Strategy: The Two-Edged Sword of Platform Dependence

The names change but the story doesn’t.  A Facebook partner discovers that even though Facebook told them that they loved them and valued the revenue that they drove, they were about to put them out of business.  Expressions of stunned disbelief follow.

Investors and operators have long been concerned about heavy dependence on Google for revenue and traffic. Now, they should be at least as concerned about Facebook dependence.

This is particularly relevant as more and more publishers evaluate the level of their commitment to Facebook Instant Articles. Instead of creating posts that link back to the publisher’s domain, they actually publish the articles on Facebook.

The logic is simple and seductive, put your articles where your readers already are–on Facebook.  You can sell the ads and keep all the revenue or let Facebook do it and keep 70%.  Pretty sweet, huh?

Except that the toothpaste never goes back into the tube.  Once readers become accustomed to reading their articles on Facebook, it will become harder and harder for media sites to drive traffic to their own domains. And, once the center of gravity has shifted, Facebook will undoubtedly “renegotiate” the terms in their favor just as it has before.

At this time last year, Tech Crunch shared this interesting/terrifying/fascinating story about the scramble to find a soft landing for BranchOut, a previously high flying startup. BranchOut had raised $49 million and rocketed to 33 million users. They got tremendous leverage and acceleration by building their business on top of the Facebook platform. They then discovered the painful truth that Facebook is your friend until they are not. I don’t think that Facebook sets out to harm its partners, but like the scorpion who begs a ride across the river from the frog and then stings him (killing both of them), they can’t help themselves because it’s in their nature.

Every few years there’s a new generation of startups that raises money based on the idea that they they can quickly achieve scale by leveraging the audience and APIs of a platform partner. Facebook actively encourages these beliefs and that investment.

First there were ad startups (such as Social Media), then Facebook apps and games, and perhaps most significantly, brand and fan pages. In each case, Facebook encouraged businesses to invest in building audiences and businesses on top of their platform. The promise was a low-friction way to build audience and prospectively to form consumer relationships that could be transferred back to the partner’s own domain.

In the short run, some of these companies have had successful exits–even IPOs. In the long run however, Facebook has ultimately closed the door on the opportunities. In each case they have materially changed the rules along the way. They’ve either shut down the businesses altogether or changed the economics to Facebook’s favor.

Right now a variety of brands are evaluating their social marketing strategies as they discover that they can no longer reach the fans who have liked them on Facebook. Working estimates in the market are that brand pages can only reach 2-4% of their followers organically while media companies are lucky to reach 5%. Not surprisingly Facebook will gladly help marketers increase their reach through paid posts. Zynga discovered the hard way that Facebook’s fancies can be quite ephemeral.

I don’t believe that any of these things are illegal–perhaps not even unethical. It’s only reasonable to assume that a publicly traded business will do everything in it’s power to grow its profits, accelerate its growth and maximize its share price. That’s the job of management.

However as an executive or investor at a partner company, it’s important to understand that Facebook reserves the right to change the rules of the game while you are still at the table. As with so many things surrounding a venture backed business, this problem has two dimensions. First, the reality of running a business that’s highly dependent on the kindness of a third party.  Second, the willingness of investors to put money into a business that’s so heavily dependent. Finally, the risk of waking up one morning to discover that unexpected scorpion bite that undercuts the foundation of your business.