Thats really the billion dollar question. With 200 million users worldwide and growing, Facebook zipped past MySpace as the world’s largest social media networking platform at the end of 2008 in terms of number of users. As they expand their repertoire to include foreign languages, the potential for membership growth increases day to day.
However, what venture capitalists, investment bankers and investors want to know, is how Facebook is actually going to monetize their huge membership base. According to calculations done by independent auditing firms, Facebook makes less in advertising per member than MySpace does, and as their costs increase with every new member and new feature provided, this can only be detrimental to Facebook. The traditionalists have put forward their views on how Facebook should do it:
1 – Advertising. Currently it actually costs less to target a clearly defined segment rather than a more nebulous one. For instance, targeting male graduates from Illinois is actually cheaper per member than to target male graduates in the whole United States. From the marketing perspective, this is ideal as most campaigns have a very tight focus anyway so this is good for companies advertising on Facebook….its not so good for Facebook.
2 – Paying Membership Tiers. Currently the full suite of Facebook services are free. There is a possibility of adding a paying tier of members similar to what Twitter is trying to impose.
3 – Revenue from Apps. Facebook does receive a small sum for every application that is developed for deployment on their platform. However, this is a small percentage of their total revenue which in itself is nothing much to shout about.
4 – Revenue from Apps transactions. Again, Facebook receives a small commission every time some one pays for buying a virtual product from one of the applications.
5 – Facebook Connect. This recently launched application allows people to use their Facebook profile AND their Facebook contacts to be automatically uploaded to an independent site which has this widget embedded in their sign up page. What makes this interesting is that a person doesn’t just join the new site, but brings his/her whole community along with them. It is an evolution from the previously maligned Beacon initiative. More insidious but probably the most effective tool in the current Facebook repertoire.
It is my belief that there are fundamental weaknesses in the traditional models being considered or being used by Facebook. I understand from an interview done last year that Facebook intends to remain relatively hands off with regards to the way their current members are using Facebook and that they intend to make money from a variety of business models so as to ensure the integrity of the whole. However, while their strategy appears solid, their execution sometimes leaves much to be desired.
– Advertising. Social Media was, for marketers, supposed to be the next step after data mining and campaign management. The basic tenets of data mining is to maximize the returns from ever more targeted markets. Facebook is actually incentivizing marketers to go after the whole community again instead of restricting their ads to those who are more likely to respond to those ads. By forcing marketers to go after the whole community they are not only doing a disservice to their clients but also to themselves as the community might react negatively to the irrelevant ad placements.
– Paying membership. From whatever research has been undertaken on this topic, it is clear that most members would consider only paying for membership that removed ads from their page. This in turn would impact Facebook’s advertising revenue, so its not an easy option to consider. I think Facebook can only seriously offer paying options for new features. If they start to block off features from their site to only paying members, they may soon find no members left as people will start to switch and soon even paying members will leave because their communities are depleted.
– Revenue from Apps. I believe that a service like PayPal would be a very good fit for Facebook. If they can provide a small range of financial services like escrow services, transmitting money, enabling members who do not have a credit card to pay for services or products on their site,…..then I think a lot of companies will see Facebook as a good platform to offer their e-commerce services.
Of the few options available, I seriously think that if Facebook can offer financial services, they would have a real winner on their hands, both from the membership as well as the profit perspective. The alternative for them if they are unable to work out a solution would really be to sell themselves off to a Google or Microsoft. I think Google would be a better fit in terms of complementary services and at the same time Google can integrate their Ortuk platform with them as well.
Tong Hsien-Hui
Some Meowsings...... 