Six Lines

Facebook’s Business Model

Posted by Aaron Massey on 11 Apr 2012.

The Wall Street Journal has a fantastic article up about Facebook’s business model. It’s a great article, and I would recommend you check out the infographics as well. Here’s the intro:

Not so long ago, there was a familiar product called software. It was sold in stores, in shrink-wrapped boxes. When you bought it, all that you gave away was your credit card number or a stack of bills.

Now there are “apps”—stylish, discrete chunks of software that live online or in your smartphone. To “buy” an app, all you have to do is click a button. Sometimes they cost a few dollars, but many apps are free, at least in monetary terms. You often pay in another way. Apps are gateways, and when you buy an app, there is a strong chance that you are supplying its developers with one of the most coveted commodities in today’s economy: personal data.

Essentially, the Wall Street Journal is saying that there’s no such thing as a free lunch. Those apps cost something: data. Is this as valuable as cash? Maybe. It’s certainly more of a risk for the companies that make the apps, but it could pay off big. Here’s one estimate from the article:

The “app economy,” which includes Facebook as well as smartphone apps, is estimated to have generated $20 billion in revenue in 2011 by selling downloads, advertising, “virtual goods” and other products, according to estimates from Rubinson Partners, a market researcher.

The WSJ article hits on a lot of big points, many of which are common themes in the security and privacy community. However, it also reminded me of a post from Marco Arment about TextMate 2. The creator of TextMate offered a free upgrade to TextMate 2 for the people who bought the first version. That was years ago. Marco wants to pay for TextMate 2 to ensure that its creator can continue to afford to work on the program.

Although paying for TextMate 2 may seem totally separate from the Facebook business model, there’s an important connection here:

By virtue of its size and user base of 800-million-plus people, Facebook is at the heart of the personal data economy. Popular apps can quickly go “viral” there and gain millions of users—but can also flame out just as quickly. This explains why some apps seek to cash in by gathering as much data as possible and hoping to find ways to make money from it.

Let’s say that someone creates a Facebook app that you really love, but maybe it just doesn’t go ‘viral’ or the creators aren’t able to turn all that data they have access to into cash. What option do you have to ensure that they will keep the app working? After the big influx of initial users, what other data could be collected to keep the app developers working on it?