Bo Peabody wrote a thought-provoking article for Business Insider called “Facebook And Twitter Will Always Be Crappy Businesses“.  I had to respond to a few things:

• It is still too early to tell what brand managers are going to do, particularly on Facebook.  You’re talking about a group of businesses (brands and agencies) with highly engrained habits and beliefs after decades of one-way, mass communication with customers. Social media and online advertising is simply new. Media buyers still don’t know how to get their arms around it, or how to efficiently buy it. But mental shifts are happening.
• Proctor & Gamble seems to be making quite an investment in Facebook.  Yes, they have a large experimental budget (they’ve been my customers with that budget), but this doesn’t sound like experimenting anymore.
• I’m a big believer in virtual goods when tied to the right experience design.  While I’ve attended events where Facebook execs dismiss virtual goods as niche compared to advertising, you know that they have studied the large Chinese web companies which make the bulk of their money from virtual goods of different sorts.  Contrary to Bo Peabody’s statement that “[a]ny monetization efforts are going to drive some users away and that will in turn erode value for the users that remain” — one of the benefits of virtual goods is that each user can determine their own level of investment.

But more than anything, I had to raise my eyebrows when Bo Peabody wrote, “Through my experience building Tripod and Everyday Health I’ve concluded that individuals get on the Web for one of two reasons: to find people or to find information.”

Come on Bo, you can’t define the world through your own lense! The dominant activity on Facebook is playing games, and YouTube and Hulu ain’t no slouches either.  Yes, I’m talking about entertainment.   Furthermore, there is this wee little trend going on. I’ll just put it out there for consideration.  It’s only hundreds of billions of dollars, and it’s called ecommerce.

One of my projects posed the question: should we create a native Facebook application (example: Playfish’s Country Story) or a separate website using Facebook Connect (example: Thread.com).  FB Connect, after all, still gives you access to the social graph, feeds, etc.  Here are some of my preliminary thoughts after conversations with other folks, and I would welcome your input.

A Business Issue more than Technical

Several developers are telling me that the issue is probably more business-related than technical.  From what I am hearing, while FBML sounds like a headache, the iframe approach makes embedding your web app or flash application within Facebook a lot simpler.  That implies that it is pretty straightforward to do both if you want, save for the extra work of designing and rendering a different front end for the 760 pixel Facebook app width.

Reasons to Create a Facebook App

1. Reduce friction: This is a biggie. I would expect greater conversion and retention if you “stay where people live”.  This has been the approach of social game companies, and no doubt why Popcap moved Bejeweled Blitz into Facebook itself.  Trying to create a second destination site, even if you leverage FB’s registration system and social graph, might hurt growth.  However, with that said, Thread.com seems to have taken a FBConnect-only approach and has gained solid traction from what I hear.
2. Discovery: a FBConnect site can leverage many marketing channels such as the news feed, fan pages, etc, but the current app directory makes it easier to discover Facebook apps, not FBConnect websites.  Facebook might change this given their interest in promoting FBConnect, and furthermore I’m not sure how many people really discover apps this way rather than through friends and ads.
3. More open namespace: on the Web, it can be tremendously difficult to get a good consumer friendly URL.  On Facebook that is much less of an issue.
4. Leverage native FB Functionality: if your application is built within Facebook, users can continue using features like Facebook chat.

Reasons to Create a FBConnect Website

1. Control over advertising: a Facebook app lives within their framework and you cannot control the advertisements that show up in the sidebar or get a piece of that monetization.  If you want to monetize primarily through advertising, you probably want to maximize control over what ads are showing up and how.
2. Control over design: With an FB app, you are limited to a column of 760 pixels and Facebook has control all around you.  If you want to maximize usability and simplicity and have total control over UI optimization, then you are better off building your own website.
3. Control over metrics: while I believe that transparency around metrics can be quite useful from a marketing perspective, sometimes you want to control when and how they get released.  FB apps force you to share monthly active users.  However, if your numbers are awesome, then you really do want to appear in the top Facebook apps list.
4. Control over your destiny: having your own website de-risks your dependence on Facebook.  You still need to adhere to Facebook’s policies around their APIs, but should they decide to compete against you, shut you down, or shut down the entire API, as long as you have been collecting email addresses yourself and training users to come to your URL, then you will be badly hurt, but have at least a chance to survive.

My friend John Swords posed the question as to whether Facebook advertisements had different conversion rates if destination was a Facebook app versus a Facebook Connect site, and I’m curious if anyone out there has experimented with this.

Facebook’s policy changes, which affect viral methods, will probably keep the inputs to this decision in flux.  Another factor to watch is Facebook’s payment system, which should be attractive for developers by reducing payment friction, but I assume that will be available to both FB apps and FB Connect sites.

