App makers face treacherous path to profit on Facebook
By Gerry Shih, ReutersSAN FRANCISCO--Last spring, the future for Viddy, a video-sharing Facebook app, seemed as sunny as southern California's skies.
March 12, 2013, 12:19 am TWN
Based a block away from Venice Beach, the 30-person startup impressed prospective investors with skyrocketing user growth figures and won funding from them at a US$370 million valuation. The tech press hailed it as the “Instagram for video,” potentially ripe for a billion-dollar-plus buyout. Justin Bieber wanted to invest — and the pop star eventually did just that.
But this month, the company fired its chief executive, laid off nearly half of its staff and blamed plummeting user numbers on something it once believed to be its ticket to success: Facebook Inc.
“Everyone has known for years that Facebook can be a huge driver of traffic, but Facebook also frequently changes who gets traffic,” said Brian O'Malley, a Viddy director and a partner at venture capital firm Battery Ventures, which is an investor in Viddy. “We certainly didn't anticipate the decline.”
Viddy's dramatic reversal of fortune is a common tale among builders of software and services that rode the No. 1 social network to viral stardom, only to plummet when Facebook made one of its frequent changes in the way third-party apps can communicate with and solicit customers.
Investors and entrepreneurs say that the unpredictable way that Facebook cuts off apps or suppresses their presence has made them increasingly wary of building companies that rely on Facebook. Some believe Facebook could eventually attract regulatory scrutiny because of its ability to make or break companies that rely on its billion-strong base of users.
Douglas Purdy, Facebook's director of developer products, said the company boosts traffic to apps that prove to be popular and takes it away from those that overwhelm people with notifications or are otherwise abusive or unpopular. In the past year and a half, Facebook has cut down spam complaints by 90 percent, he said.
“We don't want to be in the business of king-making,” Purdy said. “In the end, users decide what they care about, and they have control over it. If you're a great developer and you're good at sharing really good content, you're going to get traffic.”
He declined to comment on relationships with individual developers.
Developers sympathetic to Facebook say that the company has rightly prioritized its users, who could abandon the network if they feel overwhelmed by solicitations from apps.
“Facebook thinks first and foremost about the user,” said Riccardo Zacconi, the chief executive of game maker King.com. “For companies that were relying 100 percent on virality, there's been a negative impact, but it's been a better user experience.”
Viral growth occurs when current users recruit other users, by inviting them to join, touting the content or sharing an application.
It is not clear if Viddy and other firms who have partly blamed Facebook for declining fortunes would have run into difficulties eventually anyway as, for example, rivals came out with new products.
But as consumers spend increasing time on mobile devices, disaffected developers could choose to focus on marketing their apps directly to Apple Inc.'s App Store and Google Inc.'s Play market — two platforms that compete with Facebook.
“Facebook is in a platform battle that they're losing right now,” said Nabeel Hyatt, a partner at Spark Capital, a venture capital firm that has backed rival social media companies like Twitter and Tumblr. “When we have startup companies coming in and presenting about where they're going to get users, most of those conversations are about iOS and then Android, and then maybe Facebook.”