So, is Facebook a media firm or a technology company? In case you don’t know, the conversation was spurred by Mark Zuckerberg’s comments at the iMeme event (held in SF during late June), which I attended. Mark takes the perspective that the company is in the technology business. This existential-like question is difficult to wrestle down, not only for Facebook but for the industry more broadly.

Facebook’s position on the matter is very timely, and somewhat predictable, since platform is the strategic mantra of the company now. In case you’ve been living on Mars for a while, Facebook is an engine gaining steam despite its existing scale by opening-up. It’s demonstrated the horsepower to haul the core social networking market but is gaining the strength to pull along all kinds of adjacent services. Under the hood, it’s a jumbo-jet. But the plane has many, many empty seats where applications can sit. These applications are, of course, best sourced from the market and third-parties. Facebook’s core has therefore become open to others to wrap around the social networking phenomenon. Powerful stuff. Keep in mind, not all platforms are alike….plenty of companies have developer programs but they’re offering more of a bus-ride, rickshaw experience or mini-jet seat, compared to Facebook’s Dreamliner. Playing enabler, the company has deduced, supports the notion that it fits “lower in the technology stack” than where media businesses reside.

But does a growth strategy centered on the platform necessarily make it a technology company? I think we’re dealing here with changing semantics in the old media vs. new media paradigm. Facebook appears caught in the middle.

Let’s start to define the two categories (technology vs. media) and the boundaries between them. Technology providers focus on a functional capability that works in the context of an end-product or service (typically, someone else’s). So, if one company provides the functionality and another owns the customer relationship, that’s a clear distinction. This is the case in the telecom business where a firm like AT&T or Comcast own customer relationship whereas all of the equipment that enables services such as VoIP, VOD, etc is provided by “vendors” (always an offensive term).

In the case of Facebook, confusion arises because the relationships between companies are bi-directional. Specifically, Facebook provides functionality for other firms to tailor their applications for a social networking environment. Some companies may find this to be an entire business in and of itself (good topic for separate blog post). These applications are then integrated and distributed through the overall Facebook experience. So the business flow begins by Facebook enabling other companies but then reverses to allow Facebook to own the overall context of the user experience. Facebook is left holding the ball…this is meaningful for our de-composition and I’ll come back to connect it.

It’s true that Facebook is allowing third-parties to brand and maintain control over their services. But those services live in the Facebook sandbox. Therefore, what we’re dealing with here is just another flavor of content aggregation. First came the portal, then user-generated sites. Facebook is the latest progression of that model.

Facebook would love to become a primary distribution channel for mainstream content providers. Watching TV with your buds (asynchronously or otherwise) is real sticky, real viral and positively revealing. Talk about hitting on all vectors of value creation (targeting, personalization, virality, retention). With the Facebook platform, the consumer experience can go to the next level. For example….NBC may distribute via Facebook, a niche firm may allow re-mixing/enhancement of it based on the preferences between friends and derivative works are created. Maybe the most popular works across different collections spread, Facebook buys Adwords or does SEO to promote it, along with bringing Madison Avenue to the table. Sounds like a motion picture house doesn’t it? Facebook is the business wrapper around everything. It becomes a daily, digital Cannes Content Festival and obtains ubiquitous distribution for the best stuff. This is what the last leg of the media value chain has traditionally been all about.

In fact, this introduces another point to support categorizing the company as more content than technology provider. Can we balance the equation by thinking from the end backwards? What’s the experience in the mind of the consumer and who do they hold accountable for it? Technology companies don’t make their bread on consumer experiences, but that’s really been the driver of Facebook’s success to-date. If Facebook lives up to its vision, then it becomes a leading source for providing media experiences to users because doing this in the context of social networks is advantageous. Yes, NBC may be the original content provider syndicating but the experience is a Facebook one. And if this vision turns out to be attainable, then the company has the chance to be the final leg between content and consumers. In other words, the final interface of the media stack. That’s not a technology-centric opportunity – but it’s the one Facebook is eyeing.

