Google Plus has ensured that Facebook cannot make money

Google+ may fail … it may not succeed in weaning away enough users from Facebook…

…But what G+ has ensured is that Facebook will not be able to make enough money to justify its current market value of US$ 100 billion.

Why so?

Let us do a quick back of the envelop calculation.

  1. For Facebook to justify it current valuation of US$ 100 billion, it needs to, at some point of time, make an annual profit of at least US$ 10 billion.
  2. That can be done only if they have annual revenue of around US$ 30 billion.
  3. This revenue number is about 15 time their current annual revenue.
  4. The user base and the level of usage cannot keep growing indefinitely and will saturate at some point of time. Let us assume that it saturates at double the current level.
  5. That still means the revenue per user has to increase 7 to 8 time the current level.
  6. Even assuming that enough organizations are ready to divert their ad budget to Facebook – where will the ads be shown?
  7. This can be done either by dramatically increasing the click through rate or by showing significantly increased level of advertisement.
  8. People don’t go to Facebook to search for things – they go to Facebook to check on friends. So, significant increase is click through rate is highly unlikely.

Would you stick around in Facebook, if they start showing significantly larger number of ads?

Especially when an interesting alternative in the form of Google Plus is around?

Do you remember what Microsoft did to Netscape?

Before 1996, Netscape used to rule the browser world. However, Microsoft changed the whole game by making IE good enough and giving it away FREE. That ensured Netscape could not make any money from their browser. You can read the rise and full story here.

Microsoft did not have to make any money from IE, so Netscape really did not have a chance.

Google – Facebook story is going to be similar

Google does not have to make any money from its social media initiative. It gave away Android free just to ensure that the mobile platform remains open.

Google probably needs to spend less than a billion dollar annually to keep the social networking initiative going. They can easily do that without any ads appearing. Look at how they handled YouTube.

If Facebook pushes too hard for revenue and profit margin they would land up handing the whole game over to Google.

However, Facebook can survive and continue to thrive if they can get rid of all those people who think that the Facebook IPO is going to be a goldmine.

Is Facebook Overvalued? It depends on how you answer one simple question

The Economist conducted a poll on January, 2011 asking the readers the same question – “Is Facebook overvalues at US$ 50 billion?” At that time it was valued around US$ 50 billion. Here is the result:

Since then lot has been said and written about Facebook valuation and the valuation has also gone up to US$ 100 billion. But, the argument persists. Both sides are strong in their belief.

Gartner, in a recent report titled “Current States and Future Directions of the IT Industry” states:

“…evidence continues to mount, highlighting there are few forces more powerful than the influence that friends or peers have on consumer buying decisions…”

On the other hand, Forrester, in a report titled “Will Facebook Ever Drive eCommerce?” states:

“…for most eBusiness companies in retail, Facebook is unlikely to correlate directly to near-term sales. A few pockets of success, however, have surfaced… while Facebook disciples believe that there will be something that will in the future transform shopping, the truth is that large brands just have not experienced any sizable gains in direct sales from Facebook…”

So where does it leave us?

What is your answer this simple question?

Ultimately it boils down to this one question. How you answer it will place you either in the “Yes” or “No” camp.

Can Facebook monetize the very detailed demographic profile and social-graph data that it will have for one billion users without alienating them?

Monetize = Generate ad revenue = Provide measurable increase in sales for the ad spend

Monetize = 10 billion US$ as annual profit to justify 100 US$ valuation

True, Facebook can make some money from the developers and by selling other things like music, movie etc. but that is already a crowded market. Major revenue has to come from selling ad.

It is not going to be easy.

People go to Google to look for things so targeted advertising can in many ways be helpful to the user. When people go to Facebook, they go to see what their friends are doing. So, ad can become an intrusion.

When Google went for IPO it had already figured out how to make money for 3 years prior to IPO. Facebook has not yet figured out how to be profitable. They are trying many ideas and hopefully some will succeed.

One billion user = Sure to have from current 600 million = Likely to saturate

Facebook is the most visited site in US (see this). It accounted for 8.93% of all US visits between January and November 2010 and now has more than 500 million active users. Half of Facebook’s users come to the site at least once a day. The user base has been growing at an incredible pace.

