Facebook's real problem isn't Privacy, it's Monetization. 3 possible solutions...

For those who label me Facebook Fanboy #1, let me interrupt my regular FB gushing & recent Beacon defense for a brief moment of pessimistic caution...

While in the past i've offered fawning geek praise for the Facebook Platform & even paraphrased Ballmer by suggesting they might one day "f*#%# kill Google" (i'll probably regret that one), the biggest problem for the company is not whether Open Social eats their lunch (not for awhile), it's not whether they're worth $15B (another year, sure no problem Lee), and it's certainly not whether they have a privacy crisis on their hands (sorry mike, i don't agree). 

Nope, none of those are a big deal.

Facebook's #1 Problem?  It ain't Privacy.  It's Monetization.

While Facebook annual growth at 130%+ is impressive, as is pulling in $300M in cash for just 2% of equity, the fact that Facebook really hasn't figured out where its core future revenue stream is coming from is a problem.  It's a problem for the company, for its growing developer community, for the advertisers it's working so hard to get, and ultimately -- if it doesn't figure it out -- for its users.

Now before we go any further, note that i may be posting this warning a little early in the game.  Google took nearly 3-4 years to figure out its monetization engine (AdWords), a long time after it started to get serious traction with users & search.  It's certainly possible given more time, Facebook will discover how to tune its recently-launched-i-mean-upgraded Facebook Social Ads & get it to monetize better.  Or it's possible they sanitize Beacon & incent retailers / users to monetize transaction info published into the News Feed.  or maybe they just wait until some 3rd-party ad network figures out how to make money & just gobble them up.  maybe... maybe not.

Still, it's not too early to worry about how Facebook Platform makes money, and how to enable other platform participants to make money too.

Historical Note: It's not a REAL Platform™ until it makes MINTS MONEY.

Specifically, the choice of the word "Platform" for Facebook begs the question -- how does it make money?  Historically every other world-dominating monopolist platform vendor worth their salt has demonstrated market-crushing dominance to use their platform to make a load of money print money like the fucking US Mint.  For Microsoft, it's Windows & Office.  For Intel, it's chips.  For Cisco, it's routers.  For Google, it's Adwords & Adsense (& tho most folks don't realize it, also Analytics).  For Facebook, it's ______. 

Fill in that blank correctly, & you got Mr. Zuckerberg's attention all day long.

So why is it important for companies building platforms to make boatloads of cash, and to make that clear to other people building on their platform? 

Two reasons:

1) it says "we're sticking around"... the platform is working, it's making money, and we're going to continue to support it.  and if you want to ride this wave with us, get on board NOW.

2) it says "here's where we make money, and here's where we [d/w]on't" -- which also says, "here's where *YOU* can make money".  ahh, sweet music that is to the ears of the channel.

For developers, these two points are essential statements of platform ecosystem viability.  The first point helps people understand how & why the parent company is making money from the platform, and why they're unlikely to abandon it.  In turn, this provides a horizon of stability for developers to invest their time & energy to build on the platform, without it falling apart or dissolving before they reach payoff.

Tuned in to WIIFM?: Platform Participants Also Need to Make Money

The second point lets people know where *they* can expect to make money on the platform, and why the platform vendor won't step into that area and cannibalize their efforts. 

This is where the first point is incredibly important -- if it's not clear where the parent company is making money, then every other platform ecosystem participant will be looking over the shoulder wondering if the platform parent is going to eat their lunch as soon as they start making some moolah. 

For over 20 years, Microsoft partners, vendors, developers & solution providers have made tons of money helping sell Microsoft core products (DOS, Windows, Office, etc), and shipping their own solutions and/or selling their time & services to help fix... cough, cough... i mean, customize them.  And Microsoft has done a terrific job creating programming tools & evangelizing on how to use their platform so other folks can create their own Microsoft-based products & solutions and make money (disclosure: i was an independent software developer & Microsoft Solution Provider back in '92, founded a small company doing MS-based internet solutions & ecommerce in '94/'95, and sold in '98 to a larger company doing more of the same).

Over the past 5-6 years, Google has been making a killing on paid search on AdWords.  And they've also created a great opportunity for their channel to make money pimping AdWords, by having independent publishers & website owners & bloggers use AdSense, and by fueling the creation of an army of SEM professionals out there making bank helping Google sell paid search to tons of companies.  They continue to do well on the core revenue engine, and although sometimes i fault them for a lack of product evangelism education and channel opportunity, they still pretty much kick ass all over the place.

Hey FB & Platform Partners/Developers: Where's the BEEF?