Another complexity comes from the original positioning of the company as a communication tool. Connecting people around events and messages is at the heart of Facebook’s capability and stickiness. But that is turning out to be simply a means to an end. Connecting people is no longer a functional exercise like it used to be when the telephone was a utility. When “sharing” took-off on the web, everything changed. Every form of online interaction (sharing, watching, collaborating) across content assets (pictures, journals, video) became richer and robust by connecting to the social network – and now its really just one aggregate user experience. No doubt, web 2.0 applications have become a substitute experience for traditional entertainment. So, Facebook has certainly transcended the utility stage because the communication is the content. This explains why looking at the company like a consumer technology business is not appropriate either. How about firms like Palm which allow third-parties to develops apps for its smart phones? Or Nintendo or Sony Playstation, which allow game developers to make products for their consoles? That’s different. Those companies are truly positioned lower in the technology stack because they’re selling gear and not experiences (for the time being). But they are standard platforms.

At the heart of our decomposition is the fact that we need to look at “the stack” differently than in the past. I propose something called a Media Stack where content and technology are components of it (where each of these areas is also further divisible). Let’s start with content. It’s not inter-changeable with media. Media is the final assembly of content, technology and services into an end-product. There are many ways to package the components into distinct user experiences….which is why the field is wide open for innovation.

Content sits at the top of the stack. It’s what’s consumed. But how it’s consumed is determined lower in the stack. Increasingly, traditional content providers are being separated from delivery. Aggregators have proven valuable to end-consumers and content providers are in an absolute dash to build capabilities including SEO, SEM, syndication, email marketing, community development, etc. so they can “get hooks” into the dizzying array of consumer destinations (Digg, Delicious, Facebook, Netvibes, Google, etc). If you’re in traditional content businesses, you’re growing increasingly distant from delivering the user experience. Even before the web ushered in an era of content aggregation platforms, there were multiples layers of the stack within content (think Reuters, AP, Knight-Ridder or Bloomberg syndication into print media). You could even go a layer lower than wire services without falling into the technology realm – data providers come to mind (securities pricing from some of the above mentioned or images from Getty).

It’s natural that content layers be fed into Facebook’s social graph — leading to the claim of aggregation. Yet Facebook is a different type of aggregator because it also generates content. For user-based aggregators, delivery and content generation are tightly coupled because product usage is central to the creative process. This introduces an additional level of control and predictability over the economic model that needs to feed distinctive valuation of such companies.

The point being – there is some hierarchy here in the “content layer of the stack” and Facebook is playing in multiple levels. Content aggregators sit above content providers but there are classes within the each of them too. Facebook is both aggregator and provider, in some ways.

Here’s where some confusion arise around Facebook due to its hybrid nature. It’s both a content company which can extend its content out to where users happen to be (let’s say My Yahoo, iGoogle) while also being aggregation site where other content providers will want to get inbound hooks. The “outbound” hooks happen to hold less priority right now — and that makes sense. Better to grow the “inbound” ones so that content base continues to mushroom.

Perhaps, the issue gets muddled with political considerations. For example, Facebook may not want to alienate firms that provide content which seek to distribute it through the Facebook service. But increasingly, every one is playing on each other’s turf until things get sorted out. And do original content providers really have a choice?

Technology providers are being parsed into two camps as well. First, there are the traditional technology vendors, who offer a product that is noticeably de-coupled from the market-facing business dynamics. Does it really matter to MySpace of Facebook users which virtualization software is running in the data centers? No. That’s why those guys price their solutions on a traditional model. But, we now have media-centric technology providers (like a widget-platform company such as Clearspring or WidgetBox). Here’s where you can blend business model dynamics. Why? Because they operate in markets where they can actually exert some control over those consumer-facing economic levers in some way. A technology provider that can tap into network effects in distribution can acquire leverage with content providers to participate in lucrative revenue streams like advertising. In spaces like mobile and IPTV, it’s now pretty normal for companies that are really technology engines to exhibit characteristics like downstream players (in the value chain) because they bring things to the table (ad-sales force, customer acquisition, distribution on carriers or cable networks). This demonstrates that the technology segment of the media stack is segmented into pieces just like content.

