Ad strategy at root of Facebook privacy row
Social networking phenomenon Facebook has beaten out arch-rival and former market leader MySpace by most measures of popularity, except the one that pays the bills.
While Facebook has outpaced MySpace in bringing in members — it has 175 million active users at the latest count, compared with around 130 million for MySpace — it has struggled make money from them. While MySpace is closing in on $1 billion in revenues, Facebook generated less than $300 million in sales last year, reports say.
Indeed, Facebook’s efforts to drum up revenue have led to it repeatedly becoming the target of some of the biggest online privacy protests on the Web. Its most recent fight earlier this month followed Facebook’s attempt to redefine its own rules and assert ownership over anything its members posted on the site. The company has since backed off and is rethinking its policies.
Why hasn’t Facebook benefited from the vaunted “network effect” that makes such services more valuable the more its adds members and connections between them? After all, Facebook is spreading quickly in nearly 100 languages, while MySpace has focused on the United States and five other markets where Web advertising flourishes.
The answer may lie in the origins of the five-year-old site started by then Harvard University student Mark Zuckerberg.
Its appeal at the outset was that it was a place where users could share tidbits of their personal lives with selected friends and acquaintances. This blurred the distinction between a private space and a public one. MySpace is more explicitly a public place where friends hang out in the equivalent of a cafe or a club and the aim is often to meet new people. Most of all, MySpace is a place to share music with other fans.
Users tend to view Facebook as a private forum and resent commercial intrusions. The company’s management has responded to these sensitivities by constructing a commercial model that would preserve the intimacy of the site without filling it up with crude banner advertising.
Facebook encourages advertising that seeks to trigger social interaction between members, in effect using networks of friends for viral marketing of messages. The snag is that rewiring how the site works to make such ads more effective, has actually alienated users. Many regard attempts to make money by passing on their information in subtle ways as positively creepy.
While MySpace has been criticized for flooding its member pages with garish advertising, it has never had to rewrite its basic privacy ground rules as a result and is unapologetic for its strategy. The straight ahead commercialism of the site does not provoke mass protests.
MySpace international director Travis Katz says the site always sold advertising, meaning that its basic business model of demographic targeting has had to change little as it grew.
“Our goal and objective is not to be the site with the most users,” Katz told me recently. “Our strategy is to be the site that makes all the money. We want to own the lion’s share of the profits.”
Facebook founder Zuckerberg told a German newspaper in October that making money was not the company’s primary focus and that it was happy to experiment with new ways of advertising over the next three years to discover what approaches will work for its audience.
To be fair, there is no evidence that Facebook has lost members as a result of these experiments. Worldwide, the site added 25 million users alone in January, up from 20 million new members in December.
But privacy eruptions will never end until Facebook clarifies the relationship between its advertising ambitions and safeguards for its users’ personal information. Deepening trust would give it more freedom to target advertising to users and their friends.
Facebook finds itself working upstream to impose this business model in the toughest advertising market in modern memory further complicates its chances. Any other start-up might have run out of time.
So far, its venture and corporate investors have been patient, not wishing to disrupt a company many think as having the best chance to become the next Google in Silicon Valley. And yet, as membership surges and the costs of technology to support those audiences grow, Facebook is under growing pressure to prove that it is not another money-losing, dot-com fad.
— At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, click here. —