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A software industry @ Facebook

September 10, 2007|Jessica Guynn | Times Staff Writer

SAN FRANCISCO — Mark Pincus may hold a winning hand with his latest Internet venture.

More than 130,000 Facebook users a day play an online version of Texas Hold 'Em that the San Francisco entrepreneur created at his kitchen table while his American bulldog, Zinga, slept at his feet.

This is not the poker of smoky backrooms or illicit gambling sites but a free, friendly game at one of the Internet's hottest hangouts, Facebook. Chips serve as social currency: The more you win, the bigger the swagger. Run low and you can earn more by inviting chums to join.

Welcome to the emerging Facebook economy.

Software developers have built more than 3,000 programs to run on the social networking site in the last three months. The uses range from the practical, such as buying music or scouting vacation spots, to the quirky, including sending virtual gifts or biting your friends to turn them into zombies.

About 80% of Facebook's 40 million users have added at least one feature to their profiles. The most successful applications claim millions of users.

"Facebook is God's gift to developers," said Lee Lorenzen, founder of Altura Ventures, a Monterey, Calif., investment firm that started betting exclusively on companies creating Facebook programs in July. "Never has the path from a good idea to millions of users been shorter."

The Facebook free-for-all began in May, when the Palo Alto company invited hundreds of software developers to build their own features for the social-networking site and pocket the proceeds. The new strategy triggered a digital land rush, with 80,000 developers signing up.

They all wanted a shot at the desirably youthful demographic of Facebook users, many of whom spend hours a day on the site.

Now entrepreneurs looking to start companies or expand existing ones are building businesses on Facebook the way they used to build businesses on the Web, but they are doing it faster and cheaper -- and with a built-in audience that provides instant feedback.

RockYou founders Jia Shen, 27, and Lance Tokudo, 41, run a veritable Facebook factory, with more than two dozen applications such as horoscopes and quizzes.

The San Mateo, Calif., start-up also formed an advertising network to help marketers and other developers draw traffic by tapping into its user base, which has reached 29 million in less than a year.

That kind of track record has attracted attention from Sand Hill Road. Some venture capitalists are looking to invest in companies building Facebook features.

"The potential is huge," said Salil Deshpande, whose Menlo Park firm, Bay Partners, is on the lookout for Facebook hits.

Traffic doesn't guarantee big bucks. So far, entrepreneurs are making modest money from ads, but they have high hopes of creating a thriving Facebook marketplace where you can buy and sell goods and services and land sponsorship deals.

Major corporations and advertising agencies have just begun to explore the viral potential of Facebook applications. For example, Buffalo Wild Wings, a Minneapolis-based restaurant chain, recently agreed to pay Social Media Networks Inc. to sponsor the virtual wings Facebook users hurl at their friends through the company's Food Fight program, CEO Seth Goldstein, 37, said.

Developers are paying bounties to other developers for sending Facebook traffic their way. That's an easy way to generate cash.

"It's a bit like Monopoly money," said Pincus, 41, who helped kick off the social-networking movement in 2003 with Tribe.net. "But I am very optimistic about the long-term potential of advertising on Facebook. I think Madison Avenue is going to catch on."

Analysts are slightly more cautious. Facebook is growing crowded with applications that compete for users' attention.

It may not be the paradise some envision it to be, Motley Fool senior analyst Rick Munarriz said. "But companies that go about this the right way are going to make a good chunk of money. Who wouldn't want to reach the Facebook public?"

Rival networks, such as MySpace, Bebo and LinkedIn, have said they would follow in Facebook's footsteps and open their platforms to developers.

Max Levchin's San Francisco Internet company, Slide, lays claim to some of the top applications on Facebook. He credits the vision of Facebook founder Mark Zuckerberg, who is capitalizing on interpersonal connections in the real world.

"Essentially, Facebook is the next version of an operating system, and developers are building and plugging in components," said Levchin, who in the '90s helped found PayPal, now part of EBay Inc.

In an effort to fill Facebook with features, Zuckerberg borrowed a tactic from Microsoft Corp. In the 1980s, when Windows became the dominant operating system for the personal computer, Microsoft allowed others to build on its platform rather than whip up all of its own technology.

"We want to bend over backward for . . . developers to build their businesses off our platform," said Chamath Palihapitya, Facebook's vice president of product marketing and operations.

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