Ad strategy at root of Facebook privacy row

February 24, 2009

ericauchard1— Eric Auchard is a Reuters columnist. The opinions expressed are his own —

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. —


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Facebook is gonna have to tread lightly and be smart. I know many former myspace users who left myspace for facebook left due to intrusions.(my wifes little network of 30 odd ppl all defected en mass)

Myself I recently canceled my children’s 2 world of warcraft accounts after they started plastering add banners for pizza all over the place. (and these are accounts I use to pay 30 dollars a month to maintain)

My point is the more intrusive the money making drive is, the more you drive your customers away.

Posted by Eron | Report as abusive

Pizza ads all over WoW? Seems like I managed to quit that mess just in time!!!! Bought a 360 and never looked back. I love console gaming now, and the DLC is getting very good! I left PC gaming completely right after I left WoW due to so many issues with the games, including how DMC4 completely trashed my PC, requiring a reinstall. Also, PS3 controllers are horrid! They are hard to hold and the layout is backwards. My boss at work already regrets not going 360!!!

Posted by ataraxia | Report as abusive

They’re both just a waste of time adjunct that will be taken over by a more standard email type service that respects property rights. The two existing social networking sites have had strong network effects playing in their favor but their attitudes toward ‘harvesting’ from their customers will be replaced rather rapidly by one of Rewarding.

Facebook and Myspace are as antique as the gopher protocol and the only thing they are both going to generate in the near term is more lawsuits and property rights legislation protecting individuals from ‘grabby’ internet network-effects monopolists.

The systems provide no unique value to the user.

A better way could pop up tomorrow and myspace and facebook would both disapear, which is why they keep trying to ‘legalize’ their network effects monopoly practices via overwhelming our legal system that has no regulatory framework to deal with social networking, privacy rights, property rights online or search.

At a time when America should be looking at the internet to grow individual property value to lead the recovering economy, myspace, google and facebook are trying to sieze ownership of it.

Sad really, these short-sighted dot-coms are acting against our National Interests in the worst possible way.

Posted by James Harris | Report as abusive

Paying the bills is one thing. Making multi-millions of dollars in profit is another thing.

Facebook is more appealing to the masses because of exactly that, less advertisements and intrusions.

Posted by Barack Obama | Report as abusive

I don’t log into myspace or facebook to have my work stolen or to be stalked. Attempts to track (and direct) user activity, and shamelss attempts to seize ownership of users’ content feel a lot like being mugged and stalked – only through a clean, well-designed online interface.

Posted by Kombo | Report as abusive

Maybe I’m not really all that social….but I don’t really care to get updates that tell me that bubby is missing his ‘booboo’. And it’s irritating to have to manually turn off the tripe that occupies the lives of many people, even though they may be real life friends, acquaintances, or work mates.

I have a hard time understanding how MySpace or Facebook generate any revenue at all, given that clicking on an ad means leaving their respective sites. That runs against the grain of what they are apparently offering: complex yet easy-to-use social networking platforms.

ICQ was an incredible (and incredibly easy to use) way to network with others. I don’t hear anyone talking about it now. Social networking is not a model on which one can build a stable business model, because as near I can tell, parties where we all look at advertising never seemed to catch on. Tupperware was different. At least you got something with which you could take your sandwich to work.

The sooner advertisers bail on Facebook, the better. They could use the money for product development or something else.

Posted by Rob | Report as abusive

The views of an individual vary on how they use these two networking websites. These two protocols are good ways to keep in touch with your friends and acquaintances. In this commercially advancing world where ventures and corporate investors waiting to invest in the hot internet market, Facebook doesn’t want to lag behind. Down the road this will raise a question on the privacy. The polices the and procedures to should has to be disclosed in details in the beginning when a user signs up.

Posted by Mani | Report as abusive

[…] Ad strategy at root of Facebook privacy row Reuters ,February 25, 2009 Social networking phenomenon Facebook has beaten out arch-rival and former market leader MySpace by most measures of popularity, except the one that pays … […]

Posted by Mourinho saves his disrespect for referee, not his friend Ferguson | Digg PhotoBlog | Report as abusive

Eric – Great article. Here’s some thoughts on Facebook advertising and privacy. Personal info or behavior is the currency that keeps services free. Most people want free stuff but they also want relevant advertising not pizza ads. The trouble arises as new technology/business models emerge and are mass adopted: (email, downloadable software, social networks, etc…) Most new advances don’t/didn’t wait to sort out the privacy implications first, they surface them. Facebook has been remarkably agile at addressing issues as they arise and providing pretty great controls. I’m rooting for Facebook to figure out a way to monetize and continue to innovate both in services and in privacy controls. As an addict, I can’t imagine what I’d do without it now.

Posted by Carolyn Hodge – TRUSTe | Report as abusive

I viewed a few “walls” while recovering from a flu.
Everyone on must be either bedridden, or have vastly empty lives. It seems to me that social network sites are by and large a waste of time, but a great data harvesting resource for folks with ulterior motives. Blackmail comes to mind. Smash the computer and go organize a game of softball. Someday, your privacy will appreciate it.

Posted by Jimwa9z | Report as abusive

My experiment with Facebook lasted all of a month. Rather than realizing any value in “social networking,” I was flooded by the dreaded “apps” from friends of friends. These inane time-wasters had nothing but downsides as far as I could see, chiefly: A. Using an app required one to open one’s information to an anonymous app writer elsewhere in the world; and B. Declining an app could be seen as a social snub.
As for maintaining a “wall” or Tweetering people my moment-to-moment activities, why in the world would I want to open my personal life to online dispersal? And even if I had an ego the size of Mars, why would anyone care?

