Can Facebook possibly make money?

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

Social Media and the pirating of the new Wolverine movie…

One of the biggest issues dominating discussions on cyberspace these last few days hasn’t been the meeting of the G20 which gathered for their annual social events where expensive wine is consumed in copious quantities and general decisions are minimal.  Nope, what has consumed most of cyberspace’s attention has been the news that a pre-release of the much anticipated Wolverine movie was posted up on multiple P2P Torrent sites on Tuesday where close to 200K (at latest count) copies have been downloaded .

 

Obviously 20th Century Fox is up in arms over this.  Their chairman came out to state that the release was missing some key scenes and wasn’t fully edited yet, and promised that the perpetrators would be found and dealt with.  In what I applaud as the first sign that the cyberspace community is acting responsibly, most reputable blog or movie review sites refused to carry reviews of the pirated download.  The general sentiment is that piracy is inherently bad for long term production of good content and that it should not be encouraged.  I know of several site or community managers that took this stance even in the face of serious opposition and threats from their own followers.

 

So wasn’t it ironic and extremely annoying to all of us that the first review posted by a site with any authority was that of FoxNews, a subsidiary of the Fox empire of which 20th Century is part.  Carried by one of their own writers, it made a mockery of the company’s stance that this was something they considered a serious breach of the law.  When this report was first posted on Friday, a number of the people I discuss these matters with were up in arms.  They felt that since Fox wasn’t taking this matter seriously, why should they, as outsiders even be bothered to help them at the detriment of their own online cred?  The general sentiment was that the gloves were off and screw the so-called corporate lawyers.  I read a number of articles that were being prepared for release on Monday, all pertaining to a review of the pirated movie.

 

Just a few hours ago, Fox announced that they had fired the columnist responsible for the article.  They also removed the article from the site.  They also posted another article over it so that even viewing the Google cache of the page won’t show it.  Needless to say though, thousands have already read it so the damage is done.  I am really trying to get my head around what the editor who allowed the article was thinking when he/she gave the go-ahead to post it.  Didn’t they realize this was akin to committing corporate suicide?

 

I speculate that the following issues at Fox lead to this misstep, all of which are enshrined as problems facing big companies in the social media space:

–  They believe that to develop a strong following, you have to be badder than bad.  In their mind, controversy pulls the crowd in.  

–  To be successful in the social media space you need to forget corporate structure and position

–  You don’t need to see what others are doing online…..they are probably doing something just as bad

–  There is no morality in social media

 

All these stances, in one form or other permeate corporate thinking with regards to social media.  Sometimes its due to having a person in charge of the social media initiative who is too inexperienced to know what marcom is like in the real world.  At other times its because the person in charge has his/her strategy entirely coloured by what they read on DIGG or Twitter.  What is more often true is the following:

–  Being bad or controversial doesn’t really lead to long term communities unless there is an underlying cause.  Being bad just because you want to be bad just makes you look stupid.  Controversy is a subset of Innovation.  Ultimately the most innovative or original content builds the largest, most loyal following.

–  You don’t just forget you are part of a bigger company just because you are in social media.  Relationships with your community is dependent not only on what you do online, but what you do offline.  Don’t ever forget that unless your money is all made online, that the offline experience is more important than the online one.  People sometimes forget mistakes or arguments online, but are much less forgiving if this happened to them in the real world.

–  Not checking the general mood of the online community is a common mistake made by executives with little time to do such research.  Thats why so many promotions fail.  Nearly all marketing consultants in the field of social media tell their clients to do their groundwork in understanding their online target audience…only a very small percentage in my experience, actually do.

–  To build a strong online community you need to have a consistent moral position.  Its well and good for the once a month blogger to write scathing articles on everything from religion to government, but quite another for a blogger with a strong reputation to uphold in a pretty fickle community.  That is where a distinction must be drawn between the community leader and the community followers.  In this example, the followers were all for piracy.  Its the leaders that finally put their foot down and said that it was not right to do so and backed it up with action.

 

Its ironic and idiotic that the so-called leader who finally broke ranks was from the company that actually suffered the most from this issue…..in social media, we learn new lessons every day…..

