Wednesday, July 23, 2008

Facebook Relying on the Money Fairies

Interesting interview with Sheryl Sandberg, Facebook's chief operating officer:

Facebook's Sandberg: Growth before monetization
Anyone who was working in the industry in 1998 or '99 should already be familiar with this sort of business plan:

"Our focus is on growth--we believe this is the moment people are joining social networks. Then it's monetization to support that growth."
In other words, do your thing, grow as fast as possible, and let the money take care of itself. Because that method worked so well for companies like

It's easy for me to sit here and point fingers. Monetizing web traffic has been a problem for as long as there's been web traffic, and finding a way to extract profit out of social interaction (without so tarnishing the experience that you drive your members away) is simply a tough nut to crack. To Facebook's credit, they seem to be focusing on advertising that promotes brand awareness, rather than direct product sales, and that's likely to be much less intrusive than most of the alternatives. Their goal should definitely be to avoid the hard-sell, "click here now!" approach that would quickly spoil the experience.

So, let's run down a few monetization possibilities for Facebook, and sites like it:
  1. The magazine model. Magazines and websites have a similar problem: they need to find a way to make money off of people who -- at the moment of engaging with their product -- are not interested in buying something. Magazines have long made a practice of putting glossy ads between their stories; no one spends much time on those ads, but advertisers still value the exposure and are willing to pay for it. Pro: a proven business model. Con: magazines also charge a subscription fee, and most people still think the web should be free.

  2. The drug dealer model (i.e. "the first taste is free"). Also known as the tiered service plan. Give away basic services, but charge for the premium plan. has been profitable for years with just this model. Pro: you don't need to convert everyone to a paying customer, just a sufficient percentage. Con: If a group of friends ends up with your pay wall dividing them, they're not going to enjoy the experience.

  3. The singles bar model. Invite people over to interact with each other, and sell something that, like booze, enhances the experience. Conceivably Facebook could develop a set of premium widgets that makes the Facebook experience more fun and rewarding. Pro: Similar to the tiered model, except you're not (necessarily) dividing your members into two camps. Con: one mojito tends to lead to another, but a customer is only going to buy your widget once.
Sites like Facebook and MySpace, of course, have a unique challenge: all their eggs are in the social networking basket, so they need to make that one activity profitable. For now, at least, the better business model might be to approach social networking as an adjunct to an already-profitable business model. If you already make a living selling cars or computers, and your primary goal is to increase customer satisfaction and brand loyalty, social networking is an excellent means of approaching that goal. If, however, social networking is the only product you have to offer, get thinking, because if there's one thing we learned in Y2K, it's that growth in and of itself is not a business plan.