Life on the Edge: Learning from Facebook

The social network provides important lessons for executives—and a key forum for innovation and experimentation

Business Week
April 2, 2008
By John Hagel and John Seely Brown

For most business executives, Facebook remains a remote, somewhat mysterious, online frontier. Many executives harbor strong doubts that Facebook is at all relevant to "real business." After all, isn't it just a bunch of college kids sharing photos of drinking exploits and trying to hook up with each other?

Let's start with the stats. Facebook now brings together 66 million online users. While many of these users are students and recent graduates, users 35 years old and older account for more than half of Facebook's daily visitors and are the network's most rapidly growing demographic. Currently the average Facebook visitor spends about 2.5 hours per month on the site, which was founded in February, 2004, and was valued at $15 billion three years later when Microsoft purchased a 1.6% share of the company.

Facebook is still largely a social environment where very little commerce occurs. In fact, many businesses have expressed concern about the low click-through rates on advertisements placed on such social network sites. Products are generally not bought or sold on Facebook, but it is becoming an important site for creative talent and businesspeople to achieve visibility and build networks.

Dismissing Facebook as irrelevant to business would be dangerously shortsighted. Yes, it is on the edge of traditional business activity, but it is an edge where new approaches to business are being tested and refined. Like most edges in the business world, it may look marginal at the outset, but has the potential to redefine business more broadly over time.

Consider the momentous decision by Facebook in May, 2007, to make its site available to independent, third-party developers to offer their applications to the network's participants. In one fell swoop a single edge between Facebook and its users fragmented into thousands of edges where a growing number of independent developers can connect and interact with Facebook users in very diverse ways. Developers, drawn by the large numbers of Facebook users, swarmed in to offer a bewildering variety of applications. At last count Facebook had attracted 150,000 active developers, who are now generating more than 20,000 applications.

These edges are fertile with innovation because participation requires such a small investment in time and money. Last fall, psychologist B. J. Fogg taught a class at Stanford University in which he assigned students to develop Facebook applications. During the 10 weeks of the class, 73 students developed applications such as Kiss Me, Oregon Trail, and Secret Admirer, that have since resulted in 25 million installs and, by the end of the class, were attracting about 1 million daily, active users. These applications have generated more than $500,000 in ad revenue since September. At least three companies were formed by students in the class.

Edges not only spawn product and service innovations; they also catalyze business-model innovations. On Facebook, for example, the fragmentation of development activity made it inevitable that brokers would emerge to help entrepreneurial application developers monetize the results of their programming efforts by connecting them with advertisers. One of the most prominent of these early brokers is SocialMedia, a company formed by Seth Goldstein, a serial entrepreneur and venture capitalist who recently migrated from Silicon Alley (the infotech neighborhood of Manhattan) to Silicon Valley.

Goldstein sees a massive shift in the online world of communications and advertising, shaped by social network sites like Facebook, as applications provide a new context for placement of relevant advertisements. Rather than placing an online ad on a page of static content, why not place it in an application at appropriate points within a sequence of user actions? To take it further, why not make the entire application a promotion for a product or service?

As conventional ad placement techniques continue to yield disappointing results, many media companies are exploring the role of Facebook applications (, 3/3/08) in promoting new movies or TV series such as Resident Evil and Parking Wars.

The low cost of entry, the proliferating applications, and the blurring of conventional boundaries between content and paid advertising—as advertisers and developers join up to engage users—more effectively create interesting business challenges. Much of the experimentation and innovation in Facebook applications focuses on that holy grail—"virality." How does a new application rise above the growing crowd of other applications competing for participants' attention? Developers must strike a tricky balance, promoting rapid dissemination while avoiding resentment over spamming.

The application ecosystem on Facebook is an epidemiologist's dream. Applications take off and spread like a flu epidemic but then, for most, usage precipitously falls off as participant interest shifts to the next "hot" application. How do application developers sustain participant interest and involvement? What are the design principles that promote sustained engagement?

As a broker working at the intersection of developers and advertisers, SocialMedia is in the middle of all of this. While serving the narrow broker role of matching buyers and sellers, the company also helps identify patterns for success within the application-developer ecosystem and works with advertisers to discover more effective ways to reach participants through applications. Developers and advertisers seek out companies like SocialMedia for advice and insight to catalyze the next wave of innovation. As an example of this broader knowledge-broker role, SocialMedia is hosting a workshop next month for its top developers to help them develop business plans to support their application development businesses.

So what lessons should more traditional companies take away from the early Facebook and SocialMedia experience?

Create more edges. The decision by Facebook to open up its platform to third-party developers unleashed a torrent of innovation that continues to expand. Thousands of developers are trying out ideas and learning from each other. Facebook participants benefit from a growing diversity of applications offering functionality Facebook would have never been able to develop on its own. By offering application developers easy access to millions of potential users, Facebook spurred broad innovation in a short period of time.

Provide better ways to connect at the edge. Brokers like SocialMedia attract diverse participants at the edge and provide mechanisms to catalyze new insight and share knowledge. Sure, developers and advertisers do business with the company because it helps to drive near-term economics through its advertising network. But in the process of interacting with SocialMedia and with each other in forums created by the company, they get more insight into what is working and what is not. The analytic tools used by SocialMedia help it to do pattern recognition and deliver even more value to the participants in its network.

Demographic edges are fertile grounds for business innovation. While older participants are a growing segment of Facebook users, younger participants are the early adopters of many of the applications introduced on Facebook. They are more willing to try new things and are much more likely to refer others to applications they like. Younger generations can be important catalysts for business innovation, both because they often uncover unmet needs earlier than older customers and because they are more willing to try a new product or service.

Experiment and iterate rapidly. The power of Facebook as an innovation platform is that it costs so little for an application developer to introduce an application and generate quick market feedback. This environment encourages lots of experimentation and accelerates learning. As B.J. Fogg from Stanford has noted, "Many crummy trials beat deep thinking." Wherever possible, executives should be creating platforms for which the cost of failure is minimal and the upside is potentially enormous.

Social, technologic, and economic are inextricably intertwined. Facebook succeeds because it satisfies profound social needs to connect and be acknowledged via an easy-to-use technology platform. It also carefully manages the economics of its business to avoid upsetting the social order. When it makes mistakes, as in its recent Beacon initiative, it is quick to step in to fix them. For its part, SocialMedia understands that the key to monetizing applications hinges on understanding and leveraging social dynamics to drive adoption and use of the application.

Rather than dismissing the social dimension of the edges of the Internet, executives would do well to understand that social interaction often precedes economic activity. After all, well before we had the World Wide Web, people were venturing online to participate in bulletin board discussions and in Internet Relay Chat sessions. As the early business pioneers step into this new social arena, they are pushing themselves to redefine applications and advertising in ways that could, over time, reshape much broader business arenas.

John Hagel and John Seely Brown are co-chairman and independent co-chairman, respectively, of Deloitte LLP's Center for Edge Innovation. John Hagel writes a blog at Edge Perspectives. Their monthly column, Innovation on the Edge, explores what executives can learn from innovation emerging on various forms of edges, including the edges of institutions, markets, geographies and generations.