Internet Industry

Thoughts on Facebook’s rumored entry to email

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Image courtesy of husin.sani

I’m a bit surprised that Facebook is (rumored to be) entering the email market.   Partially my surprise is that consumer email feels like a mature market and I expect Facebook to be concentrating on areas where more innovation and value creation is possible.   The rest of my surprise is why Facebook book wants to enter a space that’s not a great business for any of the incumbents.  EMail is essential to Yahoo and AOL for the recirculation opportunities it provides to better monetizing channels but in and of itself, email does not move the needle for anyone today.

Here’s my take on the pros and cons for Facebook entering the email market:

The Downside

1) Free consumer email is a tough business

Being an email provider is expensive because you have store to an ever growing amount of old emails essentially forever even though they are rarely, if ever, viewed.   Being rarely viewed means it’s impossible to monetize those petabytes of messages eating up storage space in the data center.   In the old days before GMail changed consumer expectations forever, storage space for free accounts was sharply limited and additional space meant highly profitable premium revenue.

Compounding the problem, email page views monetize poorly compared to other types of content.  Partially this is because the incumbent providers (Yahoo, AOL, Windows Live) with exception of GMail do not target using email content.  My suspicion is even targeting off of email content does not help that much anyway.  Advertising is valuable either when the purchase intent is high (where search is king) or there’s value in brand affiliation (full page New York Times ad).   Email has neither of these characteristics and is likely getting worse on purchase intent.  No one emails anymore to ask which camera, laptop, cell phone they should buy since it’s easier and hipper to ask in a Facebook status.

2) EMail does not fit well into the walled garden model of Facebook

Facebook messaging today is an unpolluted stream where messages are almost certain to have been sent by person.  There’s no outside spam.  EMail is the exact opposite both due to its history and the expectations around it.    EMail started off with no way to verify sender identity and thus invites spam and scams.  There have been some technical fixes (DKIM, SPF) but at the end of the day you really do not know who is sent a message.   It’s also expected to be ubiquitous and completely interoperable thus removing the option of excluding bad actors from the system.

In contrast, Facebook can kick anyone out of their network.  The Stuff White People Like article on Facebook is humor but its underlying point resonates with me.  The nice, safe neighborhood feel of Facebook is a key part of its success.  Most people over 30 were never going take to the generally messiness of My Space.  Opening up your Facebook account to email, is almost like inviting the world to come by and litter on your front lawn.  And there’s no way to “de-friend” someone sending you email.  None of this is to say email is not an essential method of communication in the modern world.  I just don’t see adding email fits with the positioning that’s made Facebook so successful.

The Upside

Facebook does have several things going for it in the email market:

1) Capability to run large scale operations at low cost

Facebook has the operational know how to run a email operation at lower cost than most of the incumbents other Google.  A cost advantage is always a huge competitive advantage in a low margin market.  It’s harder to leverage though in email since pricing to the consumer is already zero.   The price of an email account is really the amount of ads and Google has been able to effectively exploit their low costs through less intrusive advertising.

2) Good targeting data

Facebook already knows so much about their users they do not need to use email for targeting.  How valuable this makes email to them is a function of how much excess ad inventory they already have.  If Facebook ad inventory is already selling out at least for certain segments, adding email will be valuable simply by boosting ad inventory.  If they are already swimming in inventory which is going for fire sale prices, there’s not a lot of money to be made.

3) Keep younger users away from Google and Yahoo

Although the kids of today do not have much use email, they will get older and need to start interacting with the grown-up world which still largely runs on email.  At that point, they will need an email address.  Providing them though Facebook keeps those users from deepening or even creating their relationship with Google or Yahoo which may benefit Facebook in the long run.   However, that benefit is mitigated by the Google and Yahoo’s failure to be at all competitive in the social space.

4) Social Graph

Facebook’s biggest advantage in any area they enter into is their owership of all that social graph information.  Maybe they have found a clever way to leverage it with email.  I’m a bit skeptical because of the inherent identity problems with email.

I’m curious to see what Facebook has come up or if the rumors are even in the right ballpark.  However, I doubt I’ll be creating myself a Facebook email address.  GMail serves my needs really well today.

Internet Industry

Value of Twitter (vs Facebook)

There’s a lot of talk of whether Facebook can crush Twitter.  As I said in my post on the network effect, the only way for a smaller player to compete in an area where the network effect is prominent is compete in a way the bigger player can not match.  The major difference between Twitter and Facebook status is that Twitter defaults public and Facebook defaults private.  Public status has value and Facebook can not compete in the public status arena because it’s entire positioning is around privacy and user control.  Defaulting status message to public would undermine this positioning.

Twitter with its public status is the first time its been really easy to find out what people who you don’t know know are thinking.  Blogging does reveal what bloggers are thinking but it’s much higher effort to blog so only a amMW subset of people will do it.  Plus, even those who blog do not just drop passing thoughts into their blog.   With Twitter, tweets about a product being great or awful are much more common since the medium encourages those kind of messages with its 140 character limit.  In a tweet, there’s little pressure to say something profound or even meaningful since there’s so little space.

Public status allows for search which is an incredible tool.  I’ve personally used Twitter search to do in an hour what would have previously taken weeks and a big check to a market research firm to accomplish. Even just for entertainment, services like Twistori give a view into the thoughts and lives of others that previously was hard to find.

Even if there is plenty of value in consuming tweets, there still have has to be value for the authors.  Being a big Twitter fan, I like the easy channel to talk to the world.  I get replies from people I don’t know that sometimes contain useful information or are just though provoking.  None of this is possible with private status.

I won’t venture a guess as to whether Twitter will be a big financial success.  There definitely value for companies to use to as a communication and research tool and if Twitter can extract some of that value, it’s a viable business.  However, there’s no feature that Facebook can add that will make Twitter disappear.  The public vs. private status distinction creates value for Twitter than Facebook can not grab.

Internet Industry

The Network Effect

Of all the things I learned in during my MBA, the strategic importance of the network effect is the one I see most misunderstood in the tech industry.  The network effect is present when the value of the a product or service is in large part determined by the number of other users of that product or service.  EBay is perfect example of the network effect.  Creating an Internet auction site is not very difficult and is an extremely lucrative business.  EBay had a gross margin of 74% in 2008 because the business never handles physical goods and the cost of running any auction marketplace is low.

So why does EBay have no serious competitors in the US?  Amazon tried to break in to the auction space without success.  EBay’s competitive advantage is the network effect.  If I want to sell something, all the buyers are on EBay.  If I want to buy something, all the sellers are on EBay.  Moving to another site as a buyer or seller means I’d lose value since all the other participants are not there.  Thus an auction site could be better than EBay and cheaper or even free and still not succeed because the value for either party is driven by the presence of the other party.

The principle applies to Craigslist as well.  It would not be difficult for someone to build a classifieds site with better features than Craigslist which still looks circa 1999 .  Web technology has advanced considerably in the last decade but Craigslist is in a time warp.  When I look for furniture on Craigslist, it’s incredibly annoying that I can not see my search results with pictures without having to click through to every listing.  However, I do not use a more functional classifieds sites since the number of listings is too low to be useful even with better features.

Facebook also benefits enormously from the network effect.  Social networks are useless unless your friends are there.  Since Facebook is the largest and almost ubiquitous in some circles, the only general purpose social network it makes sense for people to join is Facebook.  Thus, social networking is very likely to have an industry structure similar to Internet auctions where one player dominates and the 2nd and 3rd place players are dramatically smaller.  To counter the network effect, the smaller networks like My Space have to carve out a defensible space where Facebook can not effectively play for some reason.