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In spring 2010, the world got a sense of the breadth and depth of Mark Zuckerberg’s vision. During the firm’s annual f8 Developers Conference, Facebook launched a series of initiatives referred to as Open Graph that placed the company directly at the center of identity, sharing, and personalization—not just on Facebook but also across the Web.
With just a few lines of HTML code, any developer could add a Facebook “Like” button to their site and take advantage of the social network’s power of viral distribution. A user clicking that page’s “Like” button automatically would then send a link to that page to their news feed, where it has the potential to be seen by all of their friends. No additional sign-in is necessary as long as you logged into Facebook first (reinforcing Facebook’s importance as the first stop in your Internet surfing itinerary). While some sites renamed “Like” to “Recommend” (after all, do you really want to “like” a story about a disaster or tragedy?), the effort was adopted with stunning speed. Facebook’s “Like” button served up more than one billion times across the Web in the first twenty-four hours, and over fifty thousand Web sites signed up to add the “Like” button to their content within the first week.A. Oreskovic, “Facebook Efforts Hint at Growing Ad Clout,” Guardian, April 30, 2010.
Facebook also offered a system where Web site operators can choose to accept a user’s Facebook credentials for logging in. Users like this because they can access content without the hurdle of creating a new account. Web sites like it because with the burden of signing up out of the way, Facebook becomes an experimentation lubricant: “Oh, I can use my Facebook ID to sign in? Then let me try this out.”
Facebook also lets Web sites embed some Facebook functionality right on their pages. A single line of code added to any page creates a “social toolbar” that shows which of your patrons are logged into Facebook, and allows access to Facebook Chat without leaving that site. Site operators who are keen on making it easy for patrons to summon friends to their pages can now sprinkle these little bits of Facebook across the Web.
Other efforts allow firms to leverage Facebook data to make their sites more personalized. Firms around the Web can now show if a visitor’s friends have “Liked” items on the site, posted comments, or performed other actions. Using this feature, Facebook users logging into Yelp can see a list of restaurants recommended by trusted friends instead of just the reviews posted by a bunch of strangers. Users of the music-streaming site Pandora can have the service customized based on music tastes pulled from their Facebook profile page. They can share stations with friends and have data flow back to update the music preferences listed in their Facebook profile pages. Visit CNN and the site can pull together a list of stories recommended by friends.J. Valentino-DeVries, “Facebook CEO Zuckerberg on Plans to Dominate the Web,” Wall Street Journal, April 21, 2010. Think about how this strengthens the social graph. While items in the news feed might quickly scroll away and disappear, that data can now be pulled up within a Web site, providing insight from friends when and where you’re likely to want it most.
Taken together, these features enlist Web sites to serve as vassal states in the Facebook empire. Each of these ties makes Facebook membership more valuable by enhancing network effects, strengthening switching costs, and creating larger sets of highly personalized data to leverage.
Those with an eye for business disruption are watching the evolution of Facebook Credits. Credits can be used to pay for items, such as features and enhancements in video games or virtual gifts. Facebook shares Credits revenue with application developers, taking a sizeable 30 percent off the top for acting as banker and transaction clearing house. That’s a steep price to pay, but a unified standard may also prompt innovation since users are far more likely to trust Facebook with their credit card than to register their card on multiple services run by little-known app developers. As of July 2011, Facebook Credits are the mandatory in-game currency for all developers on the service.
There are real bucks to be made from digital make-believe. Analysts estimate that in 2010, virtual goods racked up an estimated $1.6 billion in U.S. transactions and $7.3 billion worldwide.D. Reisinger, “Virtual Goods Revenue to Hit $7.3 Billion This Year,” CNET, November 15, 2010; D. Takahashi, “U.S. Virtual Goods Market to Hit $2.1 Billion in 2011,” GamesBeat, September 28, 2010. Zynga alone forks over tens of millions each month for Facebook via virtual goods sales.J. Kincaid, “Facebook to Make ‘Facebook Credits’ Mandatory for Game Developers (Confirmed),” TechCrunch, January 24, 2011. There are also an increasing number of ways to pay for Credits. Facebook’s App2Credits effort lets firms offer Credits in ways that don’t involve a credit card, including getting Credits as part of a card loyalty program, converting unwanted real-world gift cards into Facebook Credits, or earning Credits for shopping or performing other online tasks.J. Kincaid, “A Look at the Future of Facebook Credits,” TechCrunch, April 21, 2010.
Credits were rolled out supporting fifteen international currencies and multiple credit cards. Transaction support is provided through a partnership with PayPal, and a deal with mobile payments start-up Zong allows users to bill credits to their phone.C. McCarthy, “Facebook to Developers: Get Ready for Credits,” CNET, February 25, 2010. Credits can also be redeemed for vouchers that can be used to buy real-world products and services offered via the Facebook Deals platform.M. Ingram, “Facebook’s Two Deal Weapons: The Social Graph and Credits,” GigaOM, April 26, 2011.
