Commentary
What If We Got This Whole Facebook Thing Wrong?
- by Catharine P. Taylor , August 17, 2012
There are times when I’m sure we’ve gotten this Facebook thing -- and maybe this social media thing -- all wrong.
When it comes to the Facebook IPO, yesterday was a day like any other day. Well, perhaps it was even more of a day like any other, because there was a clear, mathematical reason the stock dropped: the first lockup expired. This, of course, means that the Interwebs are full of almost gleeful headlines about Facebook’s crash-and-burn:
“Zuckerberg admits Facebook stock ‘painful’ to watch, report says, notes The Washington Post, illustrating its story with the photo of CEO Mark Zuckerberg and COO Sheryl Sandberg ringing the opening bell only three months ago.
First flight out: FB hits new low as lockup expires,” crows The New York Post.
“Facebook stock slump cuts Zuckerberg's worth by $600M,” intimates The Chicago Tribune.
But what none of these headlines can get at is the powerful flip side of Facebook, the part that has incalculable value, but, as its revenue models are structured now, is unmonetizable. What is it? The power of being able to connect with people who mean something to you.
It’s the way users derive value from the site, but, while a brand may piggyback on this interest, by overtly buying into the News Feed, or by harnessing data from Facebook interactions, those things have nothing to do with the value that people derive from it.
Once again, I’ll return to two examples from my personal life to illustrate what I mean:
Last night, I spent time scrolling through MOPS, the acronym the locals use for the Moms of Pelham Facebook group. (Yes, rocket scientists, that’s where I live.) Here are the topics covered in the five most recent posts:
1. The time of the high school football parents’ meeting last night.
2. The sorry state of a local vegetable garden.
3. A request for mason recommendations to repair a slate walkway.
4. A reachout from a newcomer about the local elementary school.
5. A recommendation for a new pediatrician.
What kind of value do you put you on a group capable of doling out advice and information on gardening, the school system, and local masons, all at your fingertips? Of course, these groups have existed online since we were all using dial-up modems to experience the wonders of America Online. But what separates the Facebook experience from its precursors is critical mass.
Pelham is a town of 12,000 people, and 680 of them are members of MOPS. Engagement levels are incredibly high. Almost every post gets at least one comment. In fact, it’s far more common that a post will have comments than “Likes.” But, while there’s plenty of discussion about goods and services, there is virtually no local advertising, except for a righthand column ad from our ubiquitous State Assemblywoman. And I’m really not sure how well advertising would go down, unless it was part of the kind of well-thought-out social media content strategy that most advertisers, let alone Mom-and-Pop stores, haven’t yet engineered.
As powerful as MOPS is though, it only scrapes the surface of how deep Facebook connections can go at their best. And, so, now, for my other example:
For years now, my family and I have wondered whatever happened to the family that used to live down the hill from us, especially their youngest son, who moved from my hometown when I was seven, and was one of the closest playmates I ever had. You know how this story ends, because you’ve probably experienced it. He was wondering about us all these years too. And now, we’re reunited, on Facebook.
It’s impossible to put a price on that. A CPM? A market cap? Are you kidding me?
So, let me close by asking you something: How does Facebook derive value from this power, if advertising doesn’t end up being the answer?
Catharine P. Taylor has been covering digital media and advertising for almost 15 years. Follow her on Twitter @cpealet.
I loved this article. As a marketer who uses Facebook advertising a lot, this really struck me. When Facebook becomes sophisticated enough to deliver the right brand message at the right time to the right users (such as a Westchester based stone mason's ad being served to the MOP's who were discussing the slate walkway) then the game will change.
I'm hoping that Facebook engineers are working on just that. We'll have to wait and see.
... nice story, Catharine, jack
You have hit on a key point: Facebook is highly useful. It also makes money and continues to innovate ways to improve user experience, along with exploring ways to make money from all the social interaction. Charging the users is out of the question for now, so charging others to "hang" with the users is the best solution, and FB will keep plugging away at that equation.
The only people who are distressed right now are the investors, who didn't make a killing, and don't see progress that would retrieve their chance at getting "Google rich".
Perhaps it is simply time to put that "home run" dream aside and recognize that FB may hit "singles" for years to come.
Facebook does not derive value from this, period. In this regard, Facebook is like craigslist. It makes something once cumbersome and/or expensive easy and free (for the user).
And what user wants slimy advertisers intruding into that aspect of their lives. The whole point is they like the convenience of it, and--for a small percentage-they like the addiction to platform.
I have no idea what FB's future is as a profit-making, high-growth business. I think they can do moderately well. But they are not a transformative advertising vehicle.
Google makes tons of money off their business model precisely because they have a simple service that delivers precise, actionable resources to people, often down to the local level.
Facebook has a long way to go to match that.
Yes, they'll hit singles. And probably right at around the "Mendoza line"--which if I recall is around .220.
Nowhere near enough to make it to Cooperstown.
The investors who went all in were just dumb--anyone with an ounce of sense could have seen this.
Connecting people has value but not necessarily economic to the FB member.
Researchers refer to this as 'psychic income', an emotional reward from sharing something with someone you know be it media, text, or discussion threads and comments in a geographic or interest based social group.
If you go back to the Yellow Pages model (geo and category search), this is what Google reinvented using the Web, something the telcos grasped too late (disclosure: I was responsible for business and consumer marketing at PacBell in California and Nevada).
Ad placement in a search world has a logical affinity. But social media has a more fragile advertising relationship because what people "do" while on the site does not correlate well with what they would buy.
Even the publisher content model has a long way to go using contextual relevance to ensure good ad placement and click through.
If corporations can promote brand in social media (assuming they have enough data on their own customers), then behavioral targeting could improve using FB member profiles.
