Practical Entrepreneur

From the early days of internet, web email services such as Hotmail and Yahoo Mail have ruled the virtual highways. every transaction one way or another has been going through these services. individuals communicate with their friends and family through them; viral messages/pics/videos are distributed through these channels; businesses reach their customers through them both for promotional campaigns and for transactional information; businesses market through email by buying email lists and sending promotional material to prospective customers.

Playing this pivotal role in our internet lives has given major email providers a significant power in shaping the online universe. With a reported 250 million mailboxes each, Hotmail and Yahoo Mail have been the elite in this universe and have brought significant riches to their owners. This is exactly why Google wanted a piece of this game and introduced Gmail in 2004.

But in the past year or so an interesting shift has been happening. Many of the activities that users were performing through their emails is now shifting to social networks which provide a more “social” version of the same. Here are a few simple examples:

• sending emails to family and friends == writing on their Facebook wall
• email photos as attachment == uploading photos to Facebook
• passing chain emails on == inviting friends to apps that do so on your behalf
• taking quizzes and sharing results == filling up quizzes on social applications

This shift is not just limited to personal interactions. Relationships that businesses were establishing with individuals through emails for many years are also moving to (or being augmented by) their social network equivalent:

• signing up with email and validating it == signing up with Facebook Connect
• receiving transactional email == receiving notifications on Facebook
• signing up for promotional emails == becoming a fan of the brand’s page
• receiving promotional emails == status updates from pages on Facebook
• viral growth through address book import == viral growth through Facebook invite

a very immediate implication of this shift is visible in what businesses go after

• buying email lists for promotional campaigns == buying applications with access to millions of users
• white listing business’ email with Hotmail/Yahoo == verifying business’ Application with Facebook (i am sure verification for pages will follow soon)

Obviously a lot of these activities are simply better when you add a social angel to them. Uploading photos to Facebook and tagging friends in it is a ton easier than composing an HTML email and writing captions around images and sending that to your friends. It’s a ton more fun to post that stupid quiz’s results on Facebook and see how your friends react. However, a more intriguing element in the social version of these interactions is the speed at which they happen. When you post a photo on Facebook you will receive your first comment/like/etc in a matter of minutes. Doing so through email usually gets your first reaction in half a day or so (talk about immediate gratification). The same holds true for business interactions. At Zoosk, we see this speed difference very clearly: users respond to notifications within minutes but emails usually take 12 hours or so for impact.

This speed is particularly intriguing and at times surprising. Is it because our email boxes are way more cluttered than our Facebook notification window? I find that hard to believe. There is already a considerable amount of “spam” in our Facebook notifications and feeds. So, why do consumers react to pings on Facebook so much quicker? I don’t know that answer to this question yet. Here are a few of my theories (leave your theories in comments)

• sense of urgency: my notifications/feed stories/etc will go away. I need to do something now
• state of mind: I am on a social network to sink time, so I am more open to triggers
• social element: my friends will see my action and potentially participate with me so I am more inclined to do something

right now it seems like these two systems are running in parallel. I receive an email for almost every Facebook notification that I receive. But I suspect that this balance won’t last for long. Especially if the effectiveness and speed of this new medium continues to be superior to email as we push more and more interactions onto it.

[side note: This is a critical time in web email services' life. If they are not careful, their power could diminish very quickly. Hotmail and Yahoo are both responding to this shift with "Windows Live Network" (or whatever the social element of hotmail is called) and "Yahoo Connections" both of which are trying to bring social (as in my friends and family) to their experience. I am not convinced that just capturing my social graph (which by the way they both do a horrible job of it) is going to be enough. We recently saw Google take a more ambitious approach to evolving email with their Wave project. The big three internet companies have failed to get social networking right and now they are seeing their grip on email (the other starting point for our surfing habits besides search) is eroding because the same social networks are replacing them.]

As for businesses, this shift/battle means that they need to perfect both mediums until (or if) a clear winner emerges. You still need to whitelist your email servers and also get your Facebook application verified. Yes, this means more work, but you have more opportunities to stay connected to your users. The trick now is to make sure your communication strategy takes the special characteristics of each medium into account and uses them appropriately.

Recently vice president of product marketing at Facebook, Chamath Palihapitiya, spoke about the Facebook developer platform at the TieCon conference. Some of the figures what were quotes by the attending press caught my attention.

And about 33 percent of Facebook application makers reported profits of up to $500,000 a month. Finally, at least one-quarter of the applications running on Facebook have 100,000 active daily users.

Looking at adonomics or other Facebook application trackers, you can see that only 50 Facebook applications boost 100,000 and above daily active users. By Chamath’s math, Facebook only has 200 applications! I guess MySpace platform is not doing too bad in retrospect.

