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.

Reaching consumers on the web circa 2010

I thought I'd share a graphic I'm in the process of producing to give students in my search marketing program an idea of how complex the "web channel" really is. That said, I think the graphic is applicable to the whole issue of Internet accessibility currently under debate in several venues. After all, everyone on the Internet, and certainly the web, is in some sense a consumer because we are all consuming information.

A little explanation is in order for each of the categories I define down the left hand side of the graph and how they interact in a competitive landscape.

Mega Sites

Sites like Google and Facebook each account for roughly 7% of web visits in the United States, and Google is estimated to account for 10% of Internet traffic. Those numbers represent a startling level of concentration when you consider that there are over 1 trillion web pages.

The following two things seem clear about Mega Sites like Google and Facebook:

• Search engines are the yellow pages of the web, originating over 80% of web traffic (cited to me by a knowledgeable web marketer who works for one).
• Social media sites are the web's congregation points. However they don't seem to yet hold a candle to search engines in terms of directing attention to external sites. Click through rates on social media ads tend to be 1/10 those of ads on search engine results page in my experience. One recently emerging trend is that social media sites seem well suited for directing visitors to more traditional news sites.

"Normal" Websites

Normal websites are like needles in a hay stack. Unless you know their exact address, there's no way there from here without some sort of directory service like a search engine or possibly a referral from a social media site. Bolstering this observation, the experience of students in our program is that they can sometimes increase a small website's visitors (1000 per month) by a factor of 10 or more with a well-targeted search marketing campaign.

Normal websites face the following business dynamics:

• When normal sites start to exceed the infrastructure allotment allowed by their providers, costs can quickly skyrocket leading to an emerging market for infrastructure support often referred to as cloud computing.
• Because certain activities are strongly governed by economies of scale, normal sites often depend on mega sites to manage services such as logins, interaction, transactions, media delivery, document management, etc. also often labeled as cloud computing.
• The relationships inherent in what I have labeled as cloud computing are at the root of much current controversy regarding privacy, switching costs (or even the ability to switch at all), and open standards for information exchange.

The Internet

The Internet is owned by no single entity, but the networks comprising it are owned by private and governmental entities. Traffic on these networks conforms to open protocols allowing it to potentially flow freely from network to network.Some governments attempt to constrict traffic at this level to control what their citizens are exposed to.

Mega sites such as Google find it economic to invest in their own Internet infrastructure vs. paying third parties to transport their traffic. Their infrastructure investment allows them to engage in peering relationships with other providers, vastly decreasing their costs to send traffic to areas not covered by their infrastructure.

ISPs

Internet Service Providers control most consumers' access to the Internet and therefore the web. ISPs engage in traffic shaping that effectively limits and channels what most consumers can do on the Internet. Some of these restrictions have the possibility of restricting access to certain web sites at the consumer level.

ISPs also often (particularly in the case of cell companies) stipulate the kinds of devices that they will connect to the Internet. The debate concerning net neutrality is essentially a debate about the extent to which ISPs can impose restrictions on consumer access.

Devices

Devices provide another means of shaping consumers' access to the web. This ranges from default browsers on PCs to apps on smart phones which are often just front ends for web sites or web services. Device manufacturers often advertise how their devices provide enhanced access to services available over the web such as Google Maps.

There is currently much evolution in this space with Apple's iPhone and devices running Google's Android operating system showing the most growth in smart phone market share. Microsoft's browser continues to lose share to Firefox and Google Chrome.

Trends of Note

• Players such as Google who started in one area of the web, as a search engine, have evolved to provide either products or support for products in all areas of the web channel.
• Players such as Apple and Microsoft who started largely in the area of devices have evolved to building their own Internet infrastructure and mega sites.