What If Facebook Taketh Away?
An interesting feature story on Wired News, about the emerging ad networks built on Facebook's platform, and how their future is heavily reliant on FB's continued tolerance of them. There are at least eight companies: Lookery, fbExchange, Cubics, Social Media and a new addition, Appfuel.
Context & Ripple Effects
Whether Facebook can monetize itself has shadowed the platform all year — Tech Trader Daily asked in July what happens if Facebook can't sell any ads. This Wired News feature, syndicated as "Selling Ads on Facebook Is a Tempting but Risky Business," flips that worry around: a layer of at least eight third-party ad networks — Lookery, fbExchange, Cubics, Social Media, and newly arrived Appfuel — has grown up selling inventory inside Facebook applications, and every one of them operates entirely at the pleasure of the host.
The dependent ecosystem keeps deepening even as its fragility gets flagged: Facebook reloaded its fbFund investment program for startups on September 21, and the Refresh DC meetup examined Facebook's impact on the widget economy days before this piece ran. More capital and more businesses are stacking onto ground whose rules Facebook alone writes.
First-order effects
- All eight named ad networks have no independent claim on their distribution — a single change to Facebook's platform policies could cut off their revenue overnight.
- Appfuel's entry adds yet another competitor bidding for the same in-application ad inventory, compressing margins in a business where the supply side (app developers) can switch networks freely.
Second-order effects
- App developers choosing among these networks inherit double exposure: both their application and their chosen ad network live on Facebook's terms, so a policy shift hits them through two channels at once and pushes some toward multi-platform hedging.
- fbFund's fresh round of startup funding raises the amount of venture capital riding on unwritten platform rules, increasing the political weight inside Facebook of clarifying — or restricting — what third parties may build.
Third-order effects
- If the pattern holds, early-stage investors will begin pricing "platform risk" into startups built solely atop one social network's API, much as they price customer-concentration risk elsewhere — shaping which kinds of platform-dependent companies get funded at all.
- The episode sketches the recurring structure of open-platform economics: a host opens its doors to accelerate growth, then retains sole discretion over how much of the commercial value layer built on top it continues to tolerate.
The trend: As social platforms open their APIs, a third-party advertising economy forms on top of them whose viability is set entirely by the host's tolerance rather than by market competition.