The Money Problem with Facebook / MySpace / hi5 Apps

April 2, 2008 - Get free updates of new posts here

As some of you may know I have been building web games for different social networks with some friends for the past few months. I have noticed a downward trend in revenue with apps and wanted to highlight it here. To generate a discussion, ideas and possible solutions:


link to photo

Problems:

1- On social networks in general the audiences are low value. These are kids spending money on a certain set of things: clothes, cell phones, food, movies & gasoline. Clicking on ads for other things isn’t that appealing.
2- The older demos are not installing applications. They have the money and/or provide money for their kids who are using the applications.
3- Saturation. There are now 100 million+ new page views a day that cubics, google adsense, lookery, etc…can provide ads for. That drive eCPMS down to ~$.10 or lower.
4- Scale. Your page views aren’t significant enough. Let’s say you can create 100,000,000 page-views a month. At $.10 / 1,000 pvs (eCPM) you are now making $10,000. Considering that might be 1-2 full-time people + hosting costs means you won’t be a trillionaire anytime soon.

Solutions:

– Use your app as a marketing vehicle to your own destination site.
– Reach out to brands (try hard) for individual sponsorships. Great but not too scalable.
Virtual Goods? It’s huge in Asia. Great read here. Thanks Dave.
Fun. Do it as a hobby or lifestyle business. Nothing wrong but this will be well suited for college students or part-time hackers.

Any other thoughts?

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18 responses to “The Money Problem with Facebook / MySpace / hi5 Apps

  1. Alaska Miller Reply

    You’re hitting, what Calacanis describes for Federated Media but still applies here, as the levels of success. He mentions that when publishers start small they rely on Google for advertising revenue, when they’re getting bigger they may join boutique shops like FM to get represented and better deals, but when they’re getting really really big they need their own sales team.

    You can tweak either the pageviews or the eCPM, and if you have already scaled to 100 million pageviews then the only thing left is to figure out ways to improve eCPM. You definitely need some sort of sales staff to communicate and strike up potential partnership deals. Link up with a movie studios and build games for them? Associate your games with exclusive and unique brands? Micro-gifts is also great but besides that presentation has anyone crunched any numbers?

    If all else fails just make casino games and take in rakes.

    Oh, guess I kind of wish I used Facebook too.

  2. Hiren Patel Reply

    It has to be a vehicle for something else. Gaming is huge in Asia, and the market is very unsaturated there. i am doing fb apps for fun and just for learning experience. Its a great testing ground to see how well you work with people and the ability to find amazing partners you can work on other things with. There is always a path to something greater from where you are, you just need to make it happen ;)

  3. Sir James Godwin Reply

    why not build apps that model/map the social graph. No offence, but games do not model the graph… maybe thats the problem. IMO non social graph modeling apps will continue to decline with the new changes to the rules e.g., new profile UI changes. Instead of exhausting traditional models banners/CPA, why not explore ways of enhancing parts of the *real world* with applications. (business, sports, health, etc.)

    I don’t buy the argument that facebook users are mindless who only want to use it for dating. Their behavior conforms to the rules of the game: If they don’t play, you havn’t created a very good game. Ultimately, the core UI changes Facebook is enacting are not merely to remove clutter, but more importantly, to encourage more thoughtful user behavior. They hope this will encourage ‘better’ apps (as in more accurately modeling the social graph) to succeed.

    Furthermore, I think most devs think about this whole business of monetizing wrong.. if you become *the* application people use to interact with (insert x part of life here). How much value does that create? I’m not saying this is easy, but its the challenging reality we’ve got ahead of us.

    James

    P.S. I enjoy your book reviews.

  4. Kevin Wu Reply

    I’m sure you’ve already thought about this…but consider a new business model? Is there any other way you can generate revenue?

    Your best bet is probably getting people to go to your site to play. Not sure if you’ve heard of Desktop Tower Defense but I was obsessed with this game for about a week: http://www.handdrawngames.com/DesktopTD/game.asp.

    I even played it while I was at work (which is pretty terrible I know) and managed to get a bunch of coworkers to play it too.

    Kev

  5. Noah Kagan Reply

    Kevin,

    I love DTD. Great indepdent game. The successful games that will be long-term are deep games like WoW (world of warcraft), DTD, sims, etc… Short term games are going to be harder to last and monetize.

    james,

    great point. the best strategy is making games that people want and build with them.

  6. Damon Billian Reply

    I think you have to think about creating something that creates a business model for it to work well. I Like and Flixster, for example, are businesses that seem to have a real business model behind their products & their apps help.

  7. Joe Suh Reply

    Turn those virtual sports bets into real cash bets already! I’m sure you looked into the legality of this – what’s it going to take to pull this off? You’re already living outside the states ;)

  8. nicolasz Reply

    I’ve been obsessing about benjamin’s ppt over the past week. He makes so many great points about the fact that people in Western markets just dismiss any business models coming out of Asia (I’m based in China).

    Why haven’t sites such as Facebook etc managed to install micropayment solutions? Do they just dismiss them out of hand or is it because they can’t see the forest for the trees.

    What I mean by that is it because their valuation models (as well as analysis of the sites) are primary based on traffic “If we get hundred million users we can monetise them later” rather than thinking “well if I get 10 million users who pay 50cents each that might be not bad”.

    All power to QQ, Cyberworld et al. I recommend everyone should read the ppt.

  9. dave mcclure Reply

    hmm. not sure i’m qualified / knowledgeable enough to hack this one, but here goes nothing:

    1) turn games into shows, let other people watch/bet on players. might have to use virtual currency depending on where you’re located, but could probably monetize the skill-based component. also use this to create buzz, run contests. could also offer rev-share on bets with players.

