According to the paper’s Brian Garrity:
“The surging social-networking giant is talking to a number of song-streaming services and music community sites, including Rhapsody.com, iMeem.com, iLike.com, and Lala.com, about an outsourcing deal that would more deeply integrate their music experience into Facebook, sources familiar with the situation said.”
“Zuckerberg and other Facebook executives also have been busy taking meetings with the major record companies about the strategy.”
Last week, TechCrunch’s Michael Arrington followed up on the New York Post article and reported that Facebook is indeed pursuing a music strategy at a serious level:
“We believe, based on discussions with a number of sources, that Buzznet, iLike, iMeem, LaLa, Last.fm, Rhapsody and other services were contacted and provided with a document (sometimes referred to by sources as a RFP (request for proposal), other times called a term sheet) that outlined certain goals of the new Facebook music service.”
“The RFP requires the third party service to build and power a new Facebook Music Service that offers free music streaming and playlists, music downloads for a fee, and other music merchandising services such as ringtones, concert ticket sales and physical goods like tshirts (if this sounds like MySpace Music, it’s because it is exactly their model). The service must not only handle front end user requirements but must also be able to handle the very tricky tracking issues required by the labels to monitor music streams and fees.”
According to Arrington, Facebook apparently believes that it’s in the position of leverage and is asking for some unbelievably one-sided terms that one of his sources says creates “a no-win situation” that is “suicide” for the companies Facebook provided the RPFs to. These terms include substantial termination fees as well as the assignment of the service itself, including data, to Facebook under different scenarios.
Arrington also indicates that Facebook may also be looking to avoid paying the hefty up-front fees that such a deal would require by pushing them onto the provider it selects.
A Threat to the Facebook Application Developers
When Facebook launched its developer platform, Facebook promoted it as a “new business opportunity” for developers.
The press release announcing the platforms launch noted that developers would be able to retain all of the advertising and other revenue generated by their applications and Mark Zuckerberg stated, “This is good for us because if developers build great applications then they’re providing a service to our users and strengthening the social graph.“
Facebook has always implied that it would maintain a fair playing ground for its developers.
If Facebook decides to launch its own music service, it will put itself in direct competition with one of its most prominent developers – iLike. iLike is, for all intents and purposes, the Facebook music application and Facebook has even promoted its success.
iLike, which has essentially built its entire business on the back of its popularity on Facebook, could find itself in a horrible position and depending on how nice Facebook plays, could find itself out of business.
While that’s the risk iLike took by building its business around another company’s service, such a scenario also poses a problem for Facebook.
If the company changes course and essentially ruins its “social contract” with developers, it is likely to effectively destroy the Facebook platform.
While I’ve always maintained that the financial benefit Facebook would derive from its platform was minimal and that it should not have ceded additional revenue opportunities to third-party developers, for better or worse it did.
Trying to pull a 180 on its strategy to the detriment of some of its most publicly valued stakeholders creates a no-win situation for Facebook. While it may be able to recapture some of the opportunities it ceded to third-parties, burning bridges with those third-parties is a PR nightmare and will serve as an admission that Facebook has invested two years in a platform strategy that failed the company financially.
Apparently those inside the company know this. Arrington reports that Zuckerberg is loathe to stab developers in the back but that VP of Business Development, Dan Rose, is ready to. With Facebook investors probably more concerned than ever about the company’s ability to generate revenue due to the economic environment, this may be one fight that Zuckerberg loses – Arrington claims that Facebook already has an RFP circulating for a classifieds service.
Is Facebook Losing Its Direction?
Facebook’s exploration of a music service also begs the question – is Facebook losing its direction?
Zuckerberg has always made it clear that he considers Facebook to be a technology company, not a media company. MySpace, on the other hand, has always considered itself a media company, not a technology company, which made its MySpace Music joint venture a no brainer.
Facebook has always billed itself as a “social utility” and in an interview with Time Magazine, Zuckerberg stated:
“What we’re trying to do is just make it really efficient for people to communicate, get information and share information. We always try to emphasize the utility component.”
Yet if Facebook launches a music service (and perhaps other services such as classifieds), Facebook will, whether it likes it or not, become a full-fledged media company.
Is this a bad thing? After all, one might argue that because of its focus on advertising as a revenue stream, Facebook has always been a media company.
While there’s some validity to that argument, a big Facebook foray into markets such as music will represent a major shift in the way the company operates.
Its service will change and it will have to integrate with a third-party’s platform (this is usually never elegant and smooth). In addition, its business operations will inevitably become quite a bit more complex. The concern, here, of course, is that the company’s culture is not only incompatible with an complete evolution to a media company (and de facto media portal) but that Facebook’s top management, few of whom really have much experience running a major company, will find themselves managing a company that’s too “big” to handle.
Throw in the fact that the company has been unable to leverage its massive popularity to make money and you potentially have the recipe for disaster. Not only is it unclear whether Facebook will have much more luck monetizing its new services than it has monetizing its current service, it’s also unclear as to how Facebook’s users will react to “Facebook the Portal.”
A number of commenters on TechCrunch have rightfully pointed out that Facebook’s simplicity got it to where it is today and one observed out that music, in particular, is a market that may be a losing proposition financially right off the bat due to the high costs of playing ball in the online music space, which has seen its fair share of failures.
It will be interesting to see whether or not Facebook moves ahead and develops a music service of its own. If it does, it will be interesting to see how well it executes and how well it is able to deal with those most affected by its launch (i.e. application developers).
Right now, one thing is clear – Facebook is providing a case study in the importance of knowing who you are and betting on the right strategy from day one.
I think the lesson that may be learned is that sometimes who you are is incompatible with the type of company you have built.
With its hundreds of millions of dollars in funding, $15bn valuation, 600+ employees and lack of a viable long-term business model, it’s actually quite remarkable that Mark Zuckerberg idealistic vision has lasted this long and that an internal battle over the company’s overall strategy apparently hasn’t been fought until now.
The question, regardless of which internal “faction” wins this battle is – can the company win?