In corporate America, you know you’ve hit the big time when you get skewered by the writers for South Park, an animated sitcom known for its dark satire. And recently, it was Facebook’s turn. The episode follows the efforts of a neighbourhood boy named Kip Drordy as he explores the popular social networking website. In one scene he runs into the living room to tell his parents about his latest online interactions. “Mom, Dad! My best friend Kyle, he went to the dentist yesterday and got two fillings! And today he’s wondering whether Hurt Locker really deserved the Oscar!”
And that, in short, is what Facebook is all about. Hundreds of millions of people sharing the minutiae of their daily lives with groups of “friends” over the Internet. But as ridiculous as it sounds in the hands of South Park’s writers, it has made Facebook one of the hottest Internet companies in the world, with some 400 million users who spend an average of one hour a day on the site.
Facebook’s meteoric growth (more than one-third of Canadians are now on Facebook) has caused some to speculate that a massive online shift is about to take place, with social networks emerging as the new gatekeepers of the Internet.
Just last week, 25-year-old CEO Mark Zuckerberg revealed a series of new initiatives at a conference in San Francisco that will effectively expand Facebook’s reach across the Web, allowing users to tag content that they “like” on third-party websites and share it with the rest of their network.
The move is a potential threat to Google and its current stranglehold on online advertising, as it suggests the emergence of a more humanized search engine—one where friends and acquaintances help you find what you’re looking for instead of a bunch of indifferent software programs and ranking algorithms. So far, however, Facebook has failed miserably to turn its immense popularity into big profits. “It’s been six years and still there’s no business model,” says Kaan Yigit, the president of Toronto-based Solutions Research Group. That’s because what makes Facebook potentially attractive to advertisers—a vast storehouse of personal information—also happens to be something users guard jealously. But if Facebook can solve the conundrum (and it thinks it can), the online world may wake up one day to a new king.
Facebook’s rise from obscurity is a classic Internet success story. Zuckerberg launched the site in 2004 while attending Harvard. He was 19. The idea was to create a way for students to stay connected to one another. Six years later, Facebook is closing in on half a billion users and the tech sector’s biggest players are sitting up and taking notice. Three years ago Microsoft purchased a sliver of Facebook (1.6 per cent) in a deal that valued the company at US$15 billion.
Facebook’s threat to the Web’s status quo is not initially obvious. The company, based in Palo Alto, Calif., is estimated to pull in $1 billion this year in sales, a fraction of the $24 billion generated last year by Google. But Facebook represents a big chunk of today’s Internet activity and involves a segment of the population (young people) that marketers are keen to reach.
The concern for Google is that a growing number of people are logging into Facebook first when they connect to the Internet. In March, Facebook surpassed Google as the most visited website in the United States for the first time ever, according to analytics firm Hitwise. There’s also data that suggests some websites are now seeing a majority of their traffic coming from Facebook—not Google—via links posted by users.
Now Facebook appears set to colonize the rest of the Web, making itself indispensable in the process. Following last week’s announcement, Facebook users can expect to see “like” buttons popping up alongside content on participating websites such as CNN.com or jeans-maker Levis.com. If they click on them, their friends will be notified on Facebook and their profile information could be updated. At the same time, Facebook users surfing the Web may come across content that their Facebook friends have already passed judgment on—say, a pair of Levis jeans—and will be notified by pop-ups that contain their friends’ profile pictures and comments. All of that data will be collected by Facebook, although it did not say how it intends to make money from it in the long run.
What is clear is that Facebook is fast becoming more than just a website full of old high school friends and photos of their kids. “The real issue is that Facebook is where everyone is getting their information today,” says Tim Hickernell, an analyst for Info-Tech Research Group. “So I think it’s certainly taking over a primary point of aggregation [on the Web], not just social connections.” In other words, while Google’s mission is to “organize the world’s information,” Facebook wants to be able to help people decide, based on the input of their friends, what information is worth paying attention to in the first place.
