Facebook's Black Ice

We have much to thank Facebook for - it has led the way in training society how to communicate in networked environments and has shone the technology community how to optimize communications technology for engagement. But Facebook has a big issue that is growing more acute with its IPO - its business model is in direct conflict with its networked-based engagement model.

From a business model perspective, Facebook is little more than a copy of existing media models with 68.8% of its revenue coming from text and display ads. This incents them to build functionality that encourages interactivity... but that is largely where it ends. This is highly problematic for organizations that are working to re-invent how marketing and communications is done, using interest and influencers to develop pull for products and services. To change the cost structure of marketing, organizations need to help facilitate communities and with them relationships between community members so that education and information can scale out, through chains of influence. Facebook has no incentive to support this new marketing approach because it directly conflicts with their advertising-based business model. The move by GM to pull Facebook advertising (but not their presence) was fascinating to me for this reason.

I have long had a complaint about Page functionality in this regard - it does little to help a community manager welcome new 'likers', connect people to each other, curate content or carry on a topical conversation over a period of time (there are 3rd party plug-in that do a better job at this). That functionality would really help brands engage in a more involved conversation with their markets and change how they approach marketing. Instead Facebook, through its functionality, encourages brands to treat their Facebook pages as simply smaller channels that are similar to their big channels, albeit with a bit of interactivity.

On the user end, I've noticed the need for revenue growth in my stream, which is increasingly filled with page updates vs. updates from my friends. While there used to be a degree of control over my feed, that control seems to have diminished steadily. This is another huge risk for Facebook and every user will have a tipping point when they feel like Facebook has just become one large advertisement and they start to either visit less and less or they un-like Pages in an attempt to see more of what they really care about.

Finally the biggest risk that Facebook has is their networked engagement model itself. While growing, it provided a huge positive feedback loop that allowed them to grow geometrically and very, very quickly. That same dynamic can turn into a negative feedback loop as users jump ship.

Watching the Facebook story play out has made me wonder whether they really understand the changing business environment in which they themselves helped to create - or whether they do understand it but are now caught in the catch-22 of the innovators dilimma; they had to start with an advertising model because that is what corporate customers understood but now they are so dependent on the advertising model that they cannot get themselves out from under it. Either way they are increasingly treading a fine line between keeping their users engaged and providing real value to corporate clients and there are plenty of traditional corporate clients to help hold them back.

 

 

 

Comments

[twitter.com/adamcohen]

Great thoughts Rachel. The part that has me disturbed is the new approach FB is taking to charging brands for "reach" - you can pay to increase the number of fans that see each post, from the ~35% normally to up to 75% of your fan base, for fees on each post. To your point, this is going to cause the same inequity that you see in advertising - big brands can afford it. The "interruption" marketing approach is going to diminish the value of actually being a fan - I could see it backfiring in the long haul.

Wondering if Facebook is just riding out the fact that they have a massive install base - and that the market for a player to remain pure to engagement (not to mention provider a killer mobile experience) is still green.

[Rhappe]

Thanks for the comment Adam - not only inequity in the size of brands that can afford it but it also allows crap content to get more exposure than quality content - the classic pay to play. It takes us two steps back in my opinion, not 1/2 a step forward.
The technology that is more true to relationship building engagement vs transactional activity tends to be the white labeled solutions because that is what companies are paying for. I wonder if we won't see a swing back to dedicated communities for that reason.
Certainly very interesting to watch.

[Dmeiselman]

Great post, Rachel. There are several themes running in there that match up with things I have been pondering lately as well.

I have been noticing anecdotal evidence lately that "younger people" (namely my 20 something sons and their friends) are spending a lot less time on Facebook and more on Twitter and Tumblr, specifically because they enjoy the more pure engagement model found on thoseother services. It's less crowded with games and brands (and "old" people...). While I don't think FB is poised at a MySpace moment, there is something to the losing its innovative edge theme. I am still there because my friends are there, not because the experience is continuously getting better - quite the opposite really.

The key for FB has always been to figure out a way to monetize their userbase without debasing the experience in a way that threatens their ability to sustain the userbase. I think they have inched over that line, but I am oddly optimistic that they will correct as needed to address that. They just raised $16 Billion in their IPO...one could argue the IPO puts more pressure on them, but I think Zuckerberg has shown himself capable of following his own strategy - commentators or users be damned. $16 Billion buys a lot of wiggle room and a lot of acquisitions.

I also think that the more FB develops other monetization opportunities - payments, off-FB advertising using the social graph, social-powered search (think adwords), etc. - the less it will need to rely on Ads on the site and in the feed.

[Rhappe]

Great point David and I don't know where it's all going to end so I'm not necessarily trying to paint a doomsday scenario... there are just some troubling challenges facing Facebook that they will need to figure out. But you are right that $16B buys a lot of room to do that. It is interesting that so many organizations are now somewhat dependent on these third party platforms and beholden to how they approaching the problem, which can be both good and bad. It's hard to stay on top of and impossible to know where they are going which introduces an interesting risk too. Regardless, fascinating to watch it play out.

[Ronchanel]

Great points, regarding the inherent dissonance between communication/community interaction and engagement and advertising revenue models.

But for all the danger signs that keep appearing around Facebook and their demographics, usage models, monetization methods, etc., the piece I keep coming back to is that they've successfully managed to become the aggregator for social communication online. There are lots of niche communities/technologies, lots of experiences that are more appropriate for many communities, but Facebook has become the Crossroads - in effect, valuable to all (more or less) because it is a mix of so many social identities. It has become, effectively, the town square for our world - about three odd notions there wrapped into one.
And I totally agree, lots of really fascinating stuff playing out there... evolving there even!

[Rhappe]

That is a great point - Facebook is a crossroads of sorts. It is something I've always struggled with as a user because no where else do my worlds collide in quite the same way. Like most things, that's an opportunity and a challenge.