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From VentureWire

PALO ALTO, CALIF. — ABOUT FIVE WEEKS AGO, Stanford University M.B.A. student Edward Baker and two classmates launched a Facebook application that is aptly named for the current craze of widget development: "Send Hotness."

Like many others on Facebook, the application is not extremely useful in the way some might think of online businesses. But it is catchy and extremely viral. More than 5 million people have installed it, making it the 37th most popular on Facebook, according to the Web site Adonomics.

Baker and about 75 other graduate and undergraduate students built Facebook applications this quarter in a Stanford class, "Create Engaging Web Applications Using Metrics and Learning on Facebook," taught by B.J. Fogg, director of the Stanford Persuasive Technology Lab and Dave McClure, an entrepreneur and consultant. And they've found great success so far.

Since students launched their projects in early November, the applications have about 16 million total installations and five have more than one million installs. An unknown number of the students have been hired by RockYou Inc., one of the largest Facebook application developers, and some applications are generating enough ad revenue that students are using to pay their tuition.

A number of students have had informal talks with angels and venture capitalists about investing in their projects. Some have gotten interest, but it is still too early to tell where the nascent companies will go.

"The landscape for consumer internet is changing quickly" Fogg said. "Entrepreneurs don't need investors to build or launch their applications on Facebook."

The projects produced by the class show how easily applications can be built on Facebook, the viral speed with which they can spread, and how heated the competition still is on Facebook.

"The ability to grow an app virally makes it easy for someone who's never done this to succeed even if he's just starting out," Baker said. "Someone from a VC firm came (to our class) and said there's no way for us to compete with Slide or RockYou. But I feel we may have proven that person wrong after little over a month."
The strong adoption of the applications was a surprise to McClure. "I thought that if people achieve 10,000 users, that would probably be pretty good," McClure said.

The applications included the bizarre, such as "Love Child," where users "conceive" a virtual child with a friend and then play with or discipline it. "We have an algorithm in which if you lecture your child, its IQ goes down," joked Johnny Hwin, a M.S. student in management science and engineering. "The thing about creating an engaging app is getting attention and using humor, so people will spend a lot of time on the site. And eventually click on ads."

There was also the pragmatic, such as "College: The Numbers," where high-school students can anonymously post their grade point averages and SAT scores to gauge their chances of getting into a particular college. The students who built the application got an agreement to use Kaplan Inc.'s brand on the widget.

Students learned to launch simple apps, work on viral growth, and then install new features and build up user engagement later. With Send Hotness, users select 15 friends and then can see which of their friends have the most "hotness."

After launching, the trick is understanding the viral nature of Facebook and how to drive users to an application and keep them coming back.

"It's a mix of art and science," Baker said Tuesday after a presentation of the class' applications in Palo Alto, California. "The math is not hard. But it takes a lot of experience to tweak it to optimize the numbers."
Baker also consults for TokBox Inc., a Sequoia Capital-backed video conferencing start-up, to increase its viral reach with similar methods.

That understanding of how to build applications for Facebook is something in demand as the Facebook "land grab" continues. Lance Tokuda, co-founder and chief executive of RockYou, which says it has more than 35 million users, has hired students from the Stanford class, though he declined to say how many.

"In terms of product development, they have an understanding of virality, how the demographics are different (on Facebook) and how (users) interact with their friends," Tokuda said. "If they go through two rounds of product development (in the class), they understand how it works."

The ease with which developers can launch Facebook apps may provide a different route than the traditional method of stealth-mode, followed by private-beta launch, that is employed by many start-ups.

"For some, there's no reason to launch a beta version online," said Dan Ackerman Greenberg, a teaching assistant in the class and M.S. student in management science. "You can launch a beta version on Facebook.

You can easily launch five versions of every app with different names. One will take off for some reason."
Greenberg's application, Hugs, has more than 2 million installs and the highest level of user engagement - or percentage of active users - of apps in the class, with 9%.

But given the popularity of the applications, can any of these products - and Facebook apps in general — generate any meaningful revenue?

At least five of the applications are already generating more than $1,000 per day in ad revenue, according to McClure.

But right now, generating revenue is not the most important thing, Baker freely admits. "Everyone's in land-grab mode," he said. "In the future there will be a way to better monetize." At least three teams from the class have incorporated as companies, according to Greenberg.

Still, Baker cited future revenue prospects such as Facebook allowing the purchasing of virtual gifts, digital goods or media, and physical goods, as well as new and unexpected forms of sponsorship and marketing.
And Facebook is making it more difficult to acquire users, by imposing necessary roadblocks such as spam filters so that users are not inundated with application invites, Baker added. That makes acquiring users even more important.

"It's even harder now than over the summer (of 2007)," Baker said.

Once Facebook settles on a common approach to blocking spam from applications, having an installed user base - even for hugging, kissing and conceiving virtual children - will be a major competitive advantage, Baker believes.

The Stanford class is not being taught next quarter, but it will be offered in the spring. What it will look like by then could be different, with Google's OpenSocial initiative expected to be released next year.

"The spring class — it may be on OpenSocial," Greenberg said. "I have tuition money for this quarter at least."