Facebook As Investment: No Replacement for Facebook But Pureplays Will Fade

Facebook As Investment: No Replacement for Facebook But Pureplays Will Fade shows how the fading importance of social networks is the threat—not competitors. In Part One of the Facebook As Investment trilogy, I argued that Facebook had a signifiant trust gap with users that would inhibit its ability to monetize its most unique and valuable assets, and that the trust gap was recently compounded by its “IPO irregularities.” In Part Two, I’ll take a different tack and analyze the investment prospects of Facebook-the-platform. Part Three advises executives on how to isolate their social business investments from Facebook business risks.

In its favor, Facebook will not have to worry about being “displaced” by another social network the way that it displaced MySpace. In the near term, this lack of competition will give the company some breathing room. However, a more daunting threat awaits, the end of the social network pureplay, but that is 3-5 years out.

Nonetheless, the fate of pureplays should be top-of-mind for serious Facebook investors: to produce the fabulous returns that current investors expect, Facebook will have to move far beyond adverts.

Social Networks’ Disappointing Investment Results

Pureplay social networks (Friendster, MySpace, Facebook, LinkedIn…) have not lived up to investors’ ROI aspirations, despite the fact that people (‘users”) have loved the networks and lavished mindboggling amounts of time on them. The Web 1.0 logic behind investor expectations held that the more time people spent on the sites, the more ads they would see and the more they would click. #fail

In retrospect, it is understandable that pureplays’ management and investors didn’t appreciate social networks’ social context. It turns out that very few people understand the intricacies of “sociality,” much less how to wire it into a value proposition or a business ROI. CSRA has advised and mentored hundreds of firms and executives on using social networks for defined outcomes, and most people are completely clueless. Businesspeople are a big part of the problem: like economists, they want to believe that people make decisions “rationally” and “responsibly.” People do, but not in ways that we think (often according to social logic, which few people understand). My studies of evolutionary psychology have been illuminating, and I encourage you to look into Human OS as well. Social networks, since they capture an increasing portion of the human spectrum, expose us to who we really are. One thing that Facebook got right: “it’s complicated.” No wonder that pureplays have a hard time making money.

“Wait,” you say, “Facebook has billions in revenue!” That’s true, but it’s far below what management and most investors believe it should have, based on the number of users Facebook has and the time they spend on the site. It is also a sliver of Google’s revenue. LinkedIn has been profitable for a relatively long time, but thus far at a fraction of Facebook’s current revenue. The problem is, the concept of “monetizing eyeballs” has never worked terribly well online.

The Future of Social Networks

Most technology disruptions are heralded by the arrival of “pureplays,” which focus the best minds on uncovering all aspects of how the disruption functions—with passing focus on monetizing it at first. Social networks will exit this era in the next 2-5 years. Friendster, MySpace, Facebook and LinkedIn have educated all kinds of people about social features, connecting, sharing, “friends/connections,” etc. Now users merely expect these “social features” to be everywhere, and websites’ and enterprise software’s bolt-ons are accommodating them. Interoperability is slowly increasing (Facebook Connect, Google+, Twitter). So pureplay social networks will soon be appropriate for digital museums, social features that were prototypes on social networks will be everywhere, and pureplays will be superfluous.

The Big Data Opportunity

However, “social networking” firms have the opportunity to monetize through data. I saw LinkedIn pull a classic Valley startup jujitsu move in 2009-11. When I met several of its executives in 2008, LinkedIn’s business strategy was to become an executive collaboration platform. Although I have no inside information/confirmation for this, I believe they discovered, as has CSRA, that it’s extremely difficult to get conservative businesspeople to collaborate online. They realized that it wasn’t going to happen often enough, soon enough, to build the critical mass needed to realize that business model. So they did a 180. When I covered Reid’s 2011 SxSW keynote, LinkedIn had become a “big data” company.

“Social networks” can gather extensive real-time information about our social actions, and this data is extremely valuable because it can help predict how people will act in certain situations.

The LinkedIn Example

Look at LinkedIn’s new features during the last two years from this perspective. Take Skills and Expertise. Here, LinkedIn encourages members to self-identify according to super-hot keywords, which LinkedIn uses to help people and companies understand what skills rank high in certain firms or fields. This data is very valuable to enterprises and recruiters.

The key is, LinkedIn lets members and enterprises benefit from the data LinkedIn is collecting, and Facebook needs to learn this lesson: they have to give users specific benefits before users will let Facebook monetize that same data in different ways.

It doesn’t matter whether most LinkedIn members follow through and use the data (most don’t); it’s important that they could if they wanted to. And LinkedIn talks about this online, so the people who care (like yours truly) can learn about it, use it and talk about it.

