its user base today is about where it was in 2009 – it’s lost about half. The games that killed it on Facebook – those oldies but goodies like FarmVille, CityVille, etc. that also drove about 29 percent of its revenue – were being pushed aside for the new ones. And, there was some funkiness associated with how gifts bought with Facebook Credits were being sent to recipients (turns out they weren’t). All of this has become a huge deal for Zynga and its shareholders and will soon become a pretty big deal for Facebook, as well.

Here’s why.

Zynga is doing what most Facebook platform apps developers are also doing – making their online apps mobile apps. Sure, apps developers can do some fancy schmancy programming thing called mobile markup to enable those native apps to work in the Facebook mobile environment, but that doesn’t address the clunky experience overall that users face when they get there. Things may work, but it isn’t pretty.

The risk to Facebook is that the longer it takes for them to get their mobile house in order, the shorter it may find its apps developer list. That puts it at risk of losing whatever potential revenue those apps developers might have or did have generating as part of the Facebook platform. I think that most everyone at one point in time thought that Facebook would eventually adopt an iTunes model whereby access to its users and platform would come at some sort of a price. But, suppose Zynga, to take one example, decides that being so tied to Facebook hasn’t been all that wonderful here lately and so decides to shift its faithful users to its own mobile gaming platform? I am not saying that making that sort of wholesale change would be easy, but do gamers care more about playing their games with their friends or about where they are playing them? Facebook was just one convenient way to discover and then play their games and them to broadcast their game accomplishments. But, if all of gamers were given a sweet incentive to do the same thing in a mobile gaming environment that would still allow them to post their updates on their news feeds, wouldn’t they all just do it?

On that point, today mobile apps make it just dead on easy to leverage all of the social aspects of Facebook like sharing, posting, liking, etc. One could say that these apps are getting the best of all worlds – being on mobile which is where the eyeballs are moving, control over the user experience (and development environment – Facebook’s unannounced platform updates really make development to Facebook a challenging experience) and all of the great things inherent in social sharing!  And, bonus, they may also be exerting more control over its business model. That sort of reverse use of Facebook as a communications mechanism and not an all encompassing “walled garden” could put a world of hurt on Facebook’s future revenue prospects.

All this is to say that Facebook is the latest victim of a platform envelopment play – one in which a competitor from, literally out of left field, comes along and eats your lunch. Well, not your lunch, exactly, but the money side of the platform.  Facebook never saw mobile coming at it this way, this fast.

Facebook isn’t the first company to have been caught flatfooted by a platform enveloper. LinkedIn didn’t put itself in the corporate recruiting market but has become a huge threat to them with its job boards that have enveloped the core business of online job boards like Comcast didn’t call itself a full-service communications provider but its VOIP service bundled with high speed internet and HD TV has enveloped landline subscriber sales. In both cases, these new platforms were able to extend their core capabilities into spaces occupied by other “pure play” providers, reaping higher marginal revenues since they were just extending their own platform and ravaging others who didn’t look outside of their core platform for competitive threats. And that’s the risk of these platform envelopment moves, they simply don’t come from within the “core” sector. All of the work that platforms put into making their core better and stronger ignores perhaps the biggest risk of all – someone or something else that can move the money side over to something different, but better, often at a lower cost but higher margins.

So, how does this story end? Well, the happy ending is that Facebook solves the mobile problem and does it fast and we all live happily ever after. The not so happy ending is that it gets all wild-eyed by visions of things like creating its own mobile phone and a mobile iOS. In fact that would be just about the last thing they should be thinking about right now. Being Apple’s new BFF and the reported tight integration with them is a step in the direction of happy ending, but how happy wont be known until we see the new version later this fall. The big unknown is whether getting to the happy ending becomes more of a prologue for some of the big players, like Zynga, who have its own shareholders to appease and who need to protect their own flanks. I know one thing, writing the script for the happy ending is probably the biggest task around the Facebook’s executive team’s table right now.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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