Is Facebook Toast?

Wednesday Jul 18th 2012 by Mike Elgan
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The social networking giant needs radical change if it wants to avoid a Digg-like slide into irrelevancy. Here’s the problem.

It’s been an "septimana horribilis" (horrible week) for social networking giant Facebook.

First, Facebook got its keister handed to it by Google+in a customer satisfaction survey. Then another report showed that Facebook is bleeding users.

This isn’t the end of the world for Facebook. There’s still hope for the company. But a radical shift is needed now to stop Facebook from declining into irrelevancy.

What Happened This Week?

The American Customer Satisfaction Index (ACSI) released a reportyesterday that contained devastating news for Facebook. The social network, which was already at the bottom of last year’s survey, fell an incredible 8%, scoring just 61 points on a 100-point scale.

Not only was Facebook the lowest-scoring social network by far, it was among the five lowest scoring companies in all categories measured by the ASCI.

It gets worse: Facebook’s most direct competitor, Google+, topped the survey, coming in at number-one with a score of 78 -- a position it shares only with the beloved Wikipedia site. (This is Google+’s first appearance on the annual survey.)

(Pinterest, Linkedin and Twittercame in with 69, 63 and 64 points, respectively.)

At least Facebook has still got their subscriber numbers, right? Well, that’s the other bad news.

Capstone analyst Rory Maher reportedthis week that his proprietary software, which tracks Facebook user numbers, says Facebook is bleeding users.

For example, he says, Facebook’s user base dropped by 1.1 percent in the US. Of the other major countries in which Facebook has a lot of users, a few are growing slowly, others are declining and many are holding steady.

Long story short: It appears that Facebook’s incredible user growth has plateaued, and this while other networks like Google+ and Pinterest are growing rapidly.

The Social Ash Heap of History

Social sites have been around long enough for us to know that even the strongest winners can crash and burn quickly.

Facebook itself once played the role of the tiny upstart that didn’t have a prayer against Mighty MySpace. Look at the two networks now. It’s clear that MySpace’s fall is closely linked to Facebook’s rise as a preferable alternative.

And last week, we learned that the one-time darling of the social world, the social bookmarking site Digg, would be sold for scrap-- a pathetic end to a once successful site.

Digg was valued at $160 million back when that was an astronomical amount to be valued at, but its assets were sold off this week for less than one-tenth that amount.

Like MySpace, Digg was plagued by internal problems it just couldn’t resolve. And like MySpace, Digg’s fall was associated with a replacement by a superior rival -- in this case, by Reddit.

In fact, no major social network or social bookmarking site has been able to retain the lead in its category for more than a few years. So far, the “norm” has been that today’s social leader is always tomorrow’s loser.

That fact has to be factored in when pundits say Facebook will rule supreme always. In fact, staying number one is very unlikely for Facebook.

Facebook’s Big Problem

There’s a telling scene in the movie The Social Network in which the conversation turns to monetization. Facebook’s founding investor, Eduardo Saverin, wants to start making money on the site by the introduction of advertising. But the Zuckerberg character is against it, saying that ads will ruin what’s good about “TheFacebook.”

The fake Zuck said: “We don’t even know what it is yet. We don’t know what it is, we don’t know what it can be, we don’t know what it will be. We know that it’s cool, that is a priceless asset I’m not giving up.”

At some point, the real Facebook did give up being “cool,” and started selling advertising. But as investors made clear in Facebook’s recent IPO, the company isn’t selling enough advertising -- or making enough money.

Not to worry, said pundits. With all those users, Facebook can easily monetize.

And that’s the problem. Facebook can and will monetize. They must.

The reasons Facebook scores at rock-bottom in the ACSI user satisfaction survey are advertising and privacy.

Facebook has to monetize its social network, because right now the social network is the only asset Facebook has. Yet it’s monetization through advertising that makes users unsatisfied with Facebook.

Meanwhile, Facebook’s main rival, Google+, is still “cool” -- no advertising at all.

Even more threatening to Facebook is that Google may never have to put ads in Google+. Google can harvest social signals on Google+, then apply them to Google sites that already have advertising -- sites like Search, Gmail and YouTube.

Facebook and Google+ are characterized by an imbalance of “cool” -- Google’s got it, and Facebook doesn’t.

What Facebook Needs Now

Facebook finds itself in a catch-22. Facebook can minimize monetization and keep its users. Or the company can monetize and lose users -- thereby reducing its ability to monetize!

A third option is to monetize in a way that makes users happy. Good luck with that.

And yet a fourth option is the one I believe Facebook needs to embrace in order to survive: Facebook needs to gather user data internally, and monetize externally -- just like Google does.

One way to do this is with an external ad network, which Facebook has already started to do. Facebook should create an ad system whereby web sites could place advertising, which would be unique for each user based on social signals harvested on Facebook.

Another way is to do what Google did, but in reverse. While Google had a search engine, an email service, an office suite, a video site and more before getting into the social networking racket with Google+, Facebook could launch alternative sites like this as locations for its advertising.

None of these options are appealing or likely to succeed for Facebook.

But despite the echo chamber’s assumption that Facebook is sitting pretty with nothing to worry about, I believe Facebook is a dead man walking, and needs to radically change its entire business model to survive.

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