Facebook Is Going To Be The Next Big Thing. Again.

This is the first part of a three-part post series, trying to analyze the future of social media and the web. In part I, we examine what tools Facebook has to make it a dominant force on the internet and in our lives. In part II, we will explore the battlefield between Google and Facebook and see the different tactics they deploy in taking over the internet. In part III, we will try to see into the future and I’ll make some wild claims about Twitter – and try to prove them too. Stay tuned.

Facebook’s Old Business Model Failed

Google created a lucrative business of ad placement. They make a gazillion dollars in ad revenue. In Google’s wake, there were a slew of companies trying to do the same thing. For a while, ads were the business plan of the internet. Only, it didn’t work.

It takes huge amounts of clicks to make ads a lucrative business plan. In order to get these clicks, you need a huge customer base. And even then, it doesn’t work. Facebook has a huge customer base and it places ads on every page, however their ads are not as effective as Google’s. They’re just not bringing in the big bucks.

Why is that? For starters, people don’t use Facebook to buy things. It’s much easier to sell something when you are addressing a person with buying intent. When I want to buy something, I go to Google. When I want to hang out, I go to Facebook. What ad can be relevant to me when I’m chatting with a friend?

For a moment it seemed a rather bleak outcome. If Facebook won’t become a huge company, it will wade quietly at the sidelines of the Internet, until some new contender will wash them out. I, on the other hand, think Facebook hasn’t even started affecting our lives. I think Facebook is leading a revolution on the internet, and it will make huge piles of money doing so (I’ll have to discuss my business philosophy sometime, to explain why I believe consumers gain if there’s a company that’s making a lot of money).

My Internet Identity

The first thing Facebook has, is a good grip on my internet identity. Using Facebook Connect, I can easily log into websites, without having to remember multiple usernames and passwords. The more you use Facebook Connect, the more powerful Facebook becomes. The reasons are twofold:

  1. Switching Cost – Think of what will happen if Facebook disappears. How many sites will you lose access to? How much would it cost you to reconstruct your digital identity? On this front, Facebook has some competition from the OpenId Alliance, however, OpenId is just as broken. I use my Google account for many things, and if that somehow breaks, I’m done. There are some services that really hold us by the huevos. I’d pay to keep them up (Gmail literally contains my life!), and the more I use any one service the more power it has over my digital life.
  2. Data Integration – the reason Facebook Connect is better than other services is the integration with the Facebook Feed. The more I use Facebook, internally and externally, the easier it becomes for me to control my digital persona. It all streams into a single page, my Facebook Feed, where I can interact with everything. It’s easier for me, because I don’t have to go and check multiple sites. It’s powerful for Facebook, because they know so much more about me than anyone else.

So, Facebook will own my Internet Identity, and bring it all into my feed.

My Personal Life Line

To date, Facebook has the best social feed implemented. Here’s why:

  1. Inline Comments – the fact that each item has it’s own comment thread is much easier to follow than just having a bunch of status updates. Yes, Twitter, I’m talking about you. Google Buzz has this feature right. Allowing us to discuss items inline is what social conversation is all about. I find it much easier to follow and contribute to these conversations. On the business side, Facebook has a better chance of learning what is loved and important to each and every one of us.
  2. Separating Live From Interesting – The default feed on the Facebook homepage is a combination of new and interesting items. Interesting is determined simply by the number of ‘Like’s and comments. New items are randomly inserted as well, giving new items a chance to become interesting. Crowd sourcing interest is much easier than trying to build algorithms that automatically filters these streams (the way I imagine the Google Buzz engineers will try to solve the problem). The signal to noise ratio is very good, and most of us don’t need real time feeds (more on this point in part III).

One thing I am missing on Facebook is asymmetric following. Some people use social media to post interesting links and news. They are not my friends (yet), so I just want to follow them Twitter and Buzz style, and see what’s new and interesting. In the Facebook lingo, I want to become a fan of a user, not just a page. There are many privacy issues to be resolved, but this single change can render other social networks redundant.

My Wallet

Facebook is deploying an online payment system. This is extremely important. Since Facebook owns my Identity and know me so well, they can prevent fraud much better than any other service provider. It won’t be enough to open a Facebook user to use this system. You will also have to be an active user.

With this, Facebook can protect users and businesses better than the competition, while maintaining lower commissions. They also have a larger user base than PayPal, the strongest competitor in this area. Facebook can turn into the number one payment system over night. This is a very big deal.

Coming Full Circle

It all ends back in the Facebook homepage. You’ve rated a product on a shopping site, while using Facebook Connect? It’s in the feed. You’ve bought something using Facebook Credit? It’s in the feed. Organic ads in the feed are what no-one was able to offer before without sounding sleazy and spammy. Marketers are going to love this. Sellers will jump head over heels to get a piece of this action. This will drive Facebook Connect and Facebook Credit to new heights.

With these changes, buying intent is coming to Facebook. Looking for a new dish washer? Why not search Facebook for reviews by your friends? Oh, wait. There’s also a relevant ad for that. Of course, Facebook has to upgrade its search capabilities to get this working properly, but it only has to work on the Facebook Feed, so it’s easier than trying to control the internet like Google does.

So, Identity, Feed, Wallet, Ads and Search (with buying intent). It’s not so obvious that Google will be able to dominate the internet for much longer. It’s going to be an interesting battle, and this is exactly what we’ll discuss in Part II: The topology of the New Internet.

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    • Bren

      As always, an interesting post.
      Looking forward to parts 2 and 3

    • http://www.tuhatsanaa.net Tuija Aalto

      Very good points, I too strongly believe in the identity management side of business. There’s also a whole lot of data I would like to be made available for me as a user: just one example: to see how many of my friends have hidden my status updates. Wouldn’t you just love to know? I guess to know who would be a breach of the other party’s privacy… But in aggregate, Facebook knows this.