In reality, Facebook has some 25,000 applications on it’s platform. and only 0.2% of those have more than 100K daily visitors. I am just hoping that Chamath was miss-quoted, and that he and his team don’t really think every application on their platform is thriving.

And imagine if 33% of Facebook applications were making half a million in profits every month. That would put the profit of just this 1/3 of applications at around $50 million dollars a year! That should put their revenue in the $150 million range, exactly how much Facebook made in 2007!
Simply AMAZING

If you are following social media development, then you probably have seen or heard of the O’Reilly Research analysis published here and analyzed here (among many other places). Ben Lorica’s post on Radar provides a very interesting glimpse into the Facebook ecosystem and highlights some industries that are doing well through an in-house categorization of applications and comparing the corresponding number of active users.

As this chart from the research highlights, the biggest category on Facebook is applications that are ‘just for fun’. Obviously the assessment that the most successful applications on Facebook are those that have marginal value and are time wasters resulted in extensive coverage of the report in the blogosphere and ended in headlines such as: On Facebook, Girls And Boys Just Want To Have Fun.

I think the categorization of the applications by the research team has a lot to do with this assessment. I have been looking at the same question from a different angle for a while which might be useful in structuring a discussion around the topic.

Facebook was a social network way before it became a platform. It had millions of users that were active on the site way before any of these applications existed. When the platform was introduced last year, from a user’s perspective, all of a sudden new functionalities became available. Some of the functionalities were improved versions of the existing features (think SuperWall) and some opened completely new opportunities (such as iLike for music).

So what happens if you look at the Facebook universe in terms of activities that were facilitated before and after the platform launch. Below i have tried to summarize the main activities of a typical Facebook user (please comment if I have missed major areas). I have also included (a very subjective) assessment of how Facebook was doing in facilitating each category before the platform launched by using different font sizes.

In the right most column I have included some of the applications that have emerged to improve the user experience for each activity plus the total daily active users of all such applications in the top 20 facebook applications (in terms of daily actives). Please note that the active numbers are based on back-of-envelope calculation on a random day and only for top 20 applications. In the O’Reilly report, they summed all applications up which takes the tail into account as well.
I think this perspective highlights a couple of trends/questions

• What’s up with Photo Sharing? Is Facebook Photo application so perfect that nobody can provide value beyond it? This seems like an excellent opportunity for a brand new application to come out of no where and take over.
• Improving existing functionality/purpose has the least barrier to user adoption. This is especially true in case of sub-perfect existing experiences. Facebook wall was boring and text only when FunWall and SuperWall exploded in popularity. People discovery still sucks on Facebook which is a great opportunity for Zoosk and others innovating in this area.
• Media consumption has always been a part of most successful social networks except for Facebook. To this day I don’t understand why Facebook is so bad when it comes to media discovry and sharing. But this was a known winner and iLike and Flixter capitalized on the opportunity very well.
• Social gaming seems to be the only truly new activity category when it comes to successful applications. It was basically ignored by (or unknown to) social networks until Scrabulous and Friends for Sale came into the picture on Facebook. This category now is rightly so getting plenty of attention from the venture community and entrepreneurs.

What does this mean for applications not in these categories? Is this the extent of utility that application developers can provide on social networks? I don’t think so. Social gaming didn’t really realize it’s potential until early February this year, full 9 months after the platform opened up. What is the next big emerging activity category? That being said, I believe it is much more natural to grow on social networks if you are enhancing or extending existing user bahaviors.

I should also highlight that this analysis is only looking at very large applications. If your application does not benefit from network effects then you don’t need to be huge in order to be able to provide utility. One more thing to keep in mind is that monetization potential is completely left out of this discussion. Even though having a large active user base helps with monetization opportunities, it does not guarantee the way to profit.

Is this trend going to hold up on other social networks that are opening up? It’s too early to tell. But the initial indications suggest it might hold true on MySpace and Bebo as well.

PS: Obviously a large contributor to the success of applications is the viral engineering of applications. For each of the successful applications in these categories there are hundreds of tiny copies. Just because you pick a hot category does not mean you will have a huge user base. It might just make it a little bit easier to do so. Follow Dave or Andrew‘s blog if you want some viral wisdom.

Last year around the same time I decided to join Facebook after reading an article I read in Wall Street Journal. I had no idea a year later I will be super busy building a business that is based on ideas first materialized by Facebook. When I joined Facebook it was by no means a new phenomenon in the web community which was strange for me because I am usually and early adopter when it comes to technology.

I have been having similar feelings about Twitter. Twitter has been the tech community’s darling for over a year now after their SBSW breakout last winter. I honestly can’t see what the excitement is about but I can’t ignore so much appreciation by the community for much longer. So, I finally gave in and signed up. You can “follow me” here if you are interested.
You never know, maybe history repeats itself and I will be building a business on Twitter next year. Oh wait, maybe i will mix Facebook and Twitter and do something on that…