Right now, neither of the 2 points listed above have been made clear by Facebook.  All the astonishing Facebook App growth & adoption aside, it's not clear how FB benefits from this monetarily in the long run, and it's not clear how app developers monetize in a way that isn't built on short-term bubble spending from other developers & VCs trying to buy installs & traction. 

Now don't get me wrong: i'm pretty bullish on Facebook in the long run, and as a platform for viral customer acquisition it's nothing short of astonishing.  i know a few top app developers are making decent money from advertising; and in fact several students from our Stanford class who have million-user apps appear to be covering their tuition with app revenues... hell, at least 4 teams have created their own LLCs to collect the cash, and a few are selling their apps for 5 and even 6 figures!

But to be clear: none of that money is coming from facebook directly, it's coming from third-party ad networks. and while i'm sure there are a few traditional advertisers in there somewhere, seems like most of that money is coming from other app developers paying for installs -- which makes it feel kinda bubbly. The Developer Install Circle-Jerk just doesn't seem sustainable to me, and feels a lot like funny money traffic barter deals from the late 90's (and we know how that one ended). 

More importantly though, even if those ad networks do start to figure something out, they've all got to be nervous looking over their shoulder wondering if FB will decide to step into their market, copy their model & kick them to the curb.  now maybe FB is running a grand experiment, and will just acquire whoever figures out how to make money, but certainly seems a bit like a house of cards at the moment. 

to summarize: until FB is 1) clearly making from one strong & growing revenue source (ideally based on their platform), and 2) clearly providing a platform opportunity for other participants to make money as well, everything they are working so hard to innovate, build, and evangelize is at risk.

3 Wacky Ideas on how Facebook Could Monetize Better

Alright if i'm so smart, what's the solution?  Well if i knew the answer there, i'd be rich... but i ain't.  But even if i'm still a dumb blogger, i'll throw out a few wacky new ideas on how Facebook can make money -- who knows, maybe one of them might stick, and perhaps even help other folks make money too.

Here are 3 potential ways to get Facebook Monetization rolling & get that $15B valuation to not only be supportable, but perhaps even a real bargain:

1) FeedSense: Enable Facebook users to earn money by sharing in FB revenue from clicks on the News Feed.  Create a program (similar to Google AdSense) that allows influencers to help discover & promote interesting sponsored News Feed stories and Social Ads, based on CTRs.  I like to call this "Monetizing the Long Tail of Cool"... it's the equivalent of creating a million tiny Tiger Woods out there, who help create visibility around a product or service they use & endorse.  There's of course potential for this to degrade into Amway or Tupperware, but also for it to become cool like Scion endorsing new music & rapper talent, only in a scalable way for businesses of any size to participate.

2) FeedSearch: Create a Search bar at the top of the News Feed that enables people to search for activity in their network by keyword or suggested example.  Create sponsored & paid search opportunities (a la Google's top & right-hand results) that enable more focused & monetizable user actions.  Use subsequent search activity to tune further News Feed results & suggestions.  Historically users of social networks exhibit very browse-based behavior that's challenging to monetize, however if you can create more opportunities for focused keyword-targeting behavior via search perhaps that can change.  Firefox seems to be doing quite well monetizing the search box.

3) FanPageApps: (my personal favorite...) Connect Developers directly with Advertisers, by allowing Advertisers to set open bids for clicks, users, or other activity that occurs via FB Apps & Facebook "Fan" Pages.  Advertisers & Retailers create Fan Pages for their Companies, Products & Services (as they do now), but with the added twist that Developers can create Apps that install onto those Fan Pages, and get paid by the user install, or by the click from the News Feed stories generated by the App.  Clicks on those news feed stories app then take users directly to the Fan Page (or perhaps a series of landing pages created by the App or the Advertiser), and users who install the App are added as "fans" and directly accessible by Advertisers as members of their Pages.

well those are my ideas... you folks have any others?  pile on in the comments.

(UPDATE: Fred Wilson has a good summary of a variety of online biz models in his post The Long Tail of Business Models.  Fred also linked to this post from his... thx fred :)

I realize these are all pie-in-the-sky / sparkle-in-the-eye right now, but maybe somewhere in here is a piece of an idea Facebook can use to begin to create more opportunity for both themselves and their platform partners.  If not, i certainly hope they or others come up with some things that work, because the overall potential and promise for the Facebook Platfom is darn interesting. 

All they gotta do is figure out how to Show Me The Money.