However, there are indications that for a country number of users tend to saturate at about 50% of the internet users. (see this interesting report)

Without alienating them = Showing too much ad = Move to the next happening platform

It happened to MySpace. In 2005 News Corporation acquired MySpace for US$ 550 million (see this). At that time MySpace attracted the fifth-most page views of any Web site. Last month, Specific Media takes the site off News Corporation’s hands for US$ 35 million (see this).

Having one billion users is no guarantee that there is no mass exodus. Who ever thought that Lehman Brothers can collapse in such a short period of time?

There is already some evidence that users are not that satisfied with Facebook. ASCI (American Customer Satisfaction Index) rates companies based on thousands of consumer satisfaction surveys. Maximum possible score you can get is 100 – higher the score, more satisfied are the customers. Here are the scores – not much difference between Facebook and MySpace.

Google = 80, Wikipedia = 77, Bing = 77, Yahoo! = 76, MSN = 75, AOL = 74, YouTube = 73, Ask.com = 73, Facebook = 64, MySpace = 63

Can we predict the future?

As you can guess by now that I think Facebook is not worth US$ 100 billion. To me it looks like a bubble created partly by Goldman Sachs. Check these:

However, it is always good to remember that you cannot predict a Black Swan. Just go through the following post, a 2003 vintage:

Ten reasons why you should not go for Google IPO

Forrester says Facebook NOT likely to drive eCommerce

What is your reaction to this? Are you saying …

  • …yes, I knew it
  • …the study is b******t

The study is based on the response from 102 online retailers. In a nutshell the study concludes that:

“…most eBusiness companies in retail, Facebook is unlikely to correlate directly to near-term sales. A few pockets of success, however, have surfaced…”

The report confirms my suspicion that Facebook is at the Peak of its Hype.

Why is it so?

Three reasons are provided:

  1. Social network efforts are largely about experimentation
  2. Social network rank last among 10 customer acquisition tactics
  3. Retailers find social networking ineffective compared to search and email

Key challenges include low click-through rate (other than coupons and promotions), open graph effective only for very large companies and very difficult for even the most sophisticated natural language processing tools to shape meaningful conclusions from the unstructured data.

“…while Facebook disciples believe that there will be something that will in the future transform shopping, the truth is that large brands just have not experienced any sizable gains in direct sales from Facebook…”

However, some companies can drive Businesses with Facebook Commerce:

  • Small businesses who do not want to setup their own website and local businesses
  • Large retailers with rich customer database can enhance their insight into customer behavior
  • Categories that can be digitally distributed, virtual goods and gaming companies
  • Products that consumers spend time thinking about prior to purchasing

The report goes on to conclude that money is better spent on “behavioral targeting and mobile“. However, it also recommends that you need to keep an eye on social metrics and exploit it where they make the most sense.

Here is the Forrester report – Will Facebook Ever Drive eCommerce?. The author is Sucharita Mulpuru.


Social Media Policy or Guideline – Which one should you have

What is the difference? Is there a difference?

Actually, the difference is fundamental to how you view social media. Do you look at social media as an opportunity to be leveraged or do you look at it as a threat to be guarded against?

Social Media as a Threat

If you view social media as a threat that you need to live with, you will primarily be concerned about the possible damage that can be caused be employee action. You will be concerned about:

  • Any confidential information getting inadvertently leaked out
  • You getting embarrassed because of an employee action
  • Any claim arising out of an employee posting
  • Employee expressing opinion which may not be in sync with the official position

You will need to focus on what the employee should not do. You will clearly identify the limits what is permissible and what is not. There will be no explicit encouragement to participate and the title of the document will contain the word “Policy“. Here are two examples:

Oracle Social Media Participation Policy

  • Follow all existing code of conducts
  • Protect Confidential Information
  • Don’t Comment on M&A Activity
  • Don’t Discuss Future Offerings
  • Refrain from Objectionable or Inflammatory Posts
  • Don’t Speak for Oracle
  • Don’t Post Anonymously
  • Respect Copyrights
  • Use Video Responsibly
  • Stick to Oracle Topics on Oracle-Sponsored Blogs
  • Don’t Misuse Oracle Resources