 

Tong Hsien-Hui

Future of Social Media

In nearly every one of the talks I have given over the last few months, my corporate clients will inevitably ask me about what my prediction of the future of social media will be.  I expect they want to hear about how social media will take over the world and all their customers will be plugged into the social media world.  I have had a lot of time to think about this matter and have seen how the social media landscape has changed over the last few years.  So here is my take….no punches pulled:

 

–  There is no money to be made in social media inspite of what so-called gurus talk about potential business models for Twitter or Facebook.  By money I mean profit after expenses.  The growth of Twitter and Facebook mean that they are always adding new machines and technology to keep up with their every growing but never paying customers.  Sure they make “some” money in different ways, but the truth is, the equation:  Cost > Income will lead to a situation where someone needs to pick up the tab for the balance.

–  The reason why no one wants to pay is because the value of the social connection isn’t high enough to justify forking money over.  Seriously, how many people out there (excluding companies) would want to pay for their Facebook account?  Even if they did, if most of their connections gave up their accounts they would soon give theirs up too.  Twitter is even worse…how much will you pay to receive bite sized spam?

–  Are there any other ways in which these sites can make money?  Sure, but none of them have figured it out yet.  As a consultant, I often tell clients to focus on the “social” aspect of social media…..that doesn’t mean folks at Facebook, MySpace, Twitter, etc….do too…..  One of the reasons why Google was so successful was because they had the technology to keep their expenses extremely low inspite of an exponential growth in their hit rate.  They used technology to stitch together cheap servers to form massive farms that kept their business growing.  Facebook is buying expensive servers as their clientele increases……with no appreciable increase in revenue….

–  Social Media is always about the next big thing…..  In the 1990’s people forget that one of the earliest social media sites was SixDegrees (now part of Vignette), then there was MySpace, now there is Facebook, tomorrow something else….Social Media is evolutionary and we are always on the lookout for the next big thing.  Customer loyalty is practically nil and the barriers to switching is only how long it will take to get your existing network up and running on a new platform as long as it has better features, made even easier today with features like Facebook Connect.

 

I predict in the next five years, a wave of consolidation in the Social Media space.  As with MySpace, I doubt that Facebook and Twitter can continue as independent entities.  I’m not very positive with Twitter.  I really fail to see how much value can be derived from an internet sms service.  Maybe if Microsoft were to add it to their Windows Live suite it might make some sense.  Facebook on the other hand would be best served by being part of Google.  It would be an ideal match technologically.  Either that or Facebook somehow find a way to start a Paypal like service and make use of their platform for e-trading.

 

Having lived through the internet explosion and now seeing the same foolish valuations placed on Social Media sites, its not hard to use historical references to infer what the market may look like in five to ten years.  To those who think I am excessively negative, I just hope that they are right……

 

Tong Hsien-Hui

Why I dislike the new Facebook format

Its been about a week since the new format of Facebook was rolled out to me.  In that time I went from hating it to accepting it then back to hating it.  As social media is an important part of my job, I trawled the world wide web for what others thought about it.

 

The preliminary results were not surprising.  As with anything new, I didn’t read many complimentary comments on the new format.  A number of these could be attributed to resistance to change which, after time, would turn into grudging acceptance then maybe into liking.  There are of course different categories of communities on Facebook.  The bulk of them are purely social in nature.  However, there are also businesses on Facebook and application developers.  With the various interests involved, it is not surprising that their take on the new format varied as well.

 

From the social perspective, there are both improvements and failures.  The bigger fonts and space allocated for your friends’ update caters for the new and quickly growing membership of older people on Facebook.  Where previously a small one or two liner pegged next to your friends’ names would tell you what they were doing, its now a significant slot allocated for each update.  There is also more information regarding the update as well.  Furthermore, status updates can be independent of you to better reflect news information rather than your information.  This “streaming” of information updates is the same as what Twitter provides.  

 

Kudos have also been given to the more sophisticated filters on the left side of the screen where you can view updates either as a whole or by “friend list”.  If you have segmented your friends into lists, you can easily view just their updates by clicking on the list name at the left.    There is also a “Highlights” column on the right which shows what games, groups, etc…your friends are participating in (although you need to click on the sub icons in the column to find out which friends specifically).  The problem with this Highlights column is that advertising is mixed in with the actual updates (usually at the top) without significant assessment of its suitability.  I have seen an ad for American Girls – Temp12 in the highlights column in the Facebook page of a 12 year old girl.

