From the outside, a talent acquisition looks a little bit like a failure: a founding team got together, launched a product—and couldn’t get traction. The company was liquidated, and its most valuable asset turned out to be the founders’ resumes.08.4.10
Every career has an “efficient frontier” of compensation. On one end, there’s a job that pays you what you’re worth; on the other end, there’s a job that you know will pay for next month’s rent. In some sectors, you can switch from one to the other at the same company (being a full-commission salesperson instead of a salaried “account manager”). In the technology industry, there’s not a strong tradition of pure incentive-based compensation; I don’t know any designers who will get 10% of the extra revenue from a successful A/B test.07.28.10
VCs throw money at startups because they’re scalable. With the right model, the thinking goes, you can double your revenue while your expenses rise 10%. Then, you can do it again.
This works pretty well for some companies. Facebook, for example, hit 100 million users in mid 2008, with “more than 600″ employees. Now they have 500 million users, and 1400+ employees. 400% growth in users; 130% growth in employees. That’s exactly the kind of math VCs like to see, and it’s why they were willing to fund Facebook generously in the early stages. Facebook will run into scalability barriers after a while. At some point, the limiting factor is not engineers (a scalable resource) but customer service reps and servers.
For many of the current crop of hot companies, the end of scalability is coming much faster.04.18.10
It used to be trendy to compare the size of Facebook to the size of countries. That’s gotten boring lately—at 400 million users, Facebook is ahead of the US, and only behind India and China. But population size is not the only thing Facebook has in common with governments—they also have the same business model. Both Facebook and governments can profit from letting people do business with their constituents, and taxing away some fraction of their profits.
In the case of the US, India, or China, that tax rate is determined by all sorts of lobbying, voting, personalities, and compromises. In Facebook’s case, they can collect taxes by forcing companies to use Facebook Credits. It’s just a question of maximizing profits. And that means taxing companies that profit from Facebook at the peak of a slightly modified Laffer Curve.
The Laffer Curve normally describes government revenues compared to marginal tax rates. It’s a curve because, given a sufficiently high tax rate, the incentive to work, report income, or live in a particular country declines. This leads to the argument that lower taxes are net beneficial: if we’re past the peak, they’ll raise government revenue, but even if we’re not, they can produce economic growth.
Facebook doesn’t have to care about “economic growth.” Their goal is not to grow the companies that exist on their platform, just to profit as much as possible from them. It might seem that this implies taxing at the Laffer maximum, but that’s not quite true: Facebook can afford to maximize the net present value of their future income, and to set their tax rate accordingly.
In practice, that will mean low (or zero) taxes as long as a company using Facebook’s platform is still growing. But once their growth slows, it shifts the Laffer curve to the point that taxing them more produces extra income even if it slows down their growth (and discourages other companies from using Facebook’s platform).
Since Facebook can easily prevent tax evasion, and since corporations have a fiduciary duty not to be lazy, the only mechanism by which the Laffer Curve can operate is emigration: at some point, Zynga could theoretically decide that Facebook isn’t worth it; they’ll take their bigger slice of a smaller pie elsewhere. I’m not sure what it costs Zynga to move one person from Facebook to a non-Facebook platform for the same game, but it’s probably a painfully high number when you multiply it by, say, the 82 million active users of Farmville. This might also explain why Facebook is okay with stickiness—it’s bad for business, but good for keeping existing business from going elsewhere.
Taxation or Nationalization?
Fred Wilson argues that Twitter can be free to ‘fill in the holes’ in their experience, but not to go after new verticals. In the Laffer context, the question is not which features a platform will duplicate and which it won’t, but which features it will tax and which it will expropriate instead.
Facebook, and more recently Twitter, have also done a form of “nationalization”: they turn someone else’s product into a feature of their own product. This seems to work best when the product works as a feature, and doesn’t have a clear monetary value: the classic example being Internet Explorer and Netscape Navigator; soon after IE came out, selling a computer and charging for the browser would have made as much sense as selling a car and charging for the steering wheel.
The “features they should have had” versus “value-added extras” dichotomy is false. The real question is which is worth more: taxing a platform user at the Laffer maximum, or subsuming them in order to shift the Laffer curve in a more profitable direction. At first, this sounds like an academic distinction—but it implies that the more people make money with Facebook apps, the more desirable it is to nationalize rather than tax other apps: Zynga’s $300 million in revenue is worth taxing; but if Zynga produced $1 billion in revenue, it could easily be worth giving up the chance to tax other companies, in order to make it easier to tax that billion dollars at a higher rate.
Twitter isn’t monetizing in the same way, but they do face the same equation. In their case, they’ve nationalized more, but it’s easy to see where they could start taxing instead. If you’ve looked at many financial sites that monetize through ad networks, you’ve seen who can bid the most for finance-related ad space: penny-stock promoters. That’s why Stocktwits has been so successful: it culls the spam. If Twitter sells ad space to the highest bidder, Stocktwits will get spam, and it’ll be official spam, too. A nasty outcome, but possible (though Stocktwits has mitigated this risk by building their own non-Twitter income sources, and their own independent platform; more than anyone else, they’ve figured out how to launch from someone’s platform, without being anchored to it.)
Why To Stay Bullish
Thanks to the power of Metcalfe’s law, squared, platforms have an incentive to encourage new applications, and to make them rewarding. Like a country that encourages people to start small businesses, these platforms will get more activity without having to try very hard.
So for small startups, this is irrelevant: they don’t have enough of an income for it to be worth Facebook’s time to determine the optimal tax rate, and they’ll produce more taxable income if they grow fast. Once a company hits the saturation point, though, there’s little reason for Facebook to let them earn excess profits. Sure, it will discourage VCs from funding some companies on Facebook’s platform, since they won’t be able to participate in quite so giant an IPO. On the other hand, the independent programmers who put together a simple app over a couple weekends won’t be too discouraged; Facebook is likely to tax only when it’s already fantastically profitable.
And even companies like Zynga won’t be left behind. There’s still no cheaper source for new users. Converting a small fraction of them from one platform to another is still easier than trying to get them to start out on the Zynga platform itself. Meanwhile, it makes a $25 billion market cap sound a bit more believable.04.5.10
The Economics of Advertising: Why Advertising Agencies Used to Be the Best Business in the World (And Why They Never Will Be Again)
There’s only one notably successful business personality who made his money in the ad agency business. He’s an accountant, and that should tell you something. The ad business is simply not a great place for making money.10.2.09
I’m tired of people who pitch social media marketing as a way to make sales. Either they aren’t measuring the results they get for clients, or they don’t care. Every good case study is either about how someone used a famous friend’s endorsement to make new sales, or how they made a tiny number of low-profit transactions they probably would have made anyway.
I hate pitching social media marketing—but I still do it, because it does serve a purpose. But the most important part of the pitch is the warning: if you follow the convention wisdom, your social media presence is almost certainly costing you sales.09.24.09
I’ve already mentioned how Amazon and Wikipedia own most proper nouns, but there’s one category I ignored: full names. That’s currently a fight between LinkedIn and Facebook. Facebook has more links and more profiles, but LinkedIn has more tricks up their sleeve.
But first, an experiment: Google the full names of half a dozen of your coworkers. You may find personal sites. You may discover that some of them have the same names as famous foreign athletes. But you’ll mostly see their LinkedIn and Facebook accounts. How can it be that Facebook’s 464 million links can’t consistently beat LinkedIn’s 30 million links?09.16.09
Facebook just announced that they are, more or less, profitable. Money coming in exceeds money going out. This is not the first time: in a 2005 interview, Mark Zuckerberg discusses how the company made a profit before they decided to focus on growth.