Cisco’s Internet Postings Policy

  • Violation of this policy may result in disciplinary action up to and including termination
  • Should not disclose any information that is confidential or proprietary
  • Include a disclaimer that the views are your own and not those of Cisco
  • You may be subject to liability if your posts are found defamatory, harassing, or in violation of any other applicable law
  • Cisco may request that you avoid certain subjects or withdraw certain posts from a Cisco Blog

Social Media as an Opportunity

On the other hand if you view social media as an opportunity then you will want to encourage your employees to participate and you will guide them on the best way to participate. You will be interested in providing the best practices like:

  • Being yourself and truthful
  • Admitting mistakes
  • Respect your audience
  • Being transparent but judicious

You will focus on what they may do. Though you may mention what to avoid, it will be written in as an advice rather than as a sword hanging over your head. Finally, the title of the document will contain the word “Guideline“. Here are two examples:

IBM Social Computing Guidelines

  • What you do on your own time is your affair
  • IBM supports open dialogue and the exchange of ideas
  • Know the IBM Business Conduct Guidelines
  • Be who you are (be transparent)
  • Be thoughtful about how you present yourself in online social networks (lines between public and private are blurred)
  • Speak in the first person
  • Use a disclaimer
  • Respect copyright and fair use laws
  • Protecting confidential and proprietary information
  • Some topics relating to IBM are sensitive and should never be discussed
  • Protect IBM’s clients, business partners and suppliers
  • Respect your audience and your coworkers
  • Add value
  • Don’t pick fights
  • Be the first to respond to your own mistakes
  • Adopt a warm, open and approachable tone
  • Use your best judgment

Intel Social Media Guidelines

  • Be transparent
  • Be judicious
  • Write what you know
  • Perception is reality (lines between public and private are blurred)
  • It’s a conversation
  • Are you adding value?
  • Your Responsibility
  • Create some excitement
  • Be a Leader
  • Did you screw up? (If you make a mistake, admit it)
  • If it gives you pause, pause (what you publish is yours – as is the responsibility – so be sure)

In Summary

Oracle, Cisco, IBM and Intel – the four examples are from companies operating on the same market space. Therefore, what you make out of social media depends on your enterprise DNA and the result can be very different from company to company.

Does it remind you about theory “X” and theory “Y”?

 

Is Facebook at the Peak of its Hype

The record of Facebook so far is impressive … in fact it is unprecedented. Facebook with $40 billion valuation & 500 million users – Mark Elliot Zuckerberg, the youngest billionaire & Time “person of the year” … the list goes on. So, where does Facebook go from here? Are we looking at the tip of the iceberg or are we standing at the top of Mt Everest?

Here is a 2007 May Fast Company article – Facebook’s Mark Zuckerberg: Hacker. Dropout. CEO. It makes interesting reading. The article goes on to says “…TechCrunch posted documents said to be a part of an internal valuation of Facebook by Yahoo. The documents projected that Facebook would generate $969 million in revenue, with 48 million users, by 2010…”. They have been wrong by an order of magnitude on the number of users!!!

Going forward, here are five possible scenarios for Facebook.

  1. Next big thing happens: A new and innovative entertainment channel opens up and becomes very popular. Though Facebook continues to enjoy a huge user base, total time spend by users on Facebook saturates and starts declining.
  2. Remains a social networking site: Their user base grows to about 1 billion and also gets a fair share of advertisement revenue. It remains, by far, the largest social networking sites but fails to expand beyond that. People continue to spend time on Facebook to socialize and play games but not for anything else.
  3. Encroaches into others territory: It builds up a loyal user base that uses Facebook of almost everything. It encroaches into the territory of Craigslist, eBay, Amazon, YouTube … and creates its niche. Significant portion of SMB completely depend of Facebook of all customer interactions.
  4. Seriously threatens Google and others: Proves that knowing people is vastly superior to understanding web sites. Business of all sizes starts to flock around Facebook for advertisement, sales and customer relation management. All internet segments are affected. Google sees a significant decline in ad revenue.
  5. Achieves complete dominance of the web: Facebook impacts every facet of our life and becomes synonymous to web. Majority of our web interaction happens through or with the aid of Facebook.

Can Facebook really reach level 3 and move beyond?

Here are some of the challenges that need to be dealt with.

