Saturday, April 24, 2010

Hang On: Facebook's Monetizable Assets Are The Connections You Created There

If you examine Facebook's privacy terms (login required), you'll note that you can opt out of sharing almost everything except basic information about who you are and, most importantly, your connections. Connections is a fascinating concept. It includes:

  • Your friends.
  • Pages you've linked to.

This sounds bad enough, until you read further in the FAQ for this choice quote about how central the notion of connections is to everything you do on Facebook:

Making connections is the main way to express yourself on your profile. Facebook enables you to connect with virtually anyone or anything, from your friends and family to the city you live in to your favorite bands and movies.

Further, as David Recordon, one of Facebook's lead developers states:

The web started as a collection of documents, but people are becoming even more important.

The sum translation of all of these points: The web is no longer about finding things for you. The web is for finding out things about you. You connected to it on Facebook, that must mean you want people to know it about you.

These claims seem outrageous when stated so directly. Why would Facebook make them, albeit not so directly? My bet is that you need look no further than their economics. Holders of ad inventory like Google and Facebook are paid when the ads are clicked. Click through rates on the kind of content ads Facebook shows are 1/10 what they are on the kind of search ads Google shows. Data indicate that Facebook is about on par with Google in terms of number of visitors, at least in the US. Are we to then infer from the click through rates that Facebook revenues are 1/10 those of Google? That might be going a little too far, but it does suggest that Facebook's revenues are vastly inferior to those of Google but likely with similar infrastructure costs given the similar volumes of traffic.

In other words, it sounds like there's a big profit disparity between Facebook and Google.

Big profit disparities are tough for losing competitors to sustain over the long haul and still remain viable. Therefore, Facebook must be looking for an alternative revenue model. One seemingly promising option would be for Facebook to do exactly what it is doing now, leverage the information it has about its users' connections. That information can be used to launch and sustain viral marketing campaigns, something that is really not possible in a search marketing context like Google's. Further, well executed viral campaigns can be highly valuable to companies who will be willing to pay for the wherewithal to conduct them.

Will it work? It's tough to say. People go to a spot like Facebook to socialize, not be marketed to. The beacon controversy of a few years ago suggests that once people see the social space manipulated toward commercial ends, they won't like it any more. It strikes me that this strategy could be a bit of a hail Mary.

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