Facebook and its business model problem

Yesterday, I attended the Facebook developer’s conference in San Francisco. It was my first chance to see wunderkind Mark Zuckerberg live and in person. And while I hate to say it, I have to agree with observers who have diagnosed him with a severe case of Charisma Deficit Syndrome.

Like a lot of folks, I continue to have a love-hate relationship with the social networking giant. At times, I’ve been obsessed with it. And at other times, I’ve found it useless and annoying. I go through periods of feeling like its just one more useless pile of clutter and trivia that is sucking away at my life.

I was glad to hear Zuckerberg acknowledge that mistakes had been made with the introduction of its platform last year. It’s a refreshing bit of candor in this land of PR, even if he was just stating the obvious. Facebook is on the right path to weed out the annoying applications people have created, and create a kind of policing system to make sure that users are in greater control and the applications being created are of the highest quality.

There’s been tremendous griping about the new layout that roled out this week. Well, I like it. I found it to be a big improvement, even if it means I have to re-learn that way I use some things. I’m hoping that this will reduce the trivia aspect and help me connect with more meaningful stuff from people in my network. We’ll see if I change my mind in a few weeks, but that’s my initial gut reaction after a couple of days.

I’m also intrigued by the introduction of Facebook Connect. This is the service that is aimed at extending the function of Facebook beyond its own site and out into the wider Web. In one version, that will allow me to drop a bit of code into my Web site and essentially create all the features of my Facebook account right there. And in another variant, companies that partner with Facebook will be able to offer a plug-in that pulls all my activity at the site into my Facebook profile. In that world, Facebook becomes a better hub for all my activity around the Web.

Here’s the rub: How is this going to help Facebook make money? During a Q&A with reporters after his keynote, someone asked Zuckerberg about this. Zuckerberg responded by saying the company was focused on just trying to get all this stuff to work and find ways to achieve its ideal of faciliting more and better sharing of content across the Web. He said they’d figure out the revenue part later.


It’s nice that they have that luxury. But it’s not something that can be put off forever. I’m sure there must be a lot of brainstorming and experimentation going on behind the scenes at Facebook on this front. Still, I continue to be struck by the inability of anyone to come up with some truly innovative business models around social networking businesses. I think the reliance on ads is a dead end for most, though my understanding is that Facebook overall is at least profitable.

I’m going to talk about this more in the column I’m writing for the Mercury News this coming Sunday. But I’ve found myself increasingly looking out for companies that have managed to innovate around their business models. I’m continually disappointed not to find more energy around this issue. I love many of the Web 2.0 services that have cropped up in recent years. But it becomes increasingly difficult to think about investing time in sharing through a service that I can’t see building a sustainable business model.

It strikes me that not only is this intellectual laziness, but many of the companies are laboring under the delusion that they’ll one day be bought by Google, Yahoo or Microsoft. Maybe, for some. But for most, it ain’t gonna happen.


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  • When you look at it like this, newspapers and facebook don’t seem that far apart. Neither one has a viable business model at present.

    I’ll point to the ubiquitous example of 37signals and not building a business model based on everything being free.

  • Tool

    Dude. 90M users. Extreme hyper-targeting possible. Are you kidding me? Right now, they are focused on making sure their users don’t defect and they become the platform of choice. Google took 3-4 years post launch to come up with a business model and right now, they are ripping the industry a new one. Facebook has similar potential. Do what you do best, keep your options open and you will find great ways to make money.

    37signals is a great company. But, if you gave them a choice to start 37S again, or start/run Facebook, they will poke you (Hodges) to death to have a crack at FB. I mean, like Apple, if FB starts charging a dollar or a license fee based on app usage, they will rake it in, and still have apps to share.

    It’s unfortunate that most people have issues with Zuckerberg or his model or his company or his charisma because they have seen this guy rise from under their noses and, at 24, execute lights out, (like, perhaps, only one other Harvard dropout before him) – it smacks of bitterness, I’m sorry to say. I mean, he’s not bending metal. It’s a website that any self-respecting techie could have built, but didn’t, and Zuck did it better, faster, cleaner and smarter.

    The ad industry is growing. More people are spending time online. The youth market is the highest growth market – Baby boomers are retiring. The youth spend more on games than is spent on Hollywood. This is the new medium of communication. Facebook is dominant. Why is trying to reach the youth via targeted ads not super-viable in itself? These guys are going to get out into the job market. Where will companies reach them? Where will credit-card and banks offer them specials? Loans? Mortgages? Insurance? Clothes? Travel? On a TV channel? No – on the medium where they spend a ton of time.

    I’m looking forward to Sunday for your thoughts on ‘sustainable’ models and, hopefully, an argument as to why advertising by itself (even though there are others) is not viable.

  • Marc

    Ah, but free almost always beats fee, Hassan, especially in a highly competitive marketplace like social networking web sites. A social networking site’s value is derived directly from the ubiquity of their user base and the quality of that user base (active vs. inactive/spam accounts). While charging a fee might improve the quality of the user base, it will have seriously negative effects on the ubiquity of that user base…especially when the core of your user base is broke college students.

    Alternatively, it makes absolute sense for 37signals to charge for their applications. They are all productivity-related apps and their target user base are tech-savvy professionals whose monthly service fees will be paid out of the company budget.

    Facebook’s problem isn’t that it’s free to users. Their problem, as Chris points out in the article, is that Facebook continues to fail at innovation when it comes to their business model. So far all their business model “innovations” haven’t increased the value of Facebook for its users, rather they have decreased the value. And the user base has reacted, sometimes with considerable anger. Facebook’s challenge is to find a way to increase user value while simultaneously increasing their profit stream.

    Frankly I hope none of the big 3 acquire Facebook and force them to deal with the realities of their conundrum. Being acquired is such a cop out.

  • Fact

    I work in the IT industry. Not looking for a new job. No time at work or at home to dick around with some social site to check out what my friends are not doing. Facebook has absolutely no value whatsoever. Pretty much like newspapers. Get all the news I need for free on the WWW. If you think it’s actually money worthy you need to get out more and shut down the computer for a couple of weeks. Trust me, if your long lost ‘friend’ or ‘colleague’ didn’t leave your their email or phone number chances are they didn’t want to.

  • bc

    I have a FB account and ~200 friends. I use it a few times a week. I have a job with a real income. I will never, ever, ever pay any of these FB remoras for their apps – not a single one is worth it. No bitterness, just no interest.

  • Facebook be prepare for a fight, as Google launched a counterattack aim against Facebook, Google has just unveiled the Opensocial consortium, a alliances of social networking sites and third party developers, and its good, Developers are defecting to Opensocial because Facebook is having a problem on its site, Facebook already a frustrating partner, developing in Facebook is mess , the rules is changing all the time.

  • Marc


    I’m not sure what your point is exactly. Facebook isn’t designed to deliver the news or find you a new job. Facebook has no value to you because your social group isn’t utilizing it to socialize. Maybe you’re older than the typical Facebook user or your social group just isn’t especially technical. But if 80-90% of your social group was on Facebook, then Facebook would provide value to you.

    Your comment actually provides support to my previous comment. A social network’s value is derived directly from the ubiquity of its user base. If you don’t know anybody who uses it, then there’s little motivation to use it and little value offered.

    But just because Facebook isn’t valuable to you, “Fact”, does not mean that it isn’t valuable to others.