Open To Buy

The Gotham Gal started out her career in the retailing business and spent time as a buyer at Macy’s. The way that job worked was she’d get her "open to buy" report and then go into the market and buy. I always loved that term. It meant it was time to go shopping.

Facebook went open roughly a month ago. And now VCs, web companies, and media companies have opened their pocket books and are going shopping for Facebook apps. It’s actually a bit of a feeding frenzy if the reports I am hearing are to be believed.

Yesterday was Facebook day in the office. We started off with an awesome meeting with the Jarvis father son duo. Not sure who I learned more from. But if you want a Facebook app, you can hire Jake. The first two Facebook apps I installed ( and flickr) were built by Jake so I can vouch for the work he does.

Then I spent time with a good friend who I don’t think wants to be outed on this blog who is building a very interesting facebook oriented business. And he’s in the market for apps. He’s open to buy.

And at the end of the day, I spent time with an entrepreneur who made a smart buy early in the Facebook craze and now is sitting on a bunch of apps and is now raising money to build a business on top of that foundation. He’s done his buying for now.

Then I came home to see back to back posts in Valleywag pissing on the Facebook app craze. Phew, someone is throwing some cold water on this fire. Gotta love Nick Denton. Always the contrarian.

So let’s look at some of the facts I learned yesterday.

Facebook apps sell for the number of users who have installed the app. The price was $0.10 per user last week. Now its $0.25 per user.

The CPMs that Facebook apps are getting are what you’d expect. Less than $1.

The churn rate is high. Some apps are down as much as 60% in the past week. 20% weekly churn is pretty typical.

You can build a Facebook app in an afternoon. Maybe the more complicated ones could take a man week. So let’s just say the cost of building a Facebook app isn’t that high. Certainly less than $10,000.

There are a total of 1,131 apps.  Of the last 500 to be approved, only 5 have over 100,000 members, and none have over 200,000.
This fact came word for word from the Hypebusting post on Valleywag.

So what do we have here?

A marketplace where the early entrants were able to amass a large user base quickly but where new entrants are having a much harder time. So the early birds have something that everyone else covets. And they are now monetizing it. That makes senses.

But what’s the right price to pay for a popular Facebook app? Let’s say you have a million users. Let’s say the average user visits the app page once a day. [I have no idea if that’s a good assumption. Some help here please]. That’s 1 million PVs per day, 30 million per month. Let’s say that there’s a single banner at the bottom of the Facebook app page, which is what I’ve typically seen. So at $1 cpm, we are looking at a $30,000 per month revenue stream for a one million user app. That’s $360k/year. But that is with no churn. It seems like the lifetime of a typical Facebook user is less than a year. Maybe less than six months.

So these prices of $0.10 per user to $0.25 per user make some sense to me. It’s not entirely nutty. But the churn is concerning. And I really have no idea what the right assumption is on average user visits per day per app. And I bet it varies wildly from app to app.

Markets are fascinating. And this Facebook app market fascinates me. I don’t know if VCs should be participating in it. I don’t know if our companies should be participating in it. I don’t know if it’s a bubble or a bargain.

But you cannot ignore what is going on in Facebook. It’s a hyperactive development platform on the web in the middle of a community of 27 million (May comScore numbers) people. It’s like nothing I’ve ever seen before in my 20 years in the VC business and I think you have to get your head around it and soon.

To that end, Union Square Ventures is hosing a Facebook Developers Meetup next Monday, July 2nd. I’ll be there.

#VC & Technology