Wednesday, 30 May 2012

Facebook: Great Social Network, Terrible Business

One attribute of Facebook that makes it succeed on the Social platform is that the website caters to connecting real users with real users before anything else.

So why is that bad business?

Lets look at possible revenue production Facebook can seek:


A real user social network cannot place advertising prior to it’s users, adding a step, a commercial, or interference outside of the real-people we want to connect with will only de-value the social nature of the site.

Granted, seeing that my friend “Likes Guinness” may be something of a word-of-mouth advertisement that Facebook may be able to monetize, the nature of the interest is that it’s my friend, and not Guinness brand itself.

Selling Social

One method Facebook can generate income is charge for facilitating businesses to access social information of it’s users (Either through Facebook Connect, Social Feeds, or sharing contacts). However, each connection to Facebook only adds value to Facebook more-so to the business connecting to it.

For example, the Windows Phone includes all your Facebook contacts on the phone, as well as feeding social data (through Windows Live) accessible by the phone. For the Windows Phone itself this connection to Facebook is seen simply as a feature, where as Facebook benefits doubly by facilitating more interaction between it’s users thorough its network. Essentially it’s more valuable for Facebook than the Windows Phone.

Forcing bidding for such connections will only restrict usage of the social network, and in turn, devalue connecting real-users to real-users.

Enhanced Experience

Offering it’s users for an upgraded experience at a fee would only open the door for competition to offer the free alternative. Facebook knows that there is more “social value” in having a free service than an enhanced service as outlined by their Photo sharing boom where they easily overtook Flikr with lower quality facilities, but, being free – unlimited – and easy while informing their users that they are getting the best they can offer gives Facebook the edge in adding real users to it’s user base.

But the value of social doesn’t essentially translate to business value, as Facebook management should be aware of seeing that their “social” enabled video sharing is no where close to over-taking YouTube. Where Youtube harbours it’s own social environment.

As a result, the enhanced experience will only prevent real users from using their network, and in turn, force users elsewhere.

Win a Monopoly, then tax everyone

Microsoft tried that (and continues to try it) with Internet Explorer. Essentially, the only reason why someone uses Internet Explorer is because they are participating in the monopoly nature of the browser where the browser comes packaged with Windows.

Granted it remains very popular (face it, it does the job) it’s popularity can be easily destroyed simply by charging for it’s use.

Facebook to can be destroyed simply by charging for it’s use.
Or, lose value instantly by charging to use it’s photo-sharing or any particular component.

Social Value being greater than Business Value is an illusion

Granted, this “Shouldn’t be” an illusion, it is. As long as advertising is the driving force of product sales: social will never properly exceed promotional assets. Even though people prefer word-of-mouth recommendations over advertising, The hunter-gatherer nature of individuals takes precedence over the society they participate in – we contribute to society by an accepted not-by-choice taxation/obligation, we hardly pursue such obligations but recognize their necessity.

In turn, Society enables us to mimic friends in hunting and gathering, advertising makes individuals aware of products – and there in an individual prefers to personally be the judge of a product than rely on social recommendations alone.

Now, The initial IPO for Facebook may have been over-valued. But there is still hope…

… If facebook can somehow harness the power of society over an individual, there might be an irresistible asset in connecting with real-users.

Charitable movements and Causes might be the framework Facebook can benefit financially from.

It’s remarkable to see societies using Youtube, Twitter, and Facebook to overthrow governments; Provide aid during disasters; Organize protest; And expose corruption. Granted the previous only facilitate human rights which have little uncorrupted financial reward – however – it is possible that other ‘social projects’ can be made financially rewarding.

For example, let’s say, I as an individual would like to see a bike lane on my street and will be willing to contribute $10 to it’s development only if 500 real people commit to the same project. Facebook there in can charge a minute fee for facilitating large scale projects that individuals “like” and produce a form of revenue in terms of managing such projects.

If this sounds like Governance, yes, that’s what it is. There is potential that Facebook can obtain revenue via competing with government and it’s money wasting time consuming bureaucracy. But, the question here in is, will people be interested in a social project, if the social project manager is interested in facilitating investors?

Who knows?

Maybe I’m becoming too hypothetical and we will see giant advertisements rule Facebook successfully in the near future – lets see where the NASDAQ takes Facebook. I’m expecting either a stock split, or a stock price around $10-$15 per share, unless Facebook manages some sort of strong revenue stream or some smart take overs or investments with the influx of money it just received. Only time will tell,


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