The point is, people are creeped out by companies “spying on” them and using the information they gather in “nefarious” ways. So transparency, trust and letting users benefit directly are the keys to earning the right to use the data.

Insights from Google

Google is a data company that is attempting to attract users to build social data around their online actions through Google+. Google realized belatedly how important “social” data was, and they’ve been playing catch up for several years. However, they have succeeded in monetizing data better than anyone else thus far. However, they have also felt the sting of user backlash when people felt they crossed the line.

Google+ is a useful early example of post-pureplay social sites. I don’t claim to know whether Google will “succeed” with it, but as I’ve written here and here, I think they have a better chance than any ot the pureplays to monetize significantly because they are building social intelligence to inform their other products. This is the right impulse. I have given some use cases for Google products here (slides 10-13).

But Google is very different in a way that pureplays should contemplate long and hard: a large portion of its users have defined workstreams; they are trying to get something done, something defined in a search. They aren’t “socializing,” to which most people assign low value.

Nextgen “Social Networks”

Although people continue to spend increasing amounts of time on “social” platforms like Facebook, LinkedIn and Twitter, few people realize a “return” on their time investment. But users have arbitrarily organized their lives around the trilogy (“LinkedIn for work, Facebook for personal, Twitter for whatever”). People have extensive mental resistance to moving beyond three due to lack of ROI and perceived lack of time. They lack the experience to compare platforms according to their specific use cases and to select the best ones. This leads me to predict that no platform will “replace” any of the “big three.”

Instead, social network pureplays will fade in importance and be gradually displaced by sites with deep social features, but their main characteristics will be deep domain knowledge and business process support, which will draw members with highly defined backgrounds. I do not mean this in a Web 1.0 sense in which sites were siloed and “B2B communities/marketplaces” failed. Web 3.0 interoperates, and data flows around. People will pay to accomplish meaningful things more quickly than they can otherwise. And their data can be reused and resold, as long as they agree and can see the benefits.

“Social” is too core to human interactivity to be valued by itself, but it can increase human productivity incredibly; it’s our OS, so we won’t pay for it by itself. We will pay to do things it can help us accomplish.

Where Does This Leave Facebook?

In this context, Facebook management shows itself to be sophomoric by claiming Facebook will monetize on mobile. Yes, more people have 3/4G etc. but screens are still small and ads intrusive. Mobile adverts will not be Facebook’s, or anyone’s, panacea. The problem is, [mobile] “experience” is highly personal, and people are by definition interacting with their environment, which injects all kinds of exceptions into the system. From a user perspective, it’s an order of magnitude more dynamic than the desktop. People are dealing with rude cashiers, trying to avoid getting flattened by buses, trying to flirt with someone in line… ads’ algos just aren’t smart enough to add value in the mobile environment, and that won’t change in time for Facebook.

When I covered dozens of telecoms and mobile executives at Digital Hollywood 2007, advertising was the unhappy fallback for business models, but no one liked it because people (customers) hated invasive ads on their small-screened (and slow) mobiles. Facebook management looks ignorant or disingenuous by claiming to monetize on mobile. The same way Eurozone leaders grasp at straws and claim that “growth is the answer.” As if no one had thought about and tried that before.

That said, I have long admired Facebook’s innovation with feedback on ads, but it’s not enough to carry the lion’s share of the business model. Encouraging members/users to use ads is also an interesting direction, but it will prove contributory at best. One of the most intriguing ideas on Facebook’s revenue plate is Facebook Payments, but for now it has low billing compared to “mobile” and adverts.

Opportunities and Imperatives for Facebook the Platform

• If Facebook doesn’t move to monetize the data on its users’ social actions/graphs, it will never deliver on its potential. As explained in more detail in Part One, Facebook doesn’t yet have users’ permission (even though it has the legal right).
• Facebook management needs to recognize that it’s a community—and owned by its members, whom Facebook serves (even though it’s a for-profit firm that legally owns the software, data and rights). Such is the nature of communities. This has to happen at the core; it can’t be lip service.
• Facebook needs to start releasing useful “services” that let users benefit from the data Facebook is collecting from them. Let people start to see it and benefit from it. Develop defined use cases to mitigate risks.
• Management needs to start talking about the social data; it can’t be a secret, they need to increase transparency; that’s the nature of spying, surveillance in secret. People uniformly hate it. Transparency is the medicine here.
• The Industrial Economy era of “mass merchandising” is rapidly drawing to a close, and it will be displaced by mass customization. Facebook’s social data can be extremely valuable in helping companies develop specialized offers for defined niches.
• Get over display advertising; use it to generate revenue short-term, but it has never been terribly effective, especially on mobile, and that won’t change.

What do you think about Facebook’s destiny? Will it succeed, and how?