That could eventually hurt Google’s bottom line. While Google is so far the champ of online advertising, having cleverly figured out how to marry search terms like “shingles” and “damage” with ads for local roofing companies, it has had little luck capturing the billions spent annually on brand-related advertising—the art of selling people a product they didn’t know they wanted. Indeed, it has proven extraordinarily difficult for companies to identify and target online consumers as they bounce around anonymously from site to site, largely ignoring the banner ads placed in front of them. Facebook, on the other hand, is one of the few places online where people tend to linger and provide real information about themselves, including names, ages and interests. All of which is appealing to marketers (although Facebook says it only shares anonymous or aggregated data with third parties).
Facebook, a privately held company, currently makes money from a combination of different advertising models, including pay-per-click ads, the sale of virtual goods (users who pay $1 to send a friend a little picture of a cake on their birthday) and traditional brand advertising via banner ads. It’s that last category, with a few key tweaks, that Facebook is banking on to bring in big bucks in the future. “The Internet was supposed to change marketing by making it this highly interactive, two-way, creative thing,” says spokesman Brandon McCormick. “But that’s not what we got. What we got is search ads, which only do really well when you’re looking for a specific item.” He says Facebook, by contrast, has the potential to challenge television as the preferred medium for brand advertising. “What Facebook has become is this viable platform where brand marketers can generate awareness for their products in a way that they’ve never been able to do before.” Moreover, since Facebook is effectively a giant web of interlocking personal networks, it theoretically provides an ideal way to achieve word-of-mouth or viral marketing, the most effective kind.
The challenge is figuring out how to let deep-pocketed advertisers into the party without causing everyone else to bolt for the exits—a mistake Facebook made three years ago when it launched its controversial Beacon project. The program aimed to silently track the activities of Facebook users on 44 partner websites and then transmit what they were doing—buying a pair of shoes on Zappos.com, for example—back to their Facebook friends and ostensibly opening the door to advertising that targeted their Web browsing behaviour. Facebook users protested loudly, calling the program “creepy” and a significant departure from Facebook’s focus on privacy (users have the ability to determine who they share most of their personal information with on the network). Zuckerberg quickly apologized and Beacon was ultimately shut down last year in the face of lawsuits. Facebook also ran afoul of Canada’s privacy commissioner last year because of the way in which it shared personal information with third-party developers. It has since made changes to its policies.
Facebook is still in the process of trying to figure out the right mix. Over the past few years, its focus has shifted to making advertisers blend seamlessly into the website. Companies are encouraged to build pages that resemble users’ profiles. Then they usually attempt to draw in people by planting advertisements on users’ home pages that can take the form of games or quizzes. Annamarie Carr, a manager of interactive marketing and customer relationship management for Maybelline New York, says the cosmetics company’s recent foray into Facebook has attracted more than 30,000 “fans,” many of whom visit regularly to discuss makeup products and share beauty tips. But she cautions that social media is a two-way medium and that advertisers have to be prepared to engage meaningfully with consumers.
“You really need a strategy behind it,” she says. “I think a lot of brands have fallen into the trap of launching a page, but not having a lot of advertising around it. And then after a week of posts, they drop off the face of the earth. Meanwhile, you’ve lured all these people in, but you don’t deliver anything.”
Still, many say Facebook faces a more fundamental problem when it comes to advertising. “The major problem is that consumers hate it,” says Karsten Weide, a California-based analyst at consulting firm IDC. “That doesn’t mean it’s impossible to do, but it’s an uphill battle.” Where Google succeeded was by making ads nearly as valuable to users as the search results themselves. But people generally don’t log on to Facebook to go shopping. Hence, the trick is figuring out a way to convince users to engage with advertisers and voluntarily share their experiences with their friends. That appears to be the thinking behind Facebook’s new approach to third-party content, which sounds somewhat similar to Beacon except that the onus will now be on users to “like” or “recommend” something before it gets shared. Facebook, however, has said that it doesn’t intend to use the new tools to engage in so-called behavioural advertising.
It could be that Facebook has finally given up on looking for one magic bullet when it comes to a business model. McCormick, for one, says the plan is straightforward: continue spreading Facebook’s influence on the Web while adding features that appeal to advertisers, including a deal with ratings company Nielsen last year to provide ad tracking services. With 200 million people logging on the site every day, McCormick says many big corporations are waking up to the possiblities. It all sounds remarkably grown up for a company spawned in a university dorm room—and probably a lot less fun. But the payoff could be huge.