 

When it comes to weaknesses though, there are a whole bunch now.  For one thing, most Facebookers I know are not that interested to find out the details of what their friends are doing.  Sure, they want to know what status update their friends are providing, but while knowing that their friends took a quiz on their mental age, they don’t want to know or care that the result was their friend has a mental age of 100.  If they were indeed curious they would click on their friends’ profile.   Furthermore, the larger font and space allocation reduces the number of updates they can see at a single glance.  Where previously it was easy to view most of the updates on a single page, they now have to scroll down to see all.  Given the nature of social media, most won’t bother, losing possibly interesting information.  It also becomes an issue of the domination of the frequent posters as with Twitter.  Those that post frequently can often push everyone else off your front page.  Previously the constraint of having 3-4 updates per person meant you could see more of what everyone was doing.

 

Of more irritation is the fact you can no longer selectively determine the updates you want to receive.  Facebook now has an all or nothing policy.  If for instance, you don’t want to see what games friend A is playing but still want to see his updates, it is no longer possible.  In the previous version, Facebook allowed you to select what you want to see and what you don’t.  Now, if you click on the right side of the update you can only choose to remove that person totally from your updates.  This actually is the biggest grouse I hear.  Its a big problem for those with both large and small groups of friends.  Another related issue is that those applications you blocked can still post to your newsfeed.

 

Most companies that actively update their Facebook groups like the new format.  In the same way greater exposure to the media prospectively gives you greater mind share, groups that update frequently with video, pictures, discussions, etc….repeatedly bombard their fans’ facebook homepages.  If for instance, you were a fan of Mashable, you would find that in the course of one day, you might find one third of your homepage taken up with their updates.  While this is contrary to the principles and etiquette of social media, it speaks to the old school marketers who are always looking for presence over interaction.  I expect Facebook signs up a lot more advertising with their new format.

 

I admit that I am biased against the new format.  I dislike it for the reasons given above, basically the lack of control I have over what I want to see.  I am also concerned that Facebook is blindly following the Twitter model without understanding why, inspite of all their “improvements”, Facebook can never be Twitter.  In simple terms, Facebook is a social media platform where each user has his/her own identity and community.  Twitter, for want of a better term, is an opt-in individual spamming platform.  You don’t mind linking up with people you don’t know because you don’t build a personalized profile anyway.  Thats why celebrities, politicians, religious leaders, etc….have no problem having you follow them on Twitter and vice versa, whereas they wouldn’t dream of accepting your friend request on Facebook.  So good luck to Facebook.  If things get worse, users will vote with their fingers and move to another platform.  With barriers to entry falling, you can even create your own social media platform free with Drupal!

 

Tong Hsien-Hui

Better online deals if the site doesn’t know who you are?

As part of my daily routine, I get a snapshot of all the latest, craziest news published on the web.  Some are patently false, some are true and verified and some fall in between.  Not obviously fake but then again, hard to believe if they are true.  This article is one that falls in between:  http://www.mainstreet.com/article/smart-spending/delete-cookies-save-cash

It speaks of the ability to get better online deals from e-commerce sites such as Expedia if you clear your cache and cookies such that the site can’t pull out your previous purchasing pattern.  The logic is that the site is clever enough to verify that you are indeed a habitual e-commerce customer and set a higher price point for you.  From a design standpoint, this is possible.  In fact when I worked with Amazon in their early days as an advisor on data mining, the intent was similar.  Develop algorithms and predictive models based on current or prior behaviour.  That said, once the models were developed, it was hard to ensure service quality as running those modelling programs in the background took up a lot of resources and slowed the interaction down.  Given that the power of computing has increased several fold since I was involved in this area, it is possible that these issues have been ironed out.

I am very keen to test out the truth of this and will probably spend a couple hours on it later.  If it does work, then it will certainly help to determine how I plan to approach e-commerce sites in the very near future!

 

Tong Hsien-Hui