Facebook can calm angry investors by focusing on ads

Mapping world domination. facebook

At Facebook’s first annual general meeting since going public last year, chief executive Mark Zuckerberg faced a “barrage of complaints” from shareholders, worried that the value of their investment shows no sign of recovering.

But it’s difficult being Facebook. The poster child of successful social networking sites is the source of entertainment and news for millions. At the same time there is a constant level of scrutiny and criticism around the company’s operations and its access to terabytes of personal data such as photographs, status updates and “click trails”. This tension between being an appealing media channel and a large for-profit corporation prompts comparisons to an ever-present Big Brother wrapped inside the safety of a Brave New World utopia.

Critical commentators have enthusiastically descended on any fall in the US share price as a sign of weakness and an indicator of the imminent decline of this internet giant. While this analysis is clearly premature, there is a small but vocal resistance who have “given up” their Facebook or who continue to resist the pull to socialise through the mutual maintenance of a virtual farm.

But a far greater and growing tarnish on the Facebook star are those users who have simply given up; who log in less and less; or who have moved on to other platforms.

Profitable innovation

This is the dual challenge for Facebook. To innovate and remain attractive to increasingly sophisticated consumers of social media while still producing profit. Facebook’s investors – after seeing through the early “accountant be damned” attitude to product development - expect a return on their investment.

Facebook must produce this return in an online business environment where we have all come to expect our services to be offered for a consistently similar price. Put bluntly, that price is free. With few exceptions, popular web services that demand fees higher than this expected de facto standard are immediately challenged by competitors prepared to undercut and improve the service. If every service is free, the competitors then offer more service.

There is already a rich history of this progress. Google’s improved search system removed Altavista from the collective conscience of web users. Google’s venture into webmail with massive increases in personal storage capacity effectively toppled Hotmail.

Facebook is well aware of the price sensitivity among its users. The various hoaxes regarding proposals to charge monthly access fees or to charge a small fee for each message all received massive levels of protest. The more recent curious innovation of charging fees to contact celebrities through Facebook – dubbed feemail - did not, in contrast, receive the same volume of dismayed responses.

But times have changed since those earlier hoaxes about new business models. Twitter now largely occupies the space that deals with our apparent collective cultural obsession with celebrities and their every movement. Once again this is a service delivered with the internet’s most popular pricing plan – free.

Ultimately advertising

Is Mark Zuckerberg watching you? (and telling advertisers). Victorgrigas

The reality is that Facebook is ultimately a company founded on advertising. The ability to contact former schoolmates, to “like” embedded content or send personal messages are all vehicles for delivering advertising. Admittedly this current business model is interesting for its ability to selectively integrate user-generated content with targeted advertising material. But the model is still reliant upon advertisers prepared to commit funds, and their ability to understand from Facebook the audience that they are addressing.

This need for advertisers comes back to keeping users. The more critical, or disengaged, users are of no value to advertisers, no matter how close the targeting can be. And if these users are now less excited by Facebook they will not produce the content that Facebook itself needs to continue to sell advertising space.

More sophisticated models of content production, such as Facebook’s role as a casual games platform, still require continuous user engagement to justify the advertising spend. Ask a room full of people to raise their hand if they have played Farmville. Now ask that same room who still plays Farmville. The difference in responses is as marked as Zygna’s own interpretation of horticulture is from the act of farming.

The message is clear. Content becomes dated quickly and third party developers must be encouraged to produce new material regularly, and preferably exclusively. This material must be kept well away from mobile platforms – except, of course, Facebook Mobile.

New directions?

The temptation in considering future directions for Facebook is to look towards a fee-based model for value-added user services. Services such as Facebook Dating, Facebook Personal Web Shops or Adult Facebook are all readily conceivable models with clear rationales for charging user fees. But each business model is already serviced by well established brands who have already captured the premium market for web services. This is not Facebook’s natural territory.

This all points to the need for Facebook to build a business model on its current strengths and to improve the advertiser’s experience. Its backend advertising services are still relatively primitive and reflect an era when all investment was directed to the user experience. Although this is a less spectacular direction than Google’s offerings it also must be necessarily different from this competing advertising channel.

Greater transparency regarding the data generated and the metrics being used to measure return on investment, a consistency in the reporting of statistics – including simple issues such as enabling use of a localised timezone as well as better options for third party access to reporting metrics would all represent significant progress for the business.

It may not match other internet companies for dazzle, but it forms the cornerstone of a sustainable and achievable long-term business model. And it might just save Mark Zuckerberg from those angry investors.