    • http://shmichael.com Michael

      Isn’t it frustrating that they have no public stock?

    • http://twitter.com/helencurry Helen Curry

      That’s the first I heard about the payment system – now that could really work well for them (as long as they don’t repeat their Beacon error!!).

    • http://omergertel.com Omer Gertel

      @Tujia – I know. I’d love to know if I’m hidden, if people like me, if I’m spam. It’s that peeping tom inside of us trying to get out.

      @Michael – yeah. Though there are some investors that will have a hard time making their money’s worth (more on that in part III).

      @Helen – I can’t believe I’ve never heard of Beacon. Then again, judging by the Wikipedia page, I didn’t miss anything.

    • Gilad

      Although Facebook may be able to \understand\ it’s users better then google, I believe this understanding may be limited to a handful of areas – mostly entertainment and pop culture (at least for a majority of the people).

      At least in my case, if I compare Facebook and Google I believe the latter will be able to understand and predict my interests and tastes much better than Facebook, especially if it tracks and analyzes the dozens of searches requests I send each day. This understanding will probably increase ten-fold if they ever offer a \digital assistant\ which will be given more direct feedback from the user (similar to the Facebook \like\ and \dislike\).

      Facebook may be able to analyze what you share with your friends, but Google has access to your entire life (and God forbid what will happen if they offer their own version of PayPal and have access to one’s spending habits as well!)

    • http://omergertel.com Omer Gertel

      They have Google Checkout to compete with paypal.

      Anyway, the point in place is that by having the users interact, Facebook doesn’t need to be as clever. We are working for Facebook, making the experience better for ourselves. For example, when I needed to buy a new mobile, I asked people on Facebook for recommendations. When I needed an old computer for my GF’s parents, I asked on Facebook if anyone was throwing one away. By responding to each other, we make Facebook useful. Google is only as specific as the data it indexes. In Facebook relevant data is created just for me by my peers.
      (BTW, Google recently acquired Aardvark, for a relatively high sum of $50M. Aardvak uses social networks to answer questions that the Google search engine is really bad at but humans answer with ease).

    • http://www.facebook.com/alex.apetrei Alex Apetrei

      so … I’m testing out your theory, I just logged on to here using my facebook account.

      There are a million ways to monetize facebook , except you only get 1 chance at doing it right. Should they fuck up on the Identity Management scheme … not sure how many people would stick around for a second attempt.

    • http://www.EverythingTree.com Charlie

      Great post! I am looking forward to Part II. If Facebook can reinvent itself and pull off a coup of this magnitude it bodes well for some other interesting underdogs out there.

    • George Smith

      I believe Facebook could better compete with Google by further changing their business model to one like PeopleString. If Facebook wants more advertising dollars, they will need to pull in a lot of members. Why not return a percentage of the advertising dollars they currently make back to the members? This would increase the incentive of the present membership to help draw in more members and provide Facebook with ever increasing members for advertisers to market to.

    • http://omergertel.com Omer Gertel

      George, this is a terrible idea.
      A) They already pull in a lot of members, for longer periods than anyone else.
      B) Paying people to click/watch ads has been tried several times, and failed. When you mix money and pleasure, money wins and pleasure goes away (read Dan Areily’s book, Predictably Irrational). My time is expensive, so I better be making a lot of money, or it won’t be worth my time. Usually these methods only share what accumulates to a few bucks. That’s just not enough. It’s insulting. And now, the users don’t think it’s fun anymore.

    • http://innovationimitation.com Mike

      Interesting analysis.
      I agree with you that Facebook has a lot that is going for it, and I don’t see it disappear any time soon. We are stuck with it for a long time.

      But there is something rotten in Facebook as a company. Something about company’s DNA, culture, call whatever you like. They don’t have the authentic spirit of Twitter, the engineering excellence of Google, the innovation skills of Apple.

      It feels to me that they stumbled on their success by chance, and now they lack a true sense of direction. So in my opinion they have to find their true self, if they want to succeed in the long term.

    • http://omergertel.com Omer Gertel

      Mike, I agree. It does seem Facebook are just stumbling along. One of the problems is that they haven’t built a brand in any way. We don’t know what they stand for.
      And yet, we give them all this power and information about ourselves. Each and every one of us is working on making Facebook more important. It really says a lot about our own judgment of character, I think.
      This lack of direction can be a way for someone to take over the social network market, but the chances are getting slimmer each day that passes.

    • http://mattmerriam.com Matt Merriam

      I hear all this and it sounds good. I’d like to see all this work out for Facebook but I see some significant problems. First and foremost is that I’m petrified of Facebook apps, they are so often rogue trojan horses for identity thieves. So why would I step up to expose my identity to their API?

      This has inspired me … I’m writing up my thoughts on my blog http://www.mattmerriam.com.

      Thanks for the nudge, great post, good stuff …

    • Pingback: Twitter Will Make Money (Just Not That Much) | Re-gur-gi-tate (n) | Omer Gertel

    • http://www.intotemptation.net JustJss

      Out of 150+ friends, the few (of all ages) I know who have “stuck” to facebook fall into two small groups:

      1) Hopeless Farmville addicts. Once a large group, I think I’m down to single digits.

      2) People who have something to sell and think that they HAVE to be there.

      I thought I was in the second group, but as it turns out — I don’t have to be there. I feel bad for friends who tied up their identity with FB at the expense, in time, of building their own.

      Unless you’re Zynga, et. al. …

      Facebook + You = … Facebook.

      It has its uses, of course. It’s worth having. It’s just not worth a lot; and at some point, the numbers will start to show it.