    2) create games that actually solve problems / do work for others, then monetize their finished game efforts. example: create a head-to-head game out of translating content / transcripting video or podcasts, sell the finished product. not sure this one scales as well, and limits the types of games you can create, but could be interesting. again, consider rev-share with high-scoring players.

    3) enhanced version of #1: allow people to buy equity in players, and/or stakehorse them. Friends-for-Sale meets Hollywood Stock Exchange meets Nintendo. be the house, and collect fees for buying/selling player shares. again, create celebrities / rev-share high-scoring players.

    4) add virtual goods add-ons to any of the above. boost your race-car with digital goods hi-test. buy virtual steroids / HGH for your players. buy extra lives / cheat codes, etc.

    5) if all else fails, sell out / sell your installs to big dumb brands with cash who are trying to figure out social games ;)

  10. James Gross Reply

    This is a huge problem dude and there are way to many terrible apps out there. It is hard for advertisers to value why one app is better than another, so instead they command a lower CPM and ad networks make money by “sharecropping” the long tail of apps. The aggregator of the pennies win, the individual developers lose.

    One way to solve this problem is by creating unique media(ads) and brand engagement that leverage the overall app and the community that is behind it. Jeremiah wrote up one of our campaigns we did with Dell and Graffiti(one of the three apps we work with in FB; hopefully one day we can work with more):

    http://www.web-strategist.com/blog/2008/03/24/case-study-dissecting-the-dell-regeneration-graffiti-facebook-campaign/

    Long term if you do want to go with brand/ad model, I think one way for developers to create value will be in plugging their apps into a brand’s platform. By effectively leveraging networks like Facebook, MySpace, etc. and driving people back to a brands platform and outside of the network’s walled garden, you can create real value for advertisers. If people’s actions on this app in a branded environment can still “talk back” to the networks; via profile updates, newsfeeds, etc. there is incredible engagement, “network effect” and scale there. Brands will pay for that.

  11. Noah Kagan Reply

    Atish,

    i think a fair amount of apps are profitable. the question is how much and for how long. most things get stale without updating / enhancements. the tops like scrabulous are likely making this much.

    700,000 daily active users. at 10 pvs a person (likely lower but lets give them the benefit of the doubt = 7,000,000 pvs a day * 30 = 210,000,000 * .10 cpm = $21,000. for 2 guys in india that’s a shit ton of money. $250,000 a year salary for copying someone else’s intellectual property. in the words of borat, “i like, can i touch.”

    however, if you were to work at Microsoft/Google you would like get that much in salary including stock/benefits/etc…

  12. Nicole Price Reply

    Tough situation. Are the eCPMs that low really? Can you charge for playing the games. With so many free games around, that may be tough. Actually $10000 does not sound bad at all.

  13. Firas Reply

    I think the question that gets to the heart of this issue is basically “what value does building apps on social networks provide me that regular webapps don’t?” It looks like the only advantage is rapid adoption. And thus breaking out of the social network’s ghetto (by running the app in its own site as well as ‘deployability’ other networks) is just a base requirement.

    “Leveraging the social graph” is just a fancy phrase. It’s not like Facebook is managing to leverage its OWN social graph data, nevermind us sharecroppers.

  14. Benjamin Joffe Reply

    Noah, thanks for quoting my presentation – I’ll put another one online soon following Open Web Asia in Seoul (www.openwebasia.com).

    Some comments about your post
    > Problems:
    > 1- On social networks in general the audiences are low value. These are kids spending money on a certain set of things: clothes, cell phones, food, movies & gasoline. Clicking on ads for other things isn’t that appealing.

    – You seem to assume that SNS are all for kids. Read this about a SNS with only 120,000 members making 70 million USD a year (http://www.plus8star.com/?p=138). Oh, they are all medical doctors. SNS can mean disintermediation of a middleman, or a new media / sales channel. There are tons of business efficiencies to create that have nothing to do with kids and Mars bars.

    > 2- The older demos are not installing applications. They have the money and/or provide money for their kids who are using the applications.
    – What if the currently available applications were just uninteresting for older demographics? Could the on-the-go applications people installing on iPhone be an indicator of what could work on fixed SNS?

    > 3- Saturation. There are now 100 million+ new page views a day that cubics, google adsense, lookery, etc…can provide ads for. That drive eCPMS down to ~$.10 or lower.
    – This could show that niche SNS have a higher potential than “general” ones with little purpose and focus.

    > 4- Scale. Your page views aren’t significant enough. Let’s say you can create 100,000,000 page-views a month. At $.10 / 1,000 pvs (eCPM) you are now making $10,000. Considering that might be 1-2 full-time people + hosting costs means you won’t be a trillionaire anytime soon.
    – Pageviews is the metrics of advertisers, no user ever said they were happy to have done XXX pageviews. I guess this metric can be forced on the user’s experience as long as they are not clients…

    Solutions:

    >- Use your app as a marketing vehicle to your own destination site.
    – SNS apps as media+marketing (“entertainment marketing”), I like this idea too :-)

    >- Reach out to brands (try hard) for individual sponsorships. Great but not too scalable.
    – Unless you target specific sectors and quality members, for which the companies willing to advertise are usual suspects. The medical doctors SNS is one example among other industries.

    > – Virtual Goods? It’s huge in Asia. Great read here. Thanks Dave.
    – It’s getting big in Europe and US too (Habbo Hotel, some video games). Surprising it took so long.

    >- Fun. Do it as a hobby or lifestyle business. Nothing wrong but this will be well suited for college students or part-time hackers.
    – What if a FB app had a low entry barrier and as such, could simply not make millions for all?