Here too, Facebook has a presence that make it a challenging company to classify. It’s building the platform to enable application companies to meet certain requirements – so like the traditional platform companies, it will be customer-centric to understand what those developers need. But this company’s social graph is not to the web as BEA’s app servers are to application developers. It’s platform is for a captive environment. Google, AOL and Yahoo are doing the same thing, so this is not unique but what is unique the overall constitution of the business.

So what is Facebook? For starters, it’s a media business. These days, everyone is. You can say Cisco, Google, Conde Nast all in the same breadth these days without anyone blinking an eye. The technology stack and the media stack have become one, though no simple categorizations in exist. Every media business has a different recipe or cookbook. Facebook has beyond favorable economic drivers in terms of scale, scope, barriers and network effects across content creation, application development and customer acquisition. A good start-up can be built behind one combination of those factors (e.g., scalable content generation or network effects on customer acquisition). A media business with technology provider economics and content provider brand value potential. In an upside case, it’s a dreamy scenario.

But if everyone is a media business, then how do we tell companies apart? And is Facebook more content or technology on the margin given that it plays across the stack? Those are the next logical questions.

This all comes to a head on the valuation issue. Technology companies carry higher multiples than content firms. But this should play in Facebook’s favor despite the fact that it’s end-product is content. You could look at it like a technology company and then add a factor to reflect the content factor. Or you could start with the fact that it’s content experience in the mind of users and then add something to reflect the scalability of technology businesses. No matter which way you start, Facebook carries a premium due to a unique business mix that combines the best of both worlds.

Wall Street has traditionally understood the business mix issue. A company valuation will often blend different multiples. This usually happens when a conglomerate owns multiple divisions that operate independently of each other. In the past, AT&T was prime example – having owned Lucent, a telecom equipment vendor, while also owning a consumer phone business, not to mention a print yellow pages division. Today, a company like Comcast is mostly a cable operator but has material content businesses (as in several cable TV channels). So there’s no reason not to apply the idea to Facebook.

Each category has its own benefits. Media firms insulate themselves by branding. Competing on brand is very powerful. Something else has to be a lot better, not just better, to displace you. Google is a current example (highest measurable brand value in the world according to the Financial Times). AOL is still getting mileage out of the idea. Content providers typically do not have differentiated products in terms of core functionality. But consumers find branded companies to be safe, reliable and convenient sources for them. Meanwhile, technology firms exhibit powerful economic properties around scalability – build it once and sell it over and over. Even better than it is the possibility of building a product standard so widely adopted that the economics pile-up like compounding interest as long as the industry is growing. It’s really hard to evaluate Facebook and not see economic drivers which cross traditional sector boundaries.

To sum it up, Facebook appears to be a user-based, platform-driven content aggregation and content provider business with extraordinary network effect properties (think some material fraction of human population). A mouthful indeed. Google, Yahoo and AOL have the aggregation piece in common. What’s new is anchoring the experience around the social graph and adding the platform angle. Maybe this combination allows Facebook to take it to the next level? Surely, that will take time (until the platform was announced, there was only the social networking piece).

How to boil this down into a valuation formula? That’s a subjective exercise. We could start with content aggregation multiples (like a portal) and then add premiums. A premium for being more technology or platform-driven, a premium for the scope of the opportunity, a premium for the deep grip of network effects. You start to wind-up with a valuation metric that can be a multiple to other aggregators and who knows how much more rich than other online content businesses (3x? 5x? 10x?).

That may put Facebook in a unique valuation category for the time being.

But isn’t that what the new media opportunity is all about? Those are the stakes we’re dealing with, are they not? Why let semantics get in the way?

• Facebook's Plan to Hook up the World
• Repeat After Mark: Facebook is Not a Media Company
• Facebook: “Not Media Business”
• The Best Facebook Apps
• The Race to Buy Facebook Apps
• Should Yahoo Try Again for Facebook

Filed under: User Experiences, Web Apps, Web 2.0, Innovation, Traditional Media

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Tags: Media Stack, Developer Networks, Value Chain, Syndication, Web Business Models, Super Aggregation, The Final Consumer Interface,