Thursday, January 17, 2008

Scrabulous leads the way to Business Transformation in the Facebook Economy

Hasbro has sued two Facebook developers Rajat and Jayant Agarwalla from India, claiming that the developer's App Scrabulous which gets 600,000 daily active users infringes on their US and Canada distribution rights for the board came Scrabble.

I've joined the 17,000 members of the Save Scrabulous group on Facebook.

Living and breathing facebook Apps and hanging around with the growing Facebook economy, I am amused at Hasbro and Mattel's move. I've spent a lot of time with large companies as they adapted (some are adapting still) the web.

It reminds me of when Barnes and Noble woke up to Amazon's success and sued them for claiming to be the world's largest book store before waking up and building their online site. An interesting lesson there was that the web strategy for Barnes and Noble was not a pure online business like Amazon, but a transformation of their brick and mortar business to use the internet to extend their business, leaving us consumers with more choice.

I was lucky to be part of the team who build for $2B education publisher Harcourt Brace & Company (now part of Reed Elsevier) where we integrated 27 brands into an online site. I led strategic planning working with 27 business unit presidents to understand their business and how to transform it using the Internet and executed on it working with many disparate groups with entrenched business knowledge and vested interests.

The Scrabulous-Harbro story today seems a simple case of business negotiation where Hasbro is trying to leverage it's size to threaten two Facebook developers to bring their market valuation down which should be minimum at $6Mil at $10/user acquisition cost. Any business executive in Mattel or Hashbro can see the cost of building Scrabble in the Facebook world and the customer acquisition cost to even match with Scrabulous as it is today would be costing upwards of $20Mil and a time to market of 1 year+. Also inside a corporate setting, any executive has to justify this cost by coming up with a plan on how they would monetize this acquisition by translating it to new business for existing Hashbro or Mattel businesses bearing the real risks behind this plan on his or her career.

Lets look at it from a Facebook Developer point of view! Building and launching a facebook App as done by most developers I know is counted as a single person's time of few months. The smart ones adapt to the social graph and viral reactions of early users to build user base. Many facebook developers from Facebook Meetups that I meet daily dream about a similar scenario where they would like to sell their Apps in millions to some large company.

If Hashbro or Mattel sees the business potential of Facebook, they can easily tap into 600,000 active Scrabulous users upselling the board game and other related products. So the Scrabulous developers should try to negotiate a partnership with Hashbro to upsell their products and generate revenues out of Scrabulous App. I am sure some smart executive in Hashbro or Mattel is likely to see how they can scale this partnership and will likely buy Scrabulous for its right valuation.

In the meantime Hashbro and Mattel have created a PR fiasco against themselves. History has shown repeatedly that the large company who sues a startup with real user following fails. My favorite example of this is Ben and Jerrys ice cream which was sued by Hagen Dazs to stop their distribution which prompted Ben and Jerrys to sue the parent company Pillsbury with the campaign "What the Doughboy afraid of?" in Boston.

Michael Staton of Courses App has shared with us about how he hears from companies wanting to do bizdev deals with him from the education industry every day. It takes time and experience to see which of these are viable deals worth pursuing.

Its fun growing up as an entrepreneur when your small App gains attention and you can work a real business deal to generate revenue, thats when we are truly tapping into the Facebook Economy for all its promise and potential.


Unknown said...

Nice posting. Yes, Harbro should embrace Scrabulous, but I also find it a fascinating that basically to "innovate", a startup has to essentially violate trademark law.

Where do you get the $6Mil at $10/user acquisition cost figure? Do you think Hasbro can translate Scrabulous traffic on FB into $6Mil in revenue, let alone profit?

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