All this banking activity leaves some wondering if Facebook might not have grander ambitions. The Financial Times has referred to Facebook as being on the path to becoming “The Bank of the Web.”C. Nuttall, “Facebook Credits Bank of the Web,” Financial Times, April 23, 2010. Could Facebook morph into an actual real-currency bank? A site that knows how to reach your friends might offer an easy way to, say, settle a dinner tab or hound buddies for their Final Four pool money. This might also be a solid base for even deeper banking links between users and all those firms Facebook has begun to leverage in deeper data-sharing partnerships. This may be something to think about, or perhaps, to bank on!
The decision to launch many of the new Open Graph features as “opt-out” instead of “opt-in” immediately drew the concern of lawmakers. Given the Beacon debacle, the TOS controversy, and Google’s problems with Buzz (see Chapter 14 "Google in Three Parts: Search, Online Advertising, and Beyond"), you’d think Facebook would have known better. But within a week of Open Graph’s launch, four U.S. senators contacted the firm, asking why it was so difficult to opt out of the information-sharing platform.F. Lardinois, “Is It Time for Facebook to Make Opt-In the Default?” Read Write Web, April 27, 2010. Amid a crush of negative publicity, the firm was forced to quickly roll out simplified privacy management controls.
Facebook’s struggles show the tension faced by any firm that wants to collect data to improve the user experience (and hopefully make money along the way). Opt-out guarantees the largest possible audience and that’s key to realizing the benefits of network effects, data, and scale. Making efforts opt-in creates the very real risk that not enough users will sign up and that the reach and impact of these kinds of initiatives will be limited.F. Lardinois, “Is It Time for Facebook to Make Opt-In the Default?” Read Write Web, April 27, 2010. Fast Company calls this the paradox of privacy, saying, “We want some semblance of control over our personal data, even if we likely can’t be bothered to manage it.”F. Manjoo, “Does Privacy on Facebook, Google, and Twitter Even Matter?” Fast Company, May 1, 2010. Evidence suggests that most people are accepting some degree of data sharing as long as they know that they can easily turn it off if they want to. For example, when Google rolled out ads that tracked users across the network of Web sites running Google ads, the service also provided a link in each ad where users could visit an “ad preferences manager” to learn how they were being profiled, to change settings, and to opt out (see Chapter 14 "Google in Three Parts: Search, Online Advertising, and Beyond"). It turns out only one in fifteen visitors to the ad preferences manager ended up opting out completely.F. Manjoo, “Does Privacy on Facebook, Google, and Twitter Even Matter?” Fast Company, May 1, 2010. Managers seeking to leverage data should learn from the examples of Facebook and Google and be certain to offer clear controls that empower user choice.
Chapter 7 "Social Media, Peer Production, and Web 2.0" warned that your digital life will linger forever and that employers are increasingly plumbing the depths of virtual communities in order to get a sense of job candidates. And it’s not just employers. Sleuths at universities and police departments have begun looking to Facebook for evidence of malfeasance. Oxford University fined graduating students more than £10,000 for their postexam celebrations, evidence of which was picked up from Facebook. Police throughout the United States have made underage drinking busts and issued graffiti warnings based on Facebook photos, too. Beware—the Web knows!
Facebook also allows third-party developers to create all sorts of apps to access Facebook data. Facebook feeds are now streaming through devices that include Samsung, Vizio, and Sony televisions; Xbox 360 and Wii game consoles; Verizon’s FiOS pay television service; and the Amazon Kindle. While Facebook might never have the time or resources to create apps that put its service on every gadget on the market, they don’t need to. Developers using Facebook’s access tools will gladly pick up the slack.
But there are major challenges with a more open approach, most notably a weakening of strategic assets, revenue sharing, and security. First, let’s discuss weakened assets. Mark Zuckerberg’s geeks have worked hard to make their site the top choice for most of the world’s social networkers and social network application developers. Right now, everyone goes to Facebook because everyone else is on Facebook. But as Facebook opens up access to users and content, it risks supporting efforts that undermine the firm’s two most compelling sources of competitive advantage: network effects and switching costs. Any effort that makes it easier to pack up your “social self” and move it elsewhere risks undermining vital competitive resources advantages (it still remains more difficult to export contacts, e-mails, photos, and video from Facebook than it does from sites supporting OpenSocial, a rival platform backed by Google and supported by many of Facebook’s competitors).F. Vogelstein, “The Great Wall of Facebook,” Wired, July 2009. This situation also puts more pressure on Facebook to behave. Lower those switching costs at a time when users are disgusted with firm behavior, and it’s not inconceivable that a sizable chunk of the population could bolt for a new rival (to Facebook’s credit, the site also reached out to prior critics like MoveOn.org, showing Facebook’s data-sharing features and soliciting input months before their official release).
