Belated thoughts on Facebook’s IPO

Paul Graham wrote a letter to various YCombinator companies in response to Facebook’s IPO.  In the discussion, he makes the comment:

Plus Mark himself is such a fearsomely effective person. And so young; he’s only a little older now than Larry and Sergey were when they started Google; so he still has the energy and mental flexibility that’s usually the only asset of founders just starting out.

I actually think this is backwards: The primary reason why Facebook can be successful is because it is organized such that it could realize the vision of a technical founder, who has a foot in tech and a foot in business.

You’re right that they haven’t tried to make money yet. I once raged to a friend at Google that Facebook’s use of ads displayed an utter lack of creativity or seriousness about building a business. (I also argued that Google should not try to tackle Facebook on its home turf, but if it really wanted to attack it head-on, it would need to build a destination site instead of merely “socializing” all their products. Sadly, that destination site turned out to be G+, and then they used it to socialize their products. Sigh.)

There are two Facebooks. One is an identity service, built on a noisy social graph accreted over the years, which Zuckerburg is hoping to make as fundamental as DNS for the modern non-anonymized web. The other is a micro-blogging and photo sharing site on top of that identity service. Both are going to be hard to make money with.

It is really difficult to directly monetize the core identity service. They can attempt to provide the service as a bona fide piece of Internet technology (e.g. opening up retail locations to verify accounts in-person, or by partnering with wireless providers that sell their eventual phone), but then governments and others will get into the act and require open API access to the user information and graph data. As soon as that happens, they’ve given out their crown jewels.

Any other mechanism for monetizing the identity service is tantamount to providing advertising on the back of your driver’s license, or making your social security card into a frequent-diner loyalty card. People won’t like it, privacy advocates and anti-corporate doomsayers will have a field day, and governments will start interfering with their core tech. (A good strategy for Google might be to work on a stealth, open-ID based “Plan B” to have in their back pocket, for the day if/when Facebook does shoot itself in this foot like this. They’ve certainly screwed the privacy pooch before.)

And as for the other half of Facebook, they are in a crowded, fickle space, and their offering there isn’t actually that great (and I say that as a user and a technologist). Twitter, Pinterest, and a host of small startups are very real threats. Mark paid $1B to keep Instagram from Twitter and maybe Google; how many more of those can he afford? Furthermore, Apple has enoughcash in the bank to buy two Facebooks, even at its massively inflated P/E, and its gaming platform is tied to a much broader, more sustainable group of customers than Zynga’s “whales”. I’ve personally spent over $100 on iOS games – and barely noticed that that was the case. It was easy, casual, natural, and I will probably continue to dump more money into the iOS ecosystem, because it works great. I’ve spent exactly $1.98 to buy two Zynga games, mostly to get rid of the annoying ads, and I’ve stopped playing both.

Lastly, Amazon, whose customer profiles include credit cards and addresses, and whose social information is tied in to actual purchasing intent, has yet to reveal the punchline in its Kindle strategy. Just as ‘selling books’ was not the ultimate purpose of the company, I am fairly certain that ‘reading books’ is not the ultimate purpose of the Kindle. One concept: A Kindle fire with a barcode scanner turns every single aisle in every brick & mortar store in the country (with 3G signal) into a showroom for Amazon. Add passive background RFID scanning as the user walks the aisles, and it’s a brave new world of retail.

TLDR: Mark is a smart and capable guy, now backed with fresh cash, but he’s got to apply some creative thinking to demonstrate that he can actually milk his cash cow. His worst case scenario is to become basically Verisign, and I have not seen them demonstrate any new thinking to suggest this will not be the case.


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