What Is The Facebook Formula (Part II)?

From Thinking Outside The Boxe’s Sydney Correspondent

The first part of this article identified Facebook’s advertizing revenue problem as one of the main reasons why its share price halved in three months since the much publicized IPO. Other reasons for this overvaluation may include the slowing of membership growth and the ‘feel good’ atmosphere and hype that surrounded the launch. It is not within the scope of this article to provide specific solutions that would hopefully arrest Facebook’s rapidly declining share price. However there are some fundamental business options and principles that, if examined with good faith and applied, could provide Facebook executives with some creative ideas that will generate future profit.

When looking for solutions to problems it is always useful to examine successes and see if we can find answers that are relevant. Apple is a very different company to Facebook but the success of Apple lies not only in the fact that its products are simple to use but that the Apple Story, and particularly the Steve Jobs story is compelling. Everyone in advertizing knows the power of a good story and Apple is a great story from its earliest days when Steve Jobs and Steve Wozniak created their first PC right through to Jobs’ visionary leadership. At the heart of Apple’s success is the messianic like figure that he became. Steve Jobs was Apple. Unlike Jobs, who possessed a very unfriendly personality (to say the least) Zuckerberg seems nice enough, though he is no angel, and is also young and good looking. Strangely, the apparently approachable Zuckerberg seems to generally shy away from the spotlight whereas new Apple products were always launched to great fanfare by Jobs. Zuckerberg’s image was definitely damaged by the movie The Social Network and that has been the impression of him that most people seem to retain. Mark Zuckerberg is inextricably linked to Facebook and so Facebook is in essence an extension of him. He can use this as a strength to improve the popularity of both himself and the Facebook brand by focusing on the altruistic nature of his character. In the first part of the article we discussed the fact that Zuckerberg didn’t build revenue streams into Facebook. This is a negative that can be transformed into a positive. The fact is that Zuckerberg essentially created an online yearbook with no thought of making money for himself, and more importantly it was, and still is free.

For a company boasting so many relatively experienced executives it does feel at times that they do not exactly know what they should do with Facebook, and more specifically its 900 million members. A less than coherent approach to the operation of any company can easily result in things not being done correctly, or worse not meeting their full potential. Allowing companies to put games on Facebook has been an overwhelming success. One of the major gaming companies, Zynga, generates 12% of Facebook’s revenue. On the other hand, the dating application Zoosk seems to be little more than an afterthought. Perhaps it is useful in a way but certainly not in terms of generating revenue. It is certainly not very impressive compared to websites devoted specifically to online dating. Similarly Branch Out is Facebook’s answer to Linked In. It’s useful for users to be able to get in touch with former business colleagues so easily but to some extent this could already be done by using existing Facebook search functions. Of these examples only the games are generating significant revenue, although Zynga’s revenue has fallen a little in the latter part of 2012 as reported in the Sydney Morning Herald. It is interesting to note that the Facebook games are the only one of these examples that allows you (in fact encourages you) to play with your friends and make many new ones. It would be remiss of me not to mention Facebook’s purchase of Instagram for $1 billion in 2012. The Wall Street Journal reported that although it is a product that doesn’t generate any revenue yet (merely allowing users to share photos) Facebook finds value in its purchase because use of Instagram will now help drive users engagement with Facebook, particularly on mobile devices. In turn Facebook hopes this will generate further advertizing revenue when users access the mobile site.

The discussion in the previous paragraph demonstrates the way in which Facebook should not operate in the future. But the reasoning behind the purchase of Instagram would certainly seem to be a step in the right direction. Crucially Facebook executives need to think about not only how people are using the internet now but how they will access and use the internet in years to come. With so many users there is no reason why Facebook executives should not view their company as a potential leader in how people use the internet. In the future Facebook may just be a hub around which a variety of platforms exist. Google, for example, is far more than just a search engine.

These final paragraphs may seem to contradict the previous one as it will discuss the need for Facebook to get back to basics. However looking at the service Facebook has successfully provided and why it is successful can be a point from which it is possible to look to the future. The reason Facebook became successful, even more than the fact it was free, was that it was a Facebook. The key is that all your friends were users. It was, and is, a great place to connect with existing friends and to make new ones.

According to Zdnet we spend around 7 hours per month on Facebook. Facebook executives need to think about how users can use their time in a way to generate revenue. In order to provide services that will generate ongoing revenue these executives should think about the kinds of things that friends do together, and how close or far apart these people live. Another pertinent question is why do users communicate with their friends and family? What are they saying to eachother on their Walls and in status updates? How can Facebook make all of this easier for users? Finally it is interesting to consider that in so many industries businesses are suspicious of eachother and that they would prefer to buy competitors rather than work together toward a goal that will provide mutual benefits. However as David Grossman discussed in a USA Today column airlines have operated alliances successfully for years.

It is always far more constructive to look for solutions rather than dwell on problems. However it is easy to examine and discuss Facebook because it is a big company with problems that are equally as big. Facebook’s focus has constantly been on trying to leverage the number of users it has, and the information the company has about those users. As we have seen this is only useful in generating profits up to a point. And that point seems to have been reached. Although the purchase of Instagram will help ensure users continue to spend a lot of time on Facebook the aim seems to have been to keep users or to attract new ones. This misses the critical point. Facebook needs to leverage its strengths but doesn’t seem to realize how important time is as a strength. What Facebook possesses are 900 million users X the 7 hours each user spends on the site per month. This is the Facebook Formula.


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