As Applications Blossom, Facebook Is Open for Business

First Facebook opened the dorms to the world; now it has turned them into a mini-mall.

Over the last nine months the social network has gone from being the online equivalent of a college kegger to the hottest new development platform on the web. When Facebook opened up its platform to independent developers in May, it became a hotbed for hungry startups eying the network's rapidly expanding base of 31 million members.

Instead of being a mere social network, Facebook's aim is to create a social operating system where e-commerce can thrive.

But can you run a business entirely on Facebook? According to a company spokesperson, some are doing it already, such as Lending Club, which facilitated $100,000 in personal loans via its Facebook application within a month of launching the app.

The commission on $100,000 worth of community loans isn't what's generating the buzz coming out of Facebook's Palo Alto headquarters, however. It's the ease with which Facebook apps can be developed, the speed at which they're being adopted and the attention they're getting. At press time more than 1,800 apps had been built in less than two months; nearly 30 of those apps have signed up more than a million users apiece.

"Facebook has to be the undisputed king of rapid distribution," says Max Levchin, CEO of Slide.com, whose Top Friends is Facebook's most popular third-party application. Roughly 9.5 million Facebook users have installed the app, which lets you give special billing to up to 32 friends on your profile.

Like many new Facebook apps, Top Friends is simple, free and aggressively viral. After you install it, you're prompted to invite all of your friends to do the same. As you add new names, it prompts them to install the app as well.

But as with human viruses, the ones that spread fastest often die off first, warns David Hornik, general partner for venture firm August Capital. Though bullish about the Facebook platform's potential, Hornik says it's far too early to tell which applications will have legs.

For the short term, Facebook will be more of a marketing medium than an e-commerce engine. MediaMaster CEO Neil Day sees Facebook apps as a way to acquire customers for his company's free music service, in the hopes of selling them a subscription down the road.

Consumers can upload their DRM-free music to MediaMaster's site and play them on virtually any connected device. Its Facebook app allows subscribers to put a MediaMaster "radio station" on their homepages and share it with others.

"The big attraction of Facebook is its demographically appropriate audience and its built-in viral distribution," Day says. "We look at it as a two-way street: We provide a compelling application for them, they help us build our initial user base. But I don't see any indication that users are coming to Facebook with their wallets open."

Levchin is putting his firm's money on eyeballs. Over the next few months Slide.com will be experimenting with brand-affiliated widgets, hoping users will show their love for a product or sponsor by sharing the widgets with friends -- boosting ad traffic in the process.

Targeted advertising may be Facebook's ace in the hole. When members install an application, the developer gains access to vast troves of data about them and their interests. Facebook's terms of service prohibit application vendors from storing user data off the site, but it doesn't prevent vendors from utilizing that data in marketing or advertising campaigns via their applications. As the number of Facebook subscribers grows, the service will become increasingly attractive to advertisers looking for thin but rich market segments -- for example, Ivy League grads who like Will Ferrell movies.

"To target advertising in a meaningful way, you need to get large numbers of users to give you huge amounts of data," notes Hornik. "Facebook has already convinced a lot of people to do that. It's an incredible resource for anyone trying to create an ad-driven business."

Further down the road, Facebook will be a natural for small businesses that rely on word of mouth, notes Charlene Li, principal analyst at Forrester Research, simply because you're more likely to trust a recommendation from a friend than a stranger.

Yet, just two months into the Facebook application era, it's already starting to show signs of overcrowding. For every app on the site there seem to be three or four that do more or less the same thing -- whether it's managing your photos, sharing movie recommendations or serving up photos of hamsters that vibrate when you click them. Most of those will disappear, says Li.

"In the six weeks since they opened it up, Facebook has gotten really noisy and crowded," notes MediaMaster's Day. "For people who see Facebook as a panacea, rising above the noise is going to be increasingly difficult."