Best of luck Zuck... you had me at "F8" ;)

(and for those of you who'd like to learn more about F8, come check out Graphing Social Patterns 2008 in San Diego this coming March!)

Comments

[Bruce Christensen]

I just stumbled upon this post today while doing some other research...
I have a 4th way that Facebook could monetize...
Partner with Amazon and sell real gifts for all the birthdays, weddings, baby births and holidays that every Facebook user supports during the year.
Set up to be a gift merchant and sell real stuff. See this post: http://albinophantblog.com/the-gift-shop-on-the-facebook-superhighway/2442/

[Bruce Dietzen]

Dave,
Great article. I'm also keenly interested in your 3rd idea above.

How about a cost per fan (CPF) revenue model, whereby developers create custom apps for corporate pages (you know, the guys with money) and the developer is paid specifically for every new fan the app generates. It's clear cut and should be easy enough to measure.

Correct me if I'm mistaken, but in the olden days, it might cost you $5 to $100 per thousand to "rent" a good list an use it once. Since fans are able to be marketed to over and over again, wouldn't it make sense to start the price for capturing new fans at a minimum of $100 per thousand and go up from there?

It seems to me that a developer that creates a winning app for Budweiser, wouldn't have much work to do to tweek it for Miller...etc. Plus since its a pay for performance concept, there's no upfront risk to the page owner.

What are your toughts?

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[thibaud]

What Aaron said, above. The only intention of FB visitors is to waste time. Not connecting in o. to get info they need from people or sources they trust, finding stuff they want to buy, or coordinating/collaborating/organizing to get stuff done, or networking to find jobs or service providers, but just farting around.

Maybe FB should rebrand itself as a flatter, lamer version of Gaia or Second Life.

[Bustathief]

I don't know if I would completely agree... I think the growth is impressive either way. Although its highly unlikely, but maybe they don't want to monetize facebook to its full potential.

[Lee Lorenzen]

Dave,

Google is my choice as an existence proof of the concept that a company can be worth over $100 billion by first having massive usuage and then adopting another company's monetization engine (e.g., Google circa 18 months before their IPO when they copied Overture's patented Bid-based Cost Per Click advertising model).

In the case of Facebook, there are numerous existing $100 billion sized business models to choose from:

1. Web Page Search with Sponsored Links -- one bizdev deal with Google, Yahoo or Microsoft and Facebook would be able to generate $1.2 billion per year from Bid-based Cost Per Click links. I'm guessing that they are currently prohibited from doing this by the Microsoft deal, so we probably won't see this low hanging fruit revenue until Facebook decides they want to start this. The only reason for delay is to get out from under their current restriction (which was probably part of Microsoft's first ad deal with them). At that point, they can put powering their Web Search out to bid. My guess is that Microsoft will win this bidding war and the rate will guarantee Facebook minimum web search revenue of at least $1 billion per year (i.e., 80% to 90% of the revenue Microsoft makes from this).

2. Person to Person Payment System -- one bizdev deal with eBay would lock in PayPal as the exclusive payment system for Facebook. eBay (or Visa, or AmEx or MasterCard) would pay at least $1 billion per year for this right because it would be a HUGE opportunity to lock in 60 to 200 million new users of their payment system and also allow them to sell other financial services to theese folks (e.g., off-line credit cards, loans, etc.)

3. OneCart Shopping Mall -- one bizdev deal with SHOP.COM (and Microsoft) would lock in SHOP.COM as the exclusive, multi-vendor mall for Facebook with 1,000 merchants (e.g., top e-tailers, catalogers, retailers). This Facebook Mall would have a single shopping cart, gift registry, store navigation and product search and these 1,000 merchants would pay $1 million per year in base mall rent plus performance-related rent equal to $5 per new shopper to their housefile. This type of system would generate $1 to $2 billion per year in mall rent and Microsoft would be willing to back this deal.

With $2.4 billion per year in revenue from 3 bizdev deals that leverage their 2008 install base of 200+ million users, all you need to get to a $100 billion valuation is a 42 P/E ratio.

Thanks,
Lee Lorenzen
CEO, Altura Ventures -- the first Facebook-only VC

(c) 2008 Altura Ventures LLC

[Gabe]

one of Facebook's biggest issues is actually how to improve their UI so that information actually scales well within the UI. i'm sure their back end scales fine, but as all this information is growing it is becoming increasingly unusable. Properly organizing, mining, and harvesting user information will open the doors for some real revenue.

