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It’s not often that a public company CEO suggests that he might be open to an entirely new product strategy, but that’s exactly what Mark Zuckerberg did on Facebook’s earnings call last week.
Allow us to explain.
For all it’s popularity with users and resources from investors, Facebook has always been an understaffed company.
Except for the early years, when it couldn’t hire fast enough, this has mostly been intentional.
It’s a strategy.
The company likes to tell star recruits that Facebook’s low engineer-to-users ratio means they will have a greater impact in their work. They will have more “leverage.”
This limited headcount has also gone hand-in-hand with Facebook’s platform strategy: Facebook develops and updates a core set of features and products – and then gives third-party developers controlled access to its user-base so they can do the work of building out new products, features, and applications.
Then Facebook attempts to extract value from those developers in some way.
What this abstract strategy has meant in reality is that Facebook doesn’t make games for Facebook; it lets Zynga do it. Facebook doesn’t have a music player; it lets Spotify make one. Facebook doesn’t have a bookmarking service; it lets Pinterest build one.
During Facebook second quarter earnings call, CEO Mark Zuckerberg re-iterated this strategy:
We’ve always been significantly smaller per employee compared to the number of people who we serve in the world. So it’s really baked into the company that we have to build systems and software that take into account the leverage that employees here have. And that’s actually one of the reasons why a lot of people love working here and one of the biggest reasons why people cite for wanting to join the company and staying here. So it’s also affected the strategy. I mentioned we believe that all these consumer products, and maybe even more than consumer products that people use, will become social over time. But we can’t build all those things ourselves, so we focused on building this platform.
But then he said something that surprised us.
He said: “Over time, it might make sense for us to build more of these things ourselves.”
Zuckerberg has talked about Facebook’s platform strategy for years – most memorably at a Web 2.0 conference in 2010 – and this is the first time we’ve heard him float the possibility that Facebook could, someday, start competing with the developers on its platform.
Facebook’s sudden openness to owning more of its platform might terrify the developers who have been building companies and making a living there for the past few years.
It should not. It should be viewed as a potentially lucrative opportunity.
That’s because if Zuckerberg does decide that Facebook needs to start owning more of the third-party products on its platform, the smart way for Facebook to do it is to use its incredible horde of cash and valuable stock to buy, buy, buy.
That’s what Facebook did this spring when it bought Facebook-connected photo-sharing app Instagram for $1 billion.
Despite speculation to the contrary, Facebook isn’t likely to buy a gamesmaker like Zynga. It already collects heavy taxes from Zynga’s revenues, so the upside is limited. Besides, gaming is a hits-driven business where owning the studio is much harder, riskier work than owning the distribution point. Spotify and Pinterest are more natural (and neutral) extensions to Facebook’s platform, and more likely targets.
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