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I'm a partner in the advanced analytics group at Bain & Company, the global management consulting firm. My primary focus is on marketing analytics (bio). I've been writing here (views my own) about marketing, technology, e-business, and analytics since 2003 (blog name explained).

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July 21, 2009

Facebook at 250 (Million): What's Next? And What Will Your Share Be?

Facebook announced last week that it had passed 250 million members.  Since no social network grows to the sky (as MySpace experienced before it), it's useful to reflect on the enablers and constraints to that growth, and on the challenges and opportunities those constraints present to other major media franchises (old and new) that are groping for a way ahead.

"Structured Collaboration" principles say social media empires survive and thrive based on how well they support value, affinity, and simplicity.  That is,

  • how useful (rationally and emotionally) are the exchanges of information they support?
  • how well do they support group structures that maximize trust and lower information vetting costs for members? 
  • how easy do they make it for users to contribute and consume information? 
(There are of course additional, necessary "means to these ends" factors, like "liquidity" -- the seed content and membership necessary to prime the pump -- and "extensibility" -- the degree to which members can adapt the service to their needs -- but that's for another post.)

My own experience with Facebook as a user, as well as my professional experience with it in client marketing efforts, has been:
  • Facebook focuses on broad, mostly generic emotional exchanges -- pictures, birthday reminders, pokes.  I get the first two, and I admire the economy of meaning in the third.  The service leaves it to you to figure out what else to share or swap.  As a result, it is (for me anyway) <linkbait> only sometimes  relevant as an element in a B2C campaign, and rarely relevant in a B2B campaign </linkbait>
  • Facebook roared past MySpace because it got affinity right -- initially.  That is, Facebook's structure was originally constrained -- you had to have an email address from the school whose Facebook group you sought to join.  Essentially, there had to be some pre-existing basis for affinity, and Facebook just helped (re-)build this connective tissue.  Then, Facebook allowed anyone to join, and made identifying the nature of relationships established or reinforced there optional.  Since most of us including me are some combination of busy and lazy, we haven't used this feature consistently to describe the origins and nature  of these relationships.  And, it's cumbersome and awkward to have to go back and re-categorize "friends". (An expedient hack on this might be to allow you to organize your friends into groups, and then ask you which groups you want to publish items to, as you go.)
  • Facebook is a mixed bag as a UI.  On one hand, by allowing folks to syndicate blogs and tweets into Facebook, they've made our life easier.  On the other, the popular unstructured communications vehicles -- like the "Wall" -- have created real problems for some marketers.  Structured forms of interaction that would have created less risky choices for marketers, like polls, have come later than they should have and are still problematic ( for example, you can't add polls to groups yet, which would be killer).  And, interacting with Facebook through my email client -- on my PC and on my smartphone -- is still painful.  To their credit, Facebook opened up a great API to enable others to build specialized forms of structured interaction on its social graph. But in doing so it's ceded an opportunity to own the data associated with potentially promising ones.  (Like prediction markets; Inkling Markets, for example, lets you syndicate notices of your trades to Facebook, but the cupboard's pretty bare still for pm apps running against Facebook directly.)
The big picture: Facebook's optimizing size of the pie versus share of the pie.  It can't be all things to all people, so it's let others extend it and share in the revenue and create streams of their own.  Estimates of the revenues to be earned this year by the ecosystem of third party app developers running on Facebook and MySpace run to $300-500 million, growing at 35% annually.  
Them's not "digital dimes", especially in the context of steep declines in September ad page trends in, say, revenues of leading magazine franchises, as well as stalled television network upfronts. But, folks might argue, "Do I want to live in thrall to the fickle Facebook API, and rent their social graph at a premium?"  The answer isn't binary -- how much of an app's functionality lives in Facebook, versus living on a publisher's own server, is a choice.  Plus, there's ways to keep Facebook honest, like getting behind projects like OpenSocial, as other social networks have done. (OpenSocial is trying to become to Facebook's social graph as Linux is to Windows.  Engineer friends, I know -- only sort of.)  And, for Old Media types who don't feel they are up to the engineering tasks necessary, there are modern-day Levi Strausses out there selling jeans to the miners -- like Ning, which just today raised more money at a high valuation.  Still too risky? Old Media could farm out app development to their own third party developer networks, improving viral prospects by branding and promoting (to their suscriber lists) the ones they like in exchange for a cut of any revenues.  In this scenario, content gets added as an ingredient, not the whole main course.  

What is true in the new environment is that reach-based ad network plays surfing on aggregated content won't pay any more.  Rather we have to think about services that would generate more revenue from narrower audiences.  The third-party games created by Facebook app developers referenced above demonstrate how those revenues might stem from value through entertainment.  As we speak, Apple and its developers are earning non-trivial sums from apps.  Phonetag has its hands in folks' pockets (mine included) for $10/month for its superuseful -- albeit non-social -- transcription service.  Filtering for relevant content is a big challenge and opportunity.  Might someone aggregate audiences with similar interests and offer a retail version sourced at wholesale from filtering service firms like Crimson Hexagon?  Looks like Porter Novelli may already be thinking down these lines...

Let's push the math: a winner service by anyone's measure would earn, say, $50M a year. Four bucks a month from each person is roughly $50/ year.  You'd then need a million folks, 1/250th of Facebook's user base to sign up.  Reasonability check -- consider the US circulation of some major magazine titles

If your application service is especially useful, maybe you can get $2/month directly from each person.  Maybe you can make the rest up in ecommerce affiliate commissions (a 10% commission on $125 in annual purchases by each person gets you ~$1/month) and ad revenue (the $12 million/year nut would require one dollar per member per month; a $10 CPM would mean getting each of your million users to account for one impression on your service a couple of times per week, more or less, to cover that nut.)

We also have to be prepared to live in a world where the premiums such services earn are as evanescent as mayflies, especially if we build them on open social graphs.  But that's ok -- just as Old Media winners built empires on excellent, timely editorial taste in content, New Media winners will build their franchises on "editorial noses" for function-du-jour, and function-based insights relevant to their advertisers.  And last time I checked, function and elegance were not mutually exclusive.

So, even as we salute the Facebook juggernaut as it steams past Media Beach, it's time to light some design workshop campfires, and think application services that have "Value, Affinity, Simplicity."

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