Something you hear a lot in Silicon Valley is how hard it is for the little guy to compete against the Googles, the Facebooks, and the Amazons of the world. They have a platform. And, it’s hard to compete against a platform.
A lot of the value of platforms is driven by data and how that data can be used to optimize business decisions. The Economist magazine claims that “The world’s most valuable resource is no longer oil, but data”. No surprise, then, that substantial investment focus by Amazon and Google is in artificial intelligence (see CBInsights’s very detailed analyses on these two companies). For a good understanding of the incumbent value of platforms, however, Facebook’s relatively clean business model is the easiest to examine.
Facebook revenue increased almost 6 times from $5B in 2012 to $28B in 2016. Certainly, a secular increase in internet advertising spend explains part of the trend. More fundamental in this growth, though, is the increase in the number of daily users from 0.6B to 1.2B, and the time each user spends on Facebook properties. More time, individually and as a group, means more opportunity to serve up advertising. And, very importantly, optimizing what ads to serve up and how (hello AI). In that same period, average revenue per user grew from $5 to $16.
In essence, the platform and the value that it provides is a simple function: # users x time per user. A startup has to do a great job maximizing the amount of time users spend on its properties. But, to achieve a compelling financial model, it will inevitably need a large number of users. Snap ended 2015 with 107M daily users, and averaged $0.6 per user. By 2016, number of users had risen to 158M, and average revenue per user to $2.7.
Facebook’s strategy is focused on pushing these two numbers up, and the bulk of the $25B it has spent since 2012 to acquire companies was directed at Instagram and Whatsapp. It also made an unsuccessful run at Snap. That failure led to Facebook mimicking Snap by offering camera-related features on its platforms. Instagram Stories alone has reached 200 million active users. Which exceeds Snap’s total active users, showcasing the power of platforms. Facebook now has 1.2B daily users that spend an hour a day on its combined properties. A digital river of information that Facebook gleefully monetizes.
Not every startup can be Snap, and achieving meaningful volume may require leveraging existing platforms. For which the platforms will get a meaningful cut. The other lever that startups have, is to maximize the amount of time users spend on them. Some of the most popular categories of applications are:
- Social media and browsing: Facebook – an hour a day for each user
- Video: Netflix – 2 hours; YouTube – 1 hour
- Gaming: as a category, 2 hours a day
- Music: Pandora – 1 hour
The killer app would be one that combines all, or a significant subset of these applications into one unified platform.
Sources: “The new face of Facebook” The Economist; “Google Strategy Teardown” CBInsights; “Amazon Strategy Teardown” CBInsights; Blackfire Research