- Briefing Room
- Consumer Engagement
- Commerce 3.0
Optimists see Facebook’s prospects as almost unbounded. After all, it has almost a billion users and its users spend an astounding amount of time on the site. Even if you replaced Zuckerberg with a dolt, the company ought to be able to figure out how to make gobs of money from having a community that is larger than the population of all but two countries.
Skeptics, though, remember how indomitable social-network-rival MySpace looked not that long ago. Then MySpace went into a death spiral as users flocked to Facebook. Skeptics have a more immediate cause for concern. Facebook admits that it doesn’t have very good ways of making money when people use Facebook on mobile devices. That’s a big problem as mobile use skyrockets.
Me, I’m a skeptical optimist. My optimism is based on understanding that Facebook isn’t just a platform—it’s a lot of interdependent platforms each of which could be valuable alone, but incredibly valuable together. Read on to find out why I’m nevertheless a bit skeptical.
Unpacking the Facebook Platform
To the casual observer Facebook is mainly a social network where people link up with their friends. The movie didn’t exactly help elucidate what the platform is really about. So here’s a really boring description and further evidence that I have no future in Hollywood.
Facebook’s user accounts are its core asset. For every individual who joins, Facebook has a unique identifier, relatively rich self-reported data on the person including location, sex, relationship status, where they went to school, and more. It also knows the other individuals, merchants, celebrities, and organizations that person is connected to. This has just started, but some users also have a wallet that is connected to one or more payment instruments. Facebook has these accounts for almost 900 million people around the world. That’s one amazing database.
These accounts support seven interrelated platforms as shown in the Figure 1.
The numbers shown in Figure 2 show how successful Facebook’s platforms are after just a few years of development. Remember, this company only opened up to the general public in September 2006. My optimism for Facebook’s future isn’t based, though, on how good it is today but on how much runway it has. The truth of the matter is that none of its platforms are anywhere near their full-on potential.
The most well developed platform—communications—provides mainly for fairly limited multi-casting of messages. It isn’t a sophisticated platform for bilateral communication or for broadcasting in the way Twitter is. And even for multicasting the communications are straightjacketed within a fairly limiting user page.
Some observers might think that the Facebook advertising platform is well developed. And it is relative to other online advertising networks. But it takes little imagination to realize that with the social graph to use, and rich data on people, one can do a lot better than tiny clickable display ads. Facebook, like all online advertising, is still using 20th century approaches to advertising and hasn’t yet developed innovations that really make use of the new technologies. It’s starting with things like Sponsored Stories and the newly launched Highlight feature (where people can pay to have their posts bumped to the top of a news feed) but these are early experiments. But no one else has the social graph and data available to do what Facebook can do.
Skeptics point out that Facebook is nowhere in commerce and is getting killed in mobile. But those are problems that talent, focus, and money can crack. None of those ingredients are in short supply at Facebook. I put all of those in the opportunity column.
In applications, Facebook has essentially one killer app (games) putting it, at about the same point in its history, as the personal computer with spreadsheet software like Lotus 123. With application developers around the world writing for Facebook in many different areas it is only a matter of time before there are more.
In the end, though, the reason why I’m optimistic about the economic future of Facebook is that it has almost a billion, and growing, accounts with rich information. If Facebook succeeds in most countries in obtaining the penetration of Internet users it has achieved already in some countries, it will essentially have a incredibly rich database of the global population. It won’t have everyone. But it is likely to have account information in not too long for the people that account for most of the income (and spending power) in the entire world.
There are reasons to be skeptical that Facebook will be able to capitalize on the tremendous assets it has developed. But as I’ve just noted that’s not because it doesn’t have its game together in mobile or because there isn’t a lot of commerce occurring in Facebook-land. To the extent I am skeptical that Facebook is worth $100 billion valuation it is that I see several sources of peril.
MySpace went into a death spiral because people stopped wanting to go there (it was getting pretty nasty) and because there was a nicer place to go - Facebook. Facebook isn’t immune from positive feedback effects working in reverse. Some people may decide they’d rather go hang out some other place, and then more follow them, and then sooner than you know it a slow trickle of departures turns into a stampede. Facebook is particularly vulnerable to younger people deciding that Facebook isn’t hip anymore. Those younger users could give a competing social network a critical mass (just like Facebook’s college crowd gave it a critical mass) and then that critical mass sucks in more people as they all grow up and enter the mainstream. So far Facebook hasn’t had significant defections despite various actions that have led to significant complaints from their users. But a significant misstep by Facebook, or a just a collective view from users that they’d rather be somewhere else, could sink Facebook – and it fast.
Facebook has done a much better job than MySpace at making people sticky. People are attracted by all the applications and the fact that almost all their friends and merchants they’d want to be fans of are there. That makes Facebook formidable, but hardly impregnable.
The other reason for skepticism is that Facebook hasn’t proved that it is adept at anything beyond the communications platform. Its advertising platform isn’t particularly innovative. Its software platform is well executed but Apple has developed a far richer and stickier applications layer. It is way too early to tell whether Facebook can pull together social commerce, payments, or mobile.
The final reason to worry is that there is a significant risk that Facebook, and Zuckerberg, will get drawn into government investigations and lawsuits around the world over antitrust and privacy issues. Not because they’ve done anything, mind you, but just because that’s the way it is these days for successful companies with complicated business models. Facebook is by far the leading social network, immensely wealthy, and widely known. That makes it a natural target for competition authorities and consumer advocates throughout the world. In the not too distant future, these investigators will have either gotten tired of beating up on Google or have extracted enough concessions from the search-engine giant that they feel like they can move on to fresher meat. Facebook will be the next one up. As the top executives at Microsoft found, these battles can take a lot of time and psychic energy.
In the end I’m more of an optimist than a skeptic. If I were a betting man I’d probably take a flier on Facebook. Since I’m not I’ll calmly watch my optimist friends sweat bullets if Facebook goes Groupon, and my skeptical friends turn green with envy as investors buy beach houses.
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