Facebook's Identity Crisis

I’ve always been a bit suspect of Facebook’s business model. Their so called “consumer service” offerings range from average to frivolous in value, and their track record on building a trusting relationship with their core asset, i.e. user base, has been rather dismal. How can you look to building a sustainable, value-growth engine when you are just not hitting the fundamentals of a good business entity? 

Let me first start with a disclosure – NO, I am not a member of the Facebook community. But thanks to my network of family and friends that are on FB, and my extensive reading/research pursuits, I have enough data points to be able to draw some logical conclusions. I will make my case by looking at the 4 important aspects of FB’s business model – quality of service, value to individual customers, value to enterprise customers, and influence of current socio-economic environment.

Quality of Service (QoS) – I guess by some measure, every service offered by a company is a consumer service as long as there is somebody at the other end “consuming” the service. But the notion of “consumer service” also implies that there is something tangible and meaningful that the consumer can derive from the service. My assessment is that 80-90 % of the FB services are a sheer waste of people’s time. Games, quizzes, puzzles, avatars, graffiti, etc. – Who needs them! Who cares!! Now there are some services you can subscribe to that help improve your “situational awareness” (like local crimes, events, etc.) but majority are amateur and naïve in flavor.

Value to Individual Customers – Following closely on the heels of QoS, the value and utility derived, or in other words the ROI (Return on your Investment of time and effort), is very low. Think of the opportunity cost? If you were not spending time on FB, what could you be doing? Well, some may honestly not have anything better to do with their time and love FB for its entertainment and chatter value. Majority would, I imagine, have the potential to put their time and effort to better use. I realize that FB is really taking its user inside the erstwhile personal matters and lives of their network of friends, which once upon a time was considered “none of your business”. I am predicting this fad will face its own demise in its own graceful way. Also, with the latest revelations of how FB has been violating all kinds of user-data privacy rules, people will be a lot more prudent about their level of FB engagement.

Value to Enterprise Customers – I believe the enterprise customers are in the “deer caught in front of headlights” syndrome, not sure how to leverage FB but not wanting to be left out of a 500M+ online community. FB has done some harm and has the potential of doing a lot more harm than good to for-profit companies. Companies are building branded FB pages and trying to get as many fans signed up. I get that part. It works well as long as fans are content but then it only takes 1 disgruntled fan to stir things up or one wrong move on your part and things can quickly spiral out of hands. Toyota, BP, P&G, WellPoint, etc. – all leading global brands are having a tough time calming their fans down. You can’t just walk out, so you have to engage and try to calm things down, and all of this costs precious dollars. Once again, I see FB as more of a liability than an asset for enterprise customers.

Influence of current socio-economic environment – This aspect to me is the single biggest factor driving all the hordes of people towards FB. Globally, things are still fairly stagnant. Employment numbers and college enrollment numbers are at historic lows. At the same time, barriers to entering the online world are dramatically low, thanks to the boom in wireless, smartphone, and satellite technologies. Put the two together and it does not surprise me how rapidly the FB numbers are growing. People are idling and FB is a logical destination to go hang out. But does that really add up to a market segment(s) that FB and its enterprise customers can profitably target, on a sustainable basis?? I really do not think so. I would really like to see some sort of measure which indicates the average life and activity level of an FB user. To me, in the long run, both these metrics will be on the decline once the markets turn around and people catch-up with things that have a greater utility in their lives.

Bottom line, I think FB does not have a viable and sustainable business model. It’s got a growing user base, at least for now, but has nothing valuable to offer to them. Majority of the users are in the 15-25 years of age demographic and that segment does not have a whole lot of disposable income or commitment. As always, I welcome your rants and raves on my blog postings.

Comments

[Srini]

Uday,
I beg to differ. Based on some quoted estimates, FaceBook's revenues in 2009 were around $550 million and they are expected to double this year.

Here is the breakdown of their estimated revenue in 2009 ($550 million)........ According to some sources...
$125 million from brand ads
$150 million from Facebook’s ad deal with Microsoft
$75 million from virtual goods
$200 million from self-service ads.

Each facebook user seems to bring in close $2 revenue to FB. With the estimated 500 million users, their revenue will reach more than $1 billion in 2010. Here is a nice article on their revenue model
http://www.allfacebook.com/2010/01/facebook-makes-money/

[Uday Kumar]

Srini,

Thanks for your "counter" comment. Its the user-base (individual and enterprise) and their stickiness that is the lynch-pin for the FB business model. Even though FB has monetized some parts of its services (I doubt if they have broken even yet on their investments), it will have a tough road up-selling/cross-selling services to its consumers. The user-base growth will eventually taper off and with that, the revenue growth becasue they are just not offering services that have a meaningful utility. OK, so they have created this unique/innovative channel but then beyond that, they have lacked imagination on how to innovate. Maybe Mark Zuckerburg needs to step away from the helm of affairs (as in Google's case) and give the reins to a more seasoned exec!

Uday