Along with asset weakening comes the issue of revenue sharing. As mentioned earlier, hosting content (especially photos and rich media) is a very expensive proposition. What incentive does a site have to store data if it will just be sent to a third-party site that will run ads around this content and not share the take? Too much data portability presents a free rider problemWhen others take advantage of a user or service without providing any sort of reciprocal benefit. where firms mooch off Facebook’s infrastructure without offering much in return. Consider services like TweetDeck (now owned by Twitter). The free application allows users to access their Facebook feeds and post status updates—alongside Twitter updates and more—all from one interface. Cool for the user, but bad for Facebook, since each TweetDeck use means Facebook users are “off-site,” not looking at ads, and hence not helping Zuckerberg & Co. earn revenue. It’s as if the site has encouraged the equivalent of an ad blocker, yet Facebook’s openness lets this happen!
Finally, consider security. Allowing data streams that contain potentially private posts and photographs to squirt across the Internet and land where you want them raises all sorts of concerns. What’s to say an errant line of code doesn’t provide a back door to your address book or friends list? To your messaging account? To let others see photos you’d hoped to only share with family? Security breaches can occur on any site, but once the data is allowed to flow freely, every site with access is, for hackers, the equivalent of a potential door to open or a window to crawl through.
Facebook will eventually see stellar growth start to slow as the law of large numbers sets in. The shift from growth business to mature one can be painful, and for online firms it can occur relatively quickly. That doesn’t mean these firms will become unprofitable, but to sustain growth (particularly important for keeping up the stock price of a publicly traded company), firms often look to expand abroad.
Facebook’s crowdsourcingThe act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined generally large group of people in the form of an open call. localizationAdapting products and services for different languages and regional differences. effort, where users were asked to look at Facebook phrases and offer translation suggestions for their local language (see Chapter 7 "Social Media, Peer Production, and Web 2.0"), helped the firm rapidly deploy versions in dozens of markets, blasting the firm past MySpace in global reach. But network effects are both quick and powerful, and late market entry can doom a business reliant on the positive feedback loop of a growing user base.
And global competition is out there. Worldwide, Facebook wannabes include Vkontakte (“in contact”), Russia’s most popular social networking site; Google’s Orkut (which is tops in Brazil, although Facebook’s gaining there, too); and Renren (formerly Xiaonei), which is said to have registered 90 percent of China’s college students.
China is proving a particularly difficult market for foreign Internet firms. Google, eBay, Yahoo! and MySpace have all struggled there (at one point, Rupert Murdoch even sent his wife, Wendi Deng Murdoch, to head up the MySpace China effort). And don’t be surprised to see some of these well-capitalized overseas innovators making a move on U.S. markets too.
While global growth can seem like a good thing, acquiring global users isn’t the same as making money from them. Free sites with large amounts of users from developing nations face real cost/revenue challenges. As the New York Times points out, there are 1.6 billion Internet users worldwide, but fewer than half of them have disposable incomes high enough to interest major advertisers.B. Stone and M. Helft, “In Developing Countries, Web Grows without Profit,” New York Times, April 27, 2009. Worse still, telecommunications costs in these markets are also often higher, too. Bandwidth costs and dim revenue options caused video site Veoh to block access coming from Africa, Eastern Europe, Latin America, and some parts of Asia. MySpace already offers a stripped-down Lite option as its default in India. And execs at YouTube and Facebook haven’t ruled out lowering the quality of streaming media, file size, or other options, discriminating by region or even by user.
Making money in the face of this so-called “International Paradox” requires an awareness of “fast and cheap” tech trends highlighted in Chapter 5 "Moore’s Law: Fast, Cheap Computing and What It Means for the Manager", as well as an ability to make accurate predictions regarding regional macroeconomic trends. Ignore a market that’s unprofitable today and a rival could swoop in and establish network effects and other assets that are unbeatable tomorrow. But move too early and losses could drag you down.
Concerns aren’t just financial; they’re also political and ethical. Facebook is officially banned in China (although many Chinese have used technical work-arounds to access the site), and Zuckerberg is clearly interested in the Chinese market. He spends an hour each day learning Chinese and has made several trips to China, as well.L. Horn, “Facebook’s Mark Zuckerberg Visits China’s Top Search Engine,” PC Magazine, December 20, 2010. Facebook has discussed a partnership with China’s dominant search site, Baidu, but moving forward with an effort that complies with China’s filtering requirements leaves executives conflicted. Some say even a censored Facebook would be a catalyst for Chinese democratic reform, while others see this as a compromise of the firm’s belief in the power of exchange and promoting the free flow of information. Says the firm’s COO Sheryl Sandberg, “There are compromises on not being in China, and there are compromises on being in China. It’s not clear to me which one is bigger.”B. Stone, “Why Facebook Needs Sheryl Sandberg,” BusinessWeek, May 16, 2011.