Friday, February 27, 2009

Facebook's Future

On the heels of leaked reports of Facebook's valuation (Estimated at $3.7 billion), the hot topic du mois is whether or not the company can sustain its explosive growth given its current business model. Every 1 million new users Facebook signs up requires $1 million in server and maintenance costs. At the current rate of 5 million new users per week, many are wondering how the internet darling expects to get out of the red as it surges forward.

Recently, Facebook has undertaken some controversial measures that have its users and consumer watchdog groups up in arms. Simply put, Facebook has formed partnerships with companies such as Microsoft to collect and disseminate user information (such as preferences of music, TV shows, activities, etc.) to created targeted ads. A Consumerist expose blew the lid on a stealth change in Facebook’s terms of service, which basically stated Facebook owns users information even after they cancel their account. CEO Mark Zuckerbrg responded to the outcry by encouraging users to help shape a Facebook Bill of Rights in its terms of service.

Despite the PR headache of putting consumers’ privacy at risk, the reality is Facebook needs advertising revenue to survive. But when was the last time you have clicked on a Facebook ad (excluding accidents)? And of all of the two times you did click on the ad, how many resulted in an actual purchase? Unlike the glossy spreads between magazine articles or catchy hooks in newspapers, internet users have been raised to mistrust online advertisements. Users are reluctant to click on a link that could mislead, steal private information, or infect their computers with spyware or viruses. While Facebook ads aren't going anywhere (if anything, expect them to expand in scope and type), it may not be such a bad idea for the company to consider a subscription service.

While some users will presumably suspend their accounts in protest and others in reluctance to spend, most users are far too ingrained in the service to give it up for a nominal annual fee. The likely criticism of a subscription service is that users will be asked to pay for something that was always free. Furthermore, Facebook's popularity grew through the grassroots, with an illusion that profitability was the company's secondary concern.

But in a new era of transparency and accountability, Zuckerberg should level with his customers and explain the trade-off between intrusive advertisements and subscriptions. Continuing the ruse that Facebook can grow its business without sacrifice from its users may not cripple the business. Life on Facebook will continue and people will continue to sign up in droves. But if Zuckerberg wants to avoid the public relations fate of the Walmarts of the world, he should consider a different direction.

UPDATE: Facebook's poorly performing ad click rate of .04% (thanks, Simon)

1 comment:

  1. The click through rate for facebook is 400 clicks per one million impressions (.04%). It is definitely one of the worst rates for any site.



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