I suspect that more startups will take the “do both” approach.

I would love to hear your thoughts on this, whether you think these thoughts are on or totally off target.

Thank you Joe, Becky and John for your thoughts on this topic.

My last post commented on GamesBeat’s articles from Casual Connect, which touched on the challenges old casual game leaders are having with the new world of social games / social networks.  Inside Social Games just posted about PopCap bringing Zuma to Facebook (as well as letting players use Facebook Connect on their own site).

A quick look and you can see some of the major differences to the games coming from Playfish and Zynga: 1. PopCap is not effectively cross-promoting other games in the header (or a sidebar); 2. the game’s only monetization path is through display advertisements (in this case, served by Google).

PopCap has also not copy-edited the marketing language below for the Facebook “Allow Access” screen, not a good sign.

PopCap is known for designing great games, so I think most people are assuming they are going to adapt successfully to this new world.  Porting over old hits is not going to be enough, although those games should be quite effective as “loss leaders” pulling in traffic so that PopCap can cross-promote new games with better monetization and compulsion built in.  It shall be interesting to watch their next moves.

Casual Connect just took place in Seattle and Dean Takahashi over at GamesBeat has done a great job capturing some of the trends in this part of the games world: Part 1 and Part 2.

Some of the most interesting quotes:

• Social games might hit a half billion in revenues this year. In 2007, before a price war began, casual games were an estimated $2.25 billion industry. … In the past year, the “try before you buy” model collapsed.
• Playfish has 8 million daily active users, has raised $21 million, has 200 employees, is profitable, and doesn’t spend money on marketing
• Playdom, which is the leading social game company on MySpace, has 75 employees and is expanding to 200 in the next four months, if it meets its hiring plans. … Zynga is already at 350 employees and contractors, and still hiring aggressively.

While a lot of attention is paid to the relative ease of distribution on the social networks due to viral capabilities that come with those sites, and which are cleverly designed into the games themselves, I do not see journalists paying proper due to the cross-promotional power that Zynga and Playfish have created.

Every time a player engages with one game, they are exposed to the rest of their games through cross-promotional toolbars. I believe this plays a huge role in why Playfish and Zynga’s new games leapfrog to the top of the charts, and it is of course why these companies have become attractive venture capital investments, because the cross-promotion power takes a lot of the risk out of the publisher model (i.e. you’re not simply relying on good design).

I also strongly believe that the microtransaction (virtual goods) business model plays a big part as well, as it not only allows players to get hooked for free, but it is essentially a personalized pricing model, i.e. every player sets their own level of “value” (often as impluse purchases), and this has expanded the overall market size.

A few months ago, I listened to a panel organized by Battery Ventures called “Monetizing Social Media”.  Perhaps not surprisingly for a New York-based event, the panel spent 99% of the time talking about advertising.  Still, I was surprised to see both the Facebook and MySpace representatives brush off microtransaction business models as niche and not worth discussing.

The total advertising market is certainly much bigger than virtual goods, so I can understand why they keep trying to capture ad spend dollars, but when you look at companies like Tencent and watch the rapid growth of micro-transaction based apps, the dependence on advertising starts to feel a bit like wearing blinders.  However, notwithstanding the panelists statements, both MySpace and Facebook seem to be working on virtual currency strategies, and they are smart to diversify since ad dollars still aren’t racing their way.

eMarketer now forecasts that advertising in online social networks is going to fall 3% in 2009, although they do think it will recover in 2010 and grow 10% above the 2008 levels.

After pouring so much effort into advertising, will they understand enough about virtual goods to capitalize on the new model? That remains to be seen. Facebook’s neglect of its gift system has not been a good sign, but perhaps times are a-changing.

The point is not that micro-transactions are the new savior to socnets.  Advertising will be an important revenue source.  However, as the music industry is learning, diversification of revenue streams is the name of the game.

Nielsen’s Buzz tracking research just posted this chart, and went on to write:

Nearly 15% of all online discussions about Jackson referenced either a broadcast or social network. CNN which teamed up with Facebook on streaming coverage was named in 5% of all online conversations. Also on the TV network side, BET came in 2nd with 1.9%, ABC with 1.7%, MTV with 1.44%, NBC/MSNBC with 1.43%, Fox with 1.38% and CBS with 1.0%. Among social networks, Twitter was the most discussed social networking site with 2.4%. Facebook was mentioned in 2% of the conversations, followed by Youtube (1.9%) Myspace (0.6%) and Hulu (0.3%) which streamed FOX News coverage.