Facebook’s Revenue Model is Broken

by mjfern

Facebook’s biggest, long-term challenge remains how to profit from the enormous piles of personal data of its one billion users without alienating them…

Source: Facebook’s Solid Results Are Greeted Cautiously

According to the latest ACSI results, Facebook has a customer satisfaction score of a 61. This score is on par with Comcast’s. There are just three companies with lower scores, out of the 160+ companies evaluated. Why are customers so dissatisfied with Facebook? Because its revenue model is broken.

Facebook is a platform that brings together two types of customers. [1] On the one hand you have consumers that gain value from Facebook by connecting and sharing with friends and family. [2] For the majority of consumers, privacy is an important feature. Privacy creates a safe environment for sharing personal information. [3] On the other hand you have advertisers that gain value from Facebook by using consumers’ personal data to display relevant ads, with the aim of triggering some psychological (brand awareness) or behavioral effect (click and purchase). For advertisers privacy is a major bug. Reduced personal data about consumers diminishes ad relevancy and thus any effect.

In short, there is an inherent conflict in Facebook’s revenue model, whereby delivering more value to consumers (privacy) necessarily reduces the value that Facebook can deliver to advertisers (personal data), and vice-versa. [4]

What are the implications of this conflict for Facebook?

The conflict means that Facebook’s value proposition for both consumers and advertisers will remain compromised. Its key customers will use the service, but with a persistent, uneasy feeling. Consumers will hesitate to share meaningful experiences for fear they will be exposed to advertisers and the public (e.g., employers). They will be less engaged than they would be otherwise. Advertisers will run their ads but will question the return on their marketing investment. They will have a reduced “willingness to pay.” Most importantly, both types of customers, consumers and advertisers, will be happy to jump ship if an alternative emerges. [5]

Facebook’s revenue model is broken. To win back the hearts of its customers, it needs to find another way to make money.

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[1] This is an example of a two-sided network. Developers are another important customer, making Facebook at least a three-sided network.

[2] You could argue that consumers aren’t “customers” since they don’t pay money to use Facebook. Instead, they pay with their time and attention.

[3] A secondary issue is that display ads detract from the consumers’ experience. While this type of “push marketing” has a long history in media, from television (commercials) to phone (telemarketing), consumers are increasingly finding ways to block these distractions (e.g., DVRs, do-not-call lists, Pandora paid account, flash blockers).

[4] This conflict explains why Facebook keeps evolving its privacy policies and despite its best efforts continues to encounter blowback from customers, especially consumers and privacy advocates.

[5] If customers are dissatisfied with Facebook then why do they continue to flock to the platform? For consumers there are extraordinarily strong “same-side network effects.” And because so many consumers are on Facebook, so are advertisers. This consumer-advertiser relationship is an example of a “cross-side network effect.” To learn more about network effects, including two-sided markets, I highly recommend the following Harvard Business Review article by Eisenmann, Parker and Van Alstyne: Strategies for Two-Sides Markets.

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