One of the biggest multi-sided social platforms is Facebook. Facebook connects users with app developers, advertisers, websites and companies. The subsidy side has always been the users, because the users have the strongest positive cross-side network effects on all other sides and are the most price-sensitive. More than 90% of Facebook’s revenue comes from advertisers, but still, Facebook has chosen to open up the platform to two other sides, namely The Facebook Platform (for app developers) and Business Pages in 2007. I’d like to share my thoughts on why I think Facebook did this.
Almost everyone knows what Facebook is. It is a social network founded in 2004 as communication tool for students at the Harvard University. By that time, the membership was restricted to only serve Harvard students. But because of the huge demand, it quickly loosened its entry-barriers by allowing other universities and high school students to join the platform. In 2006 Facebook launched the newsfeed (although not as advanced as it is now) and other social tools, such as messaging, discussion boards, groups and events, which all boosted the user engagement (30% increase in average time-spend on Facebook) and installed base. In 2006 the number of active accounts was 12.000.000, which made the platform hugely attractive to advertisers. In 2006 Facebook’s revenue was $48.000.000, all coming from the advertisers-side.
In 2007 Facebook launched Facebook ads and Social ads, which allowed advertisers to target specific groups directly. This was also the year that Facebook opened up two new sides to the platform: Businesses (Pages) and App developers (Facebook Platform). Businesses (Pages) were not monetized directly; a business could simply create a company-page for free. However, Facebook was able to monetize the App Developers directly by charging a fee for each transaction an app made to the user. But if you quickly scroll down to the revenue chart in figure 3, you’ll see that this revenue (labeled as ‘other fees’) is just a small portion of how Facebook monetizes its platform.
So why would Facebook open up these two new sides, facing a lot of software adjustments, if the direct revenue of these two sides is such a small portion of Facebook’s revenue?
Although maybe not intentional, Facebook unleashed huge positive cross-side network effects directed at users by opening up the Facebook Platform and Pages for Businesses. More pages and more apps resulted in more users and higher user engagement. At the end of 2007 (the year of the introduction of the two new sides) the installed base was 58.000.000 (an increase of 383% to 2006) which grew substantially every year.
Figure 1. Facebooks user installed base and revenue 2008-2011
To understand why this is so important for Facebook, I’ve illustrated the network effects between (and within) each side of the platform in figure 2. The users are in the dead center; being the driver of the growth of all other sides. Interesting to see is that the side that produces almost all revenue (advertisers) is the only side with a direct negative cross-side effect on users. So what Facebook needed to do, is to increase (and introduce) sides that have a positive cross-side network effect on users to balance out the negative cross-side effect that the advertisers have on the users. And that is exactly what the Facebook Platform and Business Pages did.
Figure 2. Cross-side and same-side network effects within the Facebook platform
So yes, direct revenue of Business Pages and App Developers are very low. But the most valuable part of the two sides is that both have a huge positive cross-side network effect on users. The ecosystem Facebook has created makes sure the installed user base was constantly growing, driven by same-side positive network effects as well as positive cross-side effects from both the Facebook Platform (apps) as Business Pages, making the platform hugely attractive for advertisers. And to make it even better: Business Pages and App Developers became advertisers themselves as well.
Figure 3. Facebook quarterly revenue from 2012 – 2015. Source: annual reports
