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Desperately seeking the "killer best way"

February 03, 2008

Was Facebook's misbegotten launch of its Beacon advertising service a case of youthful overreaching, or did it indicate a much deeper problem for the young company?

The answer to that question may have become a bit clearer last week when Google announced its quarterly results. While Google's business continued to boom, its revenue and profit numbers fell short of investors' expectations, and its stock price took an after-hours shellacking. During a conference call with analysts, Google's executives were quick to lay at least part of the blame on the company's difficulties in making money through the ads it places on social networks. Google has a big advertising deal with MySpace, which requires it to pay the giant social network's parent, News Corp., nearly a billion dollars, and it syndicates ads on other, smaller networks. So far, the company confessed, with considerable emphasis, it hasn't discovered an effective away to translate the billions of page views social networks rack up into big advertising bucks.

Said Google's CFO George Reyes, "“We have found that social networking inventory is not monetizing as well as we would like." Jonathan Rosenberg, a senior vice president, admitted, according to a press report, that "the company was looking at different formats and methods of targeting to increase the performance of ads it places on social networking sites. 'We need to find ways to target people of particular demographics that are comparable to the people you might find in The New York Times or a particular publication that you may be familiar with.'"

Cofounder Sergey Brin was particularly blunt about the problem: “We have a huge amount of social networking inventory, including the MySpace relationship. I don’t think we have the killer best way to monetize social networks yet. We are running a lot of experiments and we have had some significant improvements. But some of the things we were counting on in Q4 didn’t pan out. There were some disappointments there.”

If Google, News Corp., and MySpace are struggling to monetize social network traffic, one can only imagine the challenges facing Facebook, a much smaller company with less traffic, fewer resources, and, in general, a clientele more resistant to commercialization than MySpace's. In this light, Beacon seems less like a folly than like a deliberate act of risk-taking, if not of desperation. The rich valuation that Facebook has to live up to demands a lucrative advertising or sponsorship model, and Facebook may well have come to the conclusion that such a model inevitably requires a far more intrusive approach to using members' information and even identities for commercial ends.

The social network has proven a remarkably popular medium. As a business, though, it is a nut that has yet to be cracked.

UPDATE: Daniel Sinker has more questions about the prospects of social networks like Facebook.

Comments

There are markets where exposing your shopping habits ala Beacon are verboten, and there are markets where such would be welcome.

In vertical markets, such as industrial purchasing, I could easily see a system where purchasing managers participate in an opt-in system for exposing component and materials purchases.

Posted by: abm [TypeKey Profile Page] at February 3, 2008 12:14 PM

Great post, Nick!

I'd tend to agree that Beacon was indeed a deliberate act of risk-taking. There's been loads of scuttlebutt in the behavioral marketing community that the only way to create specific kinds of targeted ads that will yield high returns will come from knowing the exact behaviors of specific individuals(and thus, in some cases, violating our right to privacy.) So, if Beacon could have been accepted by all those people who are generating all that unmonetized (and probably un-monetizable) User Generated Content--content that is highly personal, not of a particular high quality, and often indicative of behavioral patterns--then Facebook would have found a way to juice behavioral marketing and thus have successfully monetized UGC.

Thing is if you've been collecting and curating UGC without telling people at the very start that their UGC would be curated and collected for later use, you cannot backpedal without a huge risk of pissing people off (because you have essentially deceived them about the purpose of your site.)

IF social networking is going to make money from all that UGC, they're going to have to be thoroughly transparent about it from the very beginning. Then, people are going to have to, with full knowledge, willingly turn over a whole lot of personal info, including images, so that the network will survive. And while there may be some people who believe we'll have to just get used to having less privacy to make money out here,the majority of people may not be ready for (or happy with) a privacy trade-off.


Posted by: Tish Grier [TypeKey Profile Page] at February 3, 2008 12:31 PM

I wonder if the nut to crack is not Facebook, but the evolving generational gap! The 100-year comment from Zuckerberg was probably not so far of if one looks at the immense change due to technological advances rather than just looking at Facebook.

The challenge in my mind is that as users needs have changed, Facebook’s business model hasn’t evolved at the same pace. The revenue model hasn’t made the leap to meet users needs or found the advertising models that might find acceptance with those users.

“We need to find ways to target people of particular demographics that are comparable to the people you might find in The New York Times or a particular publication that you may be familiar with.” To even suggest that The New York Times model is applicable is indicative of the problem.

The age groups defined by Facebook users cant relate, or be related to by those types of models. “We have found that social networking inventory is not monetizing as well as we would like." The nut to crack is inherently about generational shift rather than defining users as inventory! That nut will not give of it’s fruits any time soon.

Alan

Posted by: alan [TypeKey Profile Page] at February 3, 2008 01:50 PM

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