What’s wrong with Facebook: or why Mark Zuckerberg should have finished Harvard

Trent: You know what you are? You're like a big bear with claws and with fangs...
Sue: ...big fucking teeth, man.
Trent: Yeah... big fuckin' teeth on ya'. And she's just like this little bunny, who's just kinda cowering in the corner.
Sue: Shivering.
Trent: Yeah, man just kinda... you know, you got these claws and you're staring at these claws and your thinking to yourself, and with these claws you're thinking, "How am I supposed to kill this bunny, how am I supposed to kill this bunny?"
Sue: And you're poking at it, you're poking at it...
Trent: Yeah, you're not hurting it. You're just kinda gently batting the bunny around, you know what I mean? And the bunny's scared Mike, the bunny's scared of you, shivering.
Sue: And you got these fucking claws and these fangs...
Trent: And you got these fucking claws and these fangs, man! And you're looking at your claws and you're looking at your fangs. And you're thinking to yourself, you don't know what to do, man. "I don't know how to kill the bunny." With *this* you don't know how to kill the bunny, do you know what I mean?
Sue: You're like a big bear, man.
Mike: So you're not just like fucking with me?
Trent: No I'm not fucking with you.
Sue: Honestly, man.

In today’s story, Facebook is the big bear with claws and fangs–unfortunately Mark Zuckerberg has no idea how to use them. Thus far, Facebook has been massive failure.  Don’t get my wrong, I love The Book.  There is certainly no better way to brainlessly waste away than by stalking friends, digital courting, or crying to yourself about what parties you didn’t get invited to.  But, as a business, they have dropped the ball.

By all major iMetrics (see, it’s like iPod, but nerdier), the Good Book is a success.  More importantly, its an advertiser’s dream come true.  The Facebook:

• reaches 70m active users, and its the 6^th most trafficked website in the world;
• has a leading brand (2^nd most trafficked social media site in the world);
• owns the coveted 18-34 demographic (85% of college market share);
• is extremely sticky (high implied switching costs), and;
• and is constantly “tuned into” (most members visit daily). (all ComScores via FB)

Those figures alone would serve any media company well. But they fail to recognize the most valuable part of the Facebook empire: voluntarily disclosed preferences. The Facebook is the only large scale repository of personal preferences on the interweb. Myspace has personal pages, but they don’t have “favorites” sections, semi-confirmed locations, employment, age, or any other personal information.

It is the level of disclosure that separates Facebook from the rest of the internet–and what makes the company valuable. Microsoft recognized this fact when it bought its meager stake in the company, and an advertising contract, which valued the firm at $15b as a whole.

Somehow Zuckerberg has fails to recognize this, and it is beginning to look like he may pay a price. Sure, the company reportedly made $150m in revenue last year, but that’s not something to be proud of when you are positioned to be the top resource for marketing firms.

That is all well and good, but for Google’s system to reach you Google has to know what you want, something it only learns with each discrete search. Furthermore, Google only knows what you want right now: what you searched. What if advertisers could reach you before you even knew you wanted something?

Google is valuable not because of its search, or web based email, those are free. They are one of the largest companies in the world because they are able to effectively place ads. Since the dawn of mass-advertising, marketers have searched for ways to increase the yield on their advertising budgets. As the old adage goes “I know 50% of my advertising budget is wasted, but I can’t figure out which half.” Google helped close that information gap by transferring the risk of an advertisement’s failure from the firm to Google. If, as a marketer, you are only paying per click, then you are only paying for customers who willingly seek more engagement with your product. If I search “mortgages” I am probably looking for one, so I am then likely to click on a Countrywide advert. That increased conversion rate (yield) helps all the parties: customers seeking information are given relevant links; advertisers only pay for likely sales opportunities; Google skims off the top for using their system.

Economists who defend advertising do so believing advertisements lower “search costs”. Search costs are the economic price of acquiring information. They argue that without advertising, for example, someone who wants a car must spend innumerable hours researching designs, prices, financing, features, sex-appeal, etc. Advertising allows the customer to know at least some of the facts about many different cars, so they are able to narrow their search, and thus its price. If our car buyer had to find everything out for themselves, where would they even start? Google lowered the search cost for people by directing them only to relevant information. It lowered the advertiser’s price by only placing ads where they would be seen, and only by people who care. (This obviously ignores the behavioral impacts of advertising, but that is irrelevant in this discussion). In fact, the reduction in search costs is the greatest, and most valuable, feature of the entire internet. By aggregating information into a consolidated format numerous companies have been able to capture some of the “search premium”. Instead of visiting five banks for different loan terms Lending Tree puts five offers in front of you in minutes; Progressive does the same.

Facebook is the ultimate search cost reducer. When someone creates a Facebook profile they usually tell FB (and the world) volumes of information about themselves: what movies, music, and activities they like; where they live; what sex they are; how old they are; etc. Pretty much everything an advertiser would need to know to make an informed decision about what you want to know. For example, while I know I love the new Jimmy Eat World album I am lazy and not very inclined to find concerts. Since the FB knows where I live, and that I like JEW(s), FB should alert me when they’re coming to town. That reduces my search cost to zero, but I am pretty likely to buy a ticket that I wouldn’t have even known existed without the FB. Like Google, the Facebook could make a profit by providing access to my information (on a limited basis of course), and a portion of my ticket sale. FB knows what movies I like, so it should recommend new films based on my old favorites. This idea can be extended all across the FB universe.

Yes, they have begun to use their “platform” model for this (iLike sends me concert info), but why didn’t they create such a simple feature themselves? A partnership with Ticketmaster is all it would have taken.

Instead, Zuckerberg has fallen in love with banner ads. Instead of targeted content, I get 25 ads a day about how to pick up girls in New York, AIG travel insurance, or job recruiters. Way to drop merely bat the bunny around, Mark.

They have these big fucking claws, but no idea what to do with them.

Comments

[Lee D]

Great points, 1-2. For all the hoopla over maximizing ad effectiveness through social networking it keeps not happening.

So how long are major investors, not to mention the rest of us, supposed to wait for the guys with the big brains to get it together?

Oh, and the Swingers tie-in was money!

[Anal_yst]

Not to mention (and someone correct me if I'm wrong), but part of Mr. Softy's "investment" in Facebook last year was that MSFT would handle ad-delivery (amongst other things) on the FB network...

...obviously, thats working out REAAAALLLL well for them haha