  • Currently, Facebook does not recognizes the nuances in relationship (see this great slide show by Paul Adams who is slated to join Facebook from Google) – question is can this nuance be introduced without sacrificing the simplicity of interface?
  • Facebook is blocked in most large enterprises – and wining over enterprises is always a big challenge – Google is learning it the hard way. Even in SMB survey indicates that half of them don’t allow access to Facebook.
  • So far Mark Zuckerberg has unilaterally defined the rules of the game. Not the best way to take the rest of the world on – it requires alliance – it requires collective thinking. Tim Berners-Lee, the creator of the web standard has called Facebook a Walled Garden in Scientific America (here is the original article)
  • Knowing people and behavior is important but not everything. The importance of data – information – knowledge cannot be ignored and today in the area Facebook depends totally on Microsoft. Here is an interesting analysis – What Social Signals Do Google & Bing Really Count?
  • Privacy concerns – monopoly concerns – government concerns … these are real concerns and more voices will be raised as and when Facebook spreads its tentacle. This post (Facebook’s Anti-Privacy Monopoly) summarizes the current concerns of people.

Finally, here are some thoughts on where social web is going:

Web 2.0 Trends – Minus the Hype

Web 2.0? What is Web 2.0 … Oh you mean Social Media!

Yes, like a Chameleon, Web 2.0 has changed its color to become Social Media. But, what does this change of terminology imply? Web 2.0 has forked into 2 distinct streams.

  1. SOCIAL Media = Leveraging Collective Intelligence: The first fork, the original promise of Web 2.0, is about harnessing collective intelligence internally and externally. Typically this initiative is driven by IT, HR, Customer Support group or by a Knowledge Management group if it is in existence.
  2. Social MEDIA = Grabbing Attention: The second fork is about using Social Media channels for advertisement, brand building, product promotion, new product launch, campaign management etc. These initiatives are invariably driven by marketing department. The budget comes by cannibalizing other media channels.

The dynamics – the decision making – the budgeting process – the measurement criteria – the sponsors for the two forks are entirely different. Analysts have not yet started looking at the two forks separately. Look at the reports from McKinsey (The Rise of the Networked Enterprise), IDC (Predictions 2011: Welcome to the New Mainstream) & Gartner (Top 10 Strategic Technologies for 2010).

Now coming back to question 3 & 4 – [You need to read this post in conjunction with my earlier post where I had raised 4 questions and answered 2 of them].

3. If the current trend continues then where will it be in one year time?

  • By the end of next year this fork should be more visible to everybody.
  • Most organizations would have used some form web 2.0 technologies internally – would also have reported qualitative benefit – however, how to calculate quantitative benefit for internal deployment will remain a challenge.
  • Most portal platforms and knowledge management tool will incorporate Web 2.0 technologies (blog, wiki …).
  • Social MEDIA will dominate.
  • There will be a realization that the process of leveraging collective intelligence is not repeatable.

4. What happens if you take no action on the specific technology for next one year?

Sky will not fall on your head unless …

…you run a business where majority of your customer spends lot of time on Facebook.

Interesting statistics on Business Social Media Usage by Business.com

Let me give some of the highlights of the report (You can access the full report here or here).

Who is in-charge of the Social Media Initiative?

 

(Page 16)

  • Marketing = 66%
  • Customer Support = 23%
  • Others = 11%

On what measurable parameters is the impact of Social Media initiatives clearly visible?

 

(Page 19)

Maximum impact on: Brand awareness / reputation

 

Minimum impact on: Site traffic, useful product feedback

 

Will Web 2.0 work inside an enterprise?

I had written a post about one and a half year back (Why Web 2.0 will not work inside Enterprise) where I had identified 5 reasons. I was hoping that I would be proved wrong. However, available data tends to validate my fear.

McKinsey Report

First let us look at the report published by McKinsey (The Rise of the Networked Enterprise). Though it paints a very rosy picture of adoption and self reported benefit, one piece of hard data shows a slightly different picture. Have a look at their “Exhibit 3” on page 6. The correlation coefficient can be between 1 and -1 (1=highly related, 0=no relation & -1=inversely related).

What can we conclude from this exhibit?

