Facebook Platform Faces Rough Road Ahead, Despite Successes

The Facebook developer community is thriving but faces a good deal of uncertainty about its future. That was the general message from a session held at the Web 2.0 Expo today called “The Facebook Platform: Finding Success in the Facebook Economy.”

The session started off with a disagreement over how much money developers are actually making through Facebook. Naval Ravikant from Venturehacks estimated that over $100M would be made in 2008, whereas Joyce Park of Renkoo and Matt Sanchez of VideoEgg predicted revenues as low as $10-35M this year.

All panelists agreed, however, that CPM rates on Facebook are miserably low, perhaps averaging 15 cents. Developers have begun experimenting with other sources of revenue, such as the sale of virtual goods and premium services, but advertising still generates more than 80% of the platform’s revenue.

The panelists also agreed that Facebook’s recent moves to block viral distribution channels have made life harder for the developers of low engagement apps such as Slide’s FunWall. These apps suffer most because they depend on Facebook’s viral channels for their adoption, having given users little reason to invite their friends proactively.

In the long run, more engaging apps such as Scrabulous are set to do better not only because they attract more dedicated users, but because they provide better opportunities for direct monetization, even if their CPMs are also quite low. Ravikant made a point to say that travel, dating, book, and game-related apps have the brightest futures whereas “everyone else is kinda screwed”.

Despite the shift away from low engagement apps, the platform will remain the most attractive economically for independent developers. Small teams can crank out applications within days and earn decent paychecks, but large companies only have a handful of opportunities to make worthwhile returns on their investments. Ravikant made a point to discourage multi-million dollar investments in Facebook app developers, citing the difficulties associated with monetizing and maintaining a strong user-base. The sense I got, however, was that independent developers will also face hard times, since traditionally they don’t deploy high engagement apps.

The consensus from the panel was that Facebook needs to continue building a strong infrastructure for its developers. Park even suggested that Facebook roll back some of its restrictions on viral distribution since they were hurting growth of many legitimate applications (the distribution mechanisms were the main reason developers came to the platform in the first place).

She also wants Facebook to enforce its policies more clearly and fairly, since there are currently too many incentives to cheat. None of the panelists, however, were concerned that Facebook itself would trample many 3rd party apps with its own feature additions, since Facebook has the mindset of a platform provider, not an app developer.

Ravikant particularly looked forward to Facebook providing a good micro-payment system since it will spur innovation in monetization strategies, which could in turn inform how Facebook itself does business. Providing developers with better ways to make money is perhaps the most important thing Facebook can do now, especially if it continues to restrict how quickly its applications can grow.