This data bridge is still missing as GM found out. Perhaps the problem is not FB but the concept of any free service being subsidized by advertising.
Twitter is trying to experiment with ad free for a fee services. Unfortunately, people are so conditioned to no fee or freemium as their base cost, that in the long run, with CTR at .003% (FB), businesses may end up creating and paying for FB brand pages but promoting outside of FB through other channels and entirely skipping ad placement on member pages.
Whether that translates to return to shareholder is probably a weak prediction for now.
This probably holds true for all social media sites that do not offer paid for services. LinkedIn does this now for recruiters, something not in their original business model. Fortunately it seems to work for them but for sites like FB, their future revenue streams need to come from other than advertising.
The IPO model to price the stock was flawed for FB - and while there was a ton of hype around the IPO, the question remained - was it priced right !!
And therein lies the answer - what does the stockholder value..
- Strong revenue model
- Growth in business
- Potential to drive more value
So what was working against it... and what a lot of people choose to ignore:
- Slowdown in growth of FB subscribers !! No longer growing at 20%
- No revenue model existed for mobile application
- Revenues were growing but at a slow pace
- Popularity of revenues from games like Zynga were falling
All this was know before the IPO - some did not get disclosed to public until a few days before the IPO.
FB was being touted to be the next Apple of the market; seriously a company that has proven hardware and software innovations year after year currently at $600B cap and FB was planned for $120B cap ... based on what !!
Call it media hype or cause it is the largest social media platform in the world run by a young fella that does not wear suits to work ;-)
Goes back to basics .... where is the value in the company !! It needs to be proven to shareholders...
Did people forget the lack of valuation during the dot com bubble burst of 2000.
There is potential for FB... yet to be proven and if managed effectively can yield good returns to the business ;-)
My heart goes for those that paid $40 plus for the IPO stock !! Wish I could say 'hold-on' to your FB paper, at least for now.
Great article. I've often thought about the divide between the monetizing side of Facebook and the way it is actually used. Not to mention the difference between what non-profits want to accomplish there vs. what other marketers are looking to do (I work at a non-profit). The answer to your final question is unclear at this point. However, I think further "sophistication" of the sort Betsy Kent mentions above will become a serious turn-off and could lead to less engagement and perhaps closed accounts.
Here's a throw at a suggested business model: Charge users $1/month per account with a reduced fee annual membership costing $10.
This $10/year Facebook membership allows the user to set privacy and make other choices that have been reduced or removed. Ads served to these paid members would be contextually relevant.
'Free accounts' remain but would be subject to universal ad exposure (not just contextually relevant ads). Free users would not have access to the extended array of interface, functionality and privacy controls available to paid users.
The '$10 Model' would answer the question: Is Facebook worth even ten dollars a year to a *user*? What does the response to this value question reveal about the long-term viability of the channel?
And, if consumers find Facebook is not worth $10/year, does this impact their perception of brands that message through Facebook?
We need to stop applying traditional media revenue models to something that is wholly unique -- a media channel where the user is content provider, not just content consumer. It costs money to store and provide access to consumers' content and to provide them technical support.
Perhaps if Facebook starts taking money from their users, a balance will return to the landscape. Users will get the experience they want because they're paying money for it. They'll have unfettered access to the people they want to connect with, uninterrupted by irrelevant messaging and cluttered interfaces.
And marketers will get what they want: a quality, valuable audience for their contextual messaging.
I believe you absolutely *can* put a price on that, and the best model for it is outdoor advertising. Facebook is "drive by" advertising: it's content you pass on the way to the content you're headed for. The idea of brand "engagement", "relationship", and "intimacy" are fantasies. Here's the acid test: if MOPS knew Facebook would begin charging $25/month for access, would anyone pay? Or would you all simply move to the next free venue, like Google Plus?
We live in a freebies world hardware and services,labour, all have become commodities there is no going back and as the numbers now show year over year the FB new unique users have slipped in the USA the discussion will switch from growing revenue in FB to keeping users in FB. As a user and owner of a 3d virtual site I can attest it's not the amount of traffic it's the quality of traffic. You either charge a subscription fee to users or advertisers will keep paying.
Great piece, Cathy. Certainly, the group is the group precisely because there are no ads from stone masons running along the side-- the members want recommendations from their friends.
FB could pay various groups to curate lists, and then sell them?
Barbara, you've got an interesting idea there for an open-source Angie's List. Not sure Facebook is really needed (something like Ning would do just as well), but still... an interesting idea.
I think it revolves around what we use the internet for. Google for search, FB for personal (and business) interaction, Twitter for brief updates, Mapquest for directions, different browsers to find URL's depending on your computing platform, (PC, MAC, mobile) - all free. (After buying the device of course and paying for access).
What happens when one of the above, does all of the above?
We never have to leave that platform. Imagine a Facebook browser. Why leave Facebook, if they deliver what a browser delivers - access to what you want to buy. What if that purchase was tied to that "buy" and the seller paid a premium for delivering you to them? No irrelevant advertising. Supported and paid for by the product that you just bought.
Paid to Facebook.
Could they/would they do it?
I think we have looked at digital life as if it's something exotic and extraordinary, when in fact it's just an Occam's Razor solution to dealing with much of daily life. You need to know something? Go online and find it? Looking for directions? There are maps. Want to share something? There are lots of ways.
People always go for two things: convenience and communicating with other humans. Draw a straight line from the invention of the telegraph to today and you can understand a lot.
Where things got corrupted was in the notion that there was a place for intrusive, annoying advertising every time we constructed one of those new straight lines.
There isn't.
Users already pay for Facebook anyway! Through life insurance policies, funds for kids' education and other investment vehicles that happily bought into the hype with OUR money.