DISQUS

Andrew,

You've generated an all star discussion forum in the comments! (myself excluded of course).

One refinement I'd suggest based on cohort analysis of subscription businesses is to vary retention churn over time. It is typically not a constant x% per period. Rather you typically get high "infant mortality" over the first few periods, but then settle into a steady state with little loss once you've identified your core users. This data is now several years old so I feel comfortable sharing it, but in AOL's dial up business around 2002 we would average around 6-7% churn per month. But this was an average across multiple cohorts; we would lose 50% of users in the first three months, but by month 12 churn was in the 2% range (which is close to the move/death range of unavoidable churn when dealing with a service tied to an address/phone number). This "mix" problem is particularly important when you're modeling viral growth businesses that have meaningfully different user acquisition rates over time.

$50m in revenues from companies launched since Facebook opened its platform last summer seems like too high a hurdle to hold facebook app companies against. What company of any sort has pulled off that revenue growth?

Andrew,

Nice framework, but what implications do you draw from it? A matrix like this is only as useful as the predictions that it offers (like it is best to be in the upper right quadrant, as any consultant can tell you!) ;-)

J

I spoke to the Stanford Facebook class on exactly this topic. Link here:

http://lsvp.wordpress.com/2007/11/16/business-models-for-apps-and-widgets/

At the time, I concluded that there were two winning strategies:

1. Be an "at scale" portfolio of broadly focused apps (like Rockyou and Slide). [Disclosure: Rockyou is a Lightspeed portfolio company]

2. Pick a vertical with a double digit CPM opportunity (typically something with endemic advertisers and high budgets like movies, fashion, auto, health etc) and drive a deep, highly engaging app. [Disclosure: I'm an investor in Flixster]

Note that I don't hold these points of view because of the investments, but rather I made these investments because of these points of view.

Since then, I've concluded that there are also opportunities in social games since they have the combination to drive both viral growth and high engagement, and open up the possibility for digital goods business models. Link here:

http://lsvp.wordpress.com/2007/12/20/games-20-social-gaming-on-facebook/

This isn't to say that small teams can't make a good living out of building good engaging apps. They can make very nice lifestyle businesses. But they may run into trouble if they try to build very large, valuable companies for the reasons that you outlined

I think you're talking about a distinction between the time rich and the time poor. You, me and many readers are time poor and sometimes we forget what it was like to be time rich. More at the Lightspeed blog where i talked about this a little while ago:

http://lsvp.wordpress.com/2007/03/19/time-rich-or-time-poor/

Social media (Digg etc) can be an effective traffic driver over the long term if what you're getting dug is a page on your site (e.g. a game, a movie, etc). The spike goes away, but typically to a lower plateau, and you build great inbound links that help future SEO efforts.

Your point about PR being less effective for user acquisition holds though. It can however be incredibly effective to raise your profile among potential employees, partners, investors and acquirers. You just need to know what your objective is and match your PR strategy to suit. More at

http://lsvp.wordpress.com/2007/10/15/seven-things-entrepreneurs-should-know-about-pr/