Posted by AE | Report as abusive

Facebook has been trying to get into a market that no one have been able to achieve. Making massive amounts of money off people’s personal data. Due to the nature of personal privacy, all attempts prior have ended in failure.

At the end of the day, people don’t mind a nagging ad here and there. However, they are not willing to have their private information sold to others for profit. It’s just won’t work. The populous is not ready for that yet.

It’ll be interesting to see how it pans out, but as of right now, Facebook is on a slow death. They are a 900lb gorilla with only 30lbs of food to fuel it.

At some point, investors are going to give up on them (AKA. Google or MS merger?). Take the money and run. At the momment, they are willing to give Facebook the benefit of the doubt because there’s potentially alot of money being made.
Make no mistake, Facebook is not going away, nor will it fail. They are too popular to fail now.

My assessment would be that it will be bought out, and the controlling company will leverage off Facebook’s user base. Social Networking alone will not be enough justification to make profit, but rather it will fit well into a bigger overall business model. As of right now, Facebook just doesn’t have the expertise or the right folks to take it to the next level.

Posted by eric | Report as abusive

“While MySpace has been criticized for flooding its member pages with garish advertising…”

I guess I figured that Facebook had already joined them, since they bombard me with “$12,000 in grants!” scam ads every day.

Ever notice that the majority of Myspace and Facebook ads are for scams (mostly grants and diet scams)? Seems like the whole thing is a house of cards to me, when the advertisers aren’t legit companies that can survive long term.

Posted by Jason | Report as abusive

300 million… for making a website that helps people network? I understand how valuable networking can be, but for what it is I think its already making a lot more than its really worth. They should be proud of where they are, not greedy and power hungry.

Posted by Spencer | Report as abusive

I got on MySpace about 4 or 5 years back, to keep in touch with family & friends living in different states. Not once have I clicked on a advertisement. I enjoy the format – I completly ignore the ads. I know where on the page they are & my eyes don’t even go there. So it matter not to me. I enjoy the connection and being able to personalize the page wallpaper… My husband is a musician, so he has a MySpace page as well. It’s a great networking place for our area musicians. We always know where the good gigs are. I even helped a non-tech musician set up a MySpace page – the venue interested in hiring him requested that he have a MySpace page – he got the gig! In the past 3 months, we have had several friends request we join FaceBook. Just today, I set up a page for hubby. YUCK! It’s not for me. No music??!! The wall is “too much inforamtion” for me. I don’t care what my friends 82 other friends have to say. I am only interested in MY friends. You can not personalize the format on FaceBook. It’s too sterile. I’ll keep the MySpace & keep ignoring the ads. And a thanks to those who do click on the ads, the service is free for me :)

Posted by Sandy | Report as abusive

The applications in FaceBook are encoded ‘widgets’ to be ‘customized’ by user-preferences. The simplicity of drag-n-drop mentality makes for easy transference between users who wish to be noticed by others in their own social group. Perhaps the struggle for business revenues via advertising dollars (or yen, euro, etc) by FaceBook can be found in placing highly customizable ‘For Help’ resources instead of ‘For Sale’ intrusions. Help the users get the help they need at the time when they need it. Making it easier for users to help themselves find solutions is a better mousetrap. When User-A askes for help with Problem-1, then successfully meeting that need usually results in a positive testimony to everyone in the social group. Supportive Assistance Instead of Agressive Intrusions.

Posted by peter marin | Report as abusive

Facebook are lame. I useded it for a little while, but then I “disabled” my account. Which means all I have to do is go back and log in and there’s all my stuff again. They don’t delete the page whens you tell them you don’t want it anymore. Which means they keep all my personal information, they jack all the “content” I created for my page like it effing belongs_to_them. And they don’t tell you that they’ll do this until you go to erase your account.
That is so wrong on so many levels. I hope Facebook fails miserably and all their servers get f-disked so my page will finally get deleted.

Posted by Dave | Report as abusive

the criticisms of the social-networking paradigm seem to be missing the point entirely.
Yes, there are millions of vapid drones with nothing better to do than troll around these places, but these are not the people within my MySpace & Facebook networks. Most of us are professionals or dedicated amateurs in one field or another, and have very little time to coordinate with other people and projects; FB & MS offer a truly unprecedented means of networking and coordinating projects literally around the world, with access to news and information from so many people (I also use Google Reader for the latest in the blogosphere related to my passions, but you still miss a lot if the bloggers are looking the other way that day).
By way of example, I’m a professional musician, divemaster/assistant dive instructor, and published underwater/shark photographer. FB & MS offer – for free!!! – a way to meet and coordinate with other people in these areas all over the world (e.g., who knew there were so many tech divers in Turkey???)

This is an amazing time in the human experience, and not only is it free for us, but actually generates a profit for the creators/managers – which as we all know by now is the only way anyone will continue to do something anymore…..

Posted by terry | Report as abusive

To the first and second comments… there are no pizza ads in WoW. Unless you’re talking about the forums, which is just silly, because people choose to go there.

About Facebook, they’re being incredibly creepy with their privacy rules, but it’s not like other sites aren’t doing the same. Just look at Google… they store every single bit of information pertaining to your use of their products (i.e. what websites you visit, chat logs, emails, etc) I really think that people are overreacting. If you’re worried about it, just don’t post anything illegal. So yes, you probably should avoid posting that magnificent shot of you and your friends smoking weed.

Posted by Emily | Report as abusive

I don’t do either and don’t know if I’m missing something.

Posted by Wupta | Report as abusive