  1. If you are networked with the external world then you are likely to gain market share.
  2. Using these tools internally may not give any significant or measurable financial benefit.
  3. Being too open can negatively impact your market leadership position. (this is the most disturbing part of the report which Mckinsey chose to gloss over)

List of 67 case studies that prove social media ROI

This list is compiled by Rob Petersen, founder of BarnRaisers in 2 parts (Part 1 of 34 cases & Part 2 of 33 cases). The interesting or disturbing part of this list is:

  1. Of the 67 cases only 2 (IBM & EMC) pertains to successful internal implementation of social media.
  2. Majority of the case studies (40) are purely marketing & sales initiative – it is about product promotion, brand building, product campaign etc.
  3. Most of the balance cases are about community building and leveraging the community.

 

Technology Trend – Minus the Hype

If you are a pragmatist, you sure would like make your technology investment decision after discounting all the hype that surrounds the emerging technologies. The task is not easy since among all the hype around the new technologies a real inflection point may be hiding – and you would definitely not want to miss that. What is the best way to do it?

You should start by asking the following questions …

  1. What are the specific trigger points that started the hype?
  2. How much has the technology moved in last one year?
  3. If the current trend continues then where will it be in one year time?
  4. What happens if you take no action on the specific technology for next one year?

In this post I will answer the first and the second question for all the technologies that are of interest to me. I will follow this up with subsequent separate posts where I will take a deeper dive and answer question 3 and 4 for each of the technologies. So, let me start …

Technology What are the specific trigger points that started the hype? How much has the technology moved in last one year?
Cloud Computing
(Tortoise)

[Answers to question 3&4]

  • Success of Salesforce.com
  • Realization that virtualization can significantly improve server utilization
  • Success of Amazon Web Service
  • Prediction by analyst that a large centralized infrastructure provider can achieve an economy of scale
  • Nothing much has changed in last one year
  • Concerns about security and reliability continue to be there.
  • There has been no breakthrough announcement.
  • Though everybody has jumped into the bandwagon, the improvements in the cloud offerings have only been incremental.
  • None of the PaaS platforms have shown much traction.
Mobile Computing
(Elephant)

[Answers to question 3&4]

Mobile story is more than 10 years old and has already gone through one complete hype cycle.The trigger point for the current hype is:

  • Launch of iPhone
  • Prediction that Smartphone Sales To Beat PC Sales By 2011 (see this)
  • Mobile Web usage more than doubling YoY (see this)
  • Launch of iPad has open up a whole new chapter in mobile computing
  • Android devices has become the second largest selling mobile handset after Symbian (see this)
  • HTML5 on mobile is maturing and it provides features which was earlier in the realm of the native applications (see this)
  • There is a tussle going between Google & Apple to corner the mobile ad spend
Web 2.0
(Chameleon)

[Answers to question 3&4]

Tim O’Reilly & Dale Dougherty had coined the term in 2003. It was inspired by the success of, among others:

  • Wikipedia
  • Google Adsense
  • Flickr
  • Bit torrent
  • Blogosphere

See the original article by Tim O’Reilly written on 2005.

  • The term Web 2.0 is used less frequently and has been replaced by the term Social Media
  • Facebook has emerged – some of the statistics indicate that it has become the most visited web site (see this)
  • Google vs. Facebook is the big story
  • Twitter has gained significant ground on instant crowd sourced news
  • Wikipedia is still free and without advertisement. (If you want it to remain so then please contribute)
SOA
(Phoenix)

[Answers to question 3&4]

The basic concept of a service bus has been around since the 80’s. However, the term SOA was first used by Alexander Pasik in 1994.It became the “in thing” with the emergence of Web Services.

However, last year many experts pronounced the obituary of SOA. (see this & this)

  • Recent survey result tend to show significant increase in adoption of SOA (see this & the original)
  • Expert view is that for hybrid cloud SOA is critical (see this)
  • Also for multi-channel applications – specially mobile applications (see this)
Agile Methodologies
(Starfish)

[Answers to question 3&4]

There was no well defined trigger point for agile methodologies – not even the formulation of the manifesto.

  • Though the Agile Manifesto was formulated in 2001, many of the agile methodologies predate the manifesto.
  • There was no immediate hype following the formulation of the manifesto.
  • Agile never appeared in the Gartner Hype Cycle.
The adoption rate slowly climbed over the years. It has been more like the Starfish than the Spider (what is Starfish vs. Spider? Explanation – Short & Long)The growth has been steady and recent survey points to impressive adoption. (see this, this & the original)