[LOL]

I bet you spend more time using Google Image search for your blog, hunting down awesome photos, than you do thinking about what burger place you will be flipping meat at when your web 2.0 bubble bursts

[Charles Hudson]

One thing worth noting. When Google was grappling with their business model, search monetization was by no means new ground - GoTo.com was already basically doing AdWords on their own. Google's genius was to realize that search monetization works best when you have the best search technology and that there are clever things you can do with auctions to both raise revenue received and improve ad quality.

I think it's a lot harder for Facebook. Whose model do they want to copy? Look at some of the other great platforms. Ebay had it "easy" in a sense - taking a transaction as an auction house is a well-worn model. Cracking this nut will be much harder. And potentially much more lucrative.

[Ted Rheingold]

Does Facebook really need a developer community or can they be sacrificed if needed? If they can be sacrificed then is it all that important that Facebook figure it out now?

Facebooks' communication tools are what drives the new registrations and what keep people returning, not for the most part the F8 Apps. So if it takes them a year to find the real gold vein and developers don't get to join the party will that stop them from IPO and joining the ranks of eBay & Goog?

[David Ambrose]

ok, so this is the best post i read from you since i started tracking this blog in early summer. awesome dave.

as for suggestions, i do believe there's money to be made within the newsfeed, particularly within your circle of friends. i remember scoble talking about the idea of paying him or having him earn some component of cash since he's such a valuable "commodity" (if you can call him that) within the proverbial FB ecosystem.

if FB could begin something like feedsense + feedsearch perhaps in Q2 of this year to a select few of users, i think it could garner some interesting traffic en route to IPO in 2009.

however, at the same time, i TRULY believe that socialads will never live up to its hype until we see INTERNATIONAL attention by MSFT this year (that's the plan, as i understand it).

[p-air]

When I first heard of the Beacon initiative, before the more formal explanations were out, I thought it would be a more traditional behavioral & demographic based ad network. This is perhaps more of an in-the-box thought, but I see no reason for why FB couldn't be an ad network that can target on the basis of demographics, psychographics and behavior given that they have access to all 3. Leveraging the knowledge about its members in FB to appropriately target advertisers' ads to them on other sites. This could be an opt-out capability as I don't believe too many people would care.

There would be no Beacon-like feedback of users' activities on external sites feeding to FB. This would help keep away fm the messy privacy issues. This would in effect provide the first behavioral ad network where users could opt-out if they chose to. The ad rates here, given the fact that they could deliver a very specific targeted audience, are closer to lead generation rates than pure contextual ad rates.

This could be deployed much like AdSense but with advertisers bidding on what audience they want, rather than on keywords. Sure, this is far less innovative of a model, but it has possibilities w/o rocking too many boats and delivering an audience using similar metrics that advertisers are accustomed to in the TV world.

[Aaron]

I completely agree with your premise, but I think your potential solutions ignore what made your examples work. Intel, Cisco, Microsoft, and Google all profit by making available very tangible products. Google's are less tangible, but the system is designed to give a direct ROI per click.

Meanwhile, you're basically making suggestions which extend the idea of Beacon... and nothing more. Unless a large percentage of Beacon messages can be converted into a direct sale (and I suspect the answer to this is "they can't"), then finding new and creative ways for people to merely *associate* themselves with a brand is not too many steps up from the "per view" ad schemes that brought down the first round of crazy internet companies.

As has been mentioned before, probably on this blog as well, Google has the major advantage of 'intent.' People come to Google looking for something, and if the advertisement looks to satisfy that requirement, it gets clicked.

People go to Facebook to connect with their friends... and nothing about your suggestions addresses this. Facebook is going to need to find something that extends what they already do into something profitable, not just find new ways to cram more information into the site. Google found a direct correlation between search and advertising on the search. (Well, duh.) As for Microsoft, Intel, and Cisco, they're selling actual THINGS so that's a different ballpark entirely.

So... how could we EXTEND how Facebook is already used to make money? Well, FB always brags about how they've got more photos than Flickr, more events than EVite; Why not expand those? Expand the Gifts payment system and allow people to sell tickets to events via the Events application... and maybe that widely available enough that it becomes practical for local bands or party promoters to profit through Facebook.

Just one idea...

[Zach Allia]

it is all my fault. i'm stealin' all their gift revs.

[Lora Lufark]

Privacy, monetization, better monetization, evil Google, poor Facebook, innocent Mr. Zuckerberg, apps, developers, Show Me The Money, Money, Money... maybe we should look at the problem from other side: what users really want? ;)

[Justin Smith]

McClure, you're all over it with your suggestions - fantastic! "FanPageApps" is my favorite as well.