5 ways Facebook can leverage their platform and start justifying a $15 Bln valuation

Paul Buchheit wrote an interesting post a few days ago called “Facebook knows who you are, and that is worth more than you think”. As an ex-Google employee and now one of the founders of FriendFeed, he knows what he is talking about.

It’s very fashionable to declare that Facebook is an over-hyped fad and will never make any real money, certainly not enough to justify it’s insane $15 billion dollar valuation. At first glance, it’s easy to understand why some people might think it’s a toy — most of the activity there seems to involve biting, poking, and joining groups with funny names.

However, I think that assessment misses out on something very interesting: Facebook is capturing everyone’s identity and relationships. Of course there’s some noise caused by random friending, but by examining the larger graph as well as other details such as location, affiliations, interactions, and of course explicitly entered relationship details (“how do you know Paul?”), they can get a pretty good idea of which people are actual friends and acquaintances.

He goes on and writes that people that rant about Facebook and its business model aren’t using enough imagination.

Perhaps a people directory doesn’t seem terribly valuable, but if you can’t imagine how to make money from knowing everyone’s identity and trust networks, then you aren’t being very imaginative.

I believe that this last sentence is important. It not only discusses opportunity, but it also shows how incredibly vulnerable such a business model is (will get to that in a second).

Facebook stores one of the largest social graphs in the world. With their incredible user base, and their viral methods to gain more insight in users and their relationships they are building an unprecedented people’s directory. Facebook asks users that add friends about their relationships, it has viral applications that only work if you “infect” your friends with it too, and it seems to be moving in the direction of interaction, providing its users with chat functionality. Every action of every user on the Facebook platform is stored, analyzed and added tot the social graph they are building.

The database must be immense by now and growing every minute. From the perspective of Facebook this database with identities and relationships forms the value that is to be leveraged. The Facebook business model depends entirely on that leverage.

The information stored in the Facebook databases must be a marketeers wet dream. Instead of working with “old-fashioned” demographic information to reach customers, Facebook provides the marketeer with a platform that allows almost any kind of dissection of user groups into specific customer types. Talk about possibilities to target customers (what a terrible phrase that is). Marketeers are idiots of course (no I didn’t mean you 😉 ), so they won’t really be able to leverage the possible value.

There are a gazillion ways to use the information and create value from the Facebook database. Targeted advertisement, brand campaigns, specific customer interactions, targeting specific customer types, “social” search, “friend referrals” (Beacon was a very poorly implementation of this), etc. etc. But having all of this data does come at a cost. Facebook has created a perfect conceiled advertisement trap, but it’s a trap they had better not fall into themselves. The trap is formed because Facebook has chosen to make the social graph the most important aspect of their business model. Instead of directly leveraging customer value, they are leveraging network value.

The problem with this choice is trust of course. You have to be extremely careful that you aren’t leveraging too much of the data you collect for commercial purposes. The users, often unaware of the data collection and purpose of it, will not see the added value in that. They will most likely lose trust in the service that hosts their user profile and friend network if it turns out to collect data for commercial purposes. Facebook already has to deal with this problem with the increased friend spamming that is taking place, for example with 3rd party developed applications trying to collect their own social graph data.

A great example of a friend spamming application I received. I have to forward it to other friends to see its content (didn’t do it BTW).

So what can Facebook do to leverage their social graph data? How can they turn Facebook not only into a success in terms of nr of users and traffic, but also in terms of revenues? Here are my 5 tips how to make Facebook more valuable to its users and more profitable at the same time:

1. Focus on user value first, then leverage the data, no the other way around. It means getting rid of advertisement in user interactions on the Facebook platform. It doesn’t add value to the interaction and it often hurts the trust relationship Facebook has with its users. Alan Stern writes about the poor quality of the ads in Facebook. Its sits in the way of interaction. It also means getting rid of the 3rd party applications that have the purpose of collecting user data. Especially stop the friend spamming apps.
2. Focus on interaction. Social networking isn’t about user profiles or social graph data, it’s about interaction. Stimulate interaction, provide services that allow users to interact in ways they couldn’t before. That’s user value. And advertisers have no purpose or any value in interactions between friends. They aren’t part of the conversation, they are trespassing.
3. Think mobile. What is the single most successful business model that is entirely based upon interaction and user value? It’s mobile of course. People love to interact. They use their mobile many times a day to call and send SMSes to each other. And they are obviously willing to pay a lot of money for it. I can’t understand that a service with such web presence isn’t capable of mobilizing its users. The applications are there, but they aren’t being used. Facebook lacks focus on mobile, a possible revenue generator.
4. Open up the walled garden. Even though a lot of users aren’t aware of it, there are bound to arrive new competitors that provide valuable social interaction services without locking the customer in. Human nature will always find a way out. We don’t like to be trapped. Opening up has two important upsides. It forces you to think in terms of user value, because now you have to deliver a better service than any competitor. And it makes you have to trust your customer, and not ruin that trust by doing something evil. Opening up is also needed to be successful at point 5.
5. Leverage the social graph data outside of the Facebook platform. The future of Social Advertisement lies outside of the network. There is no value in trying to become commercial within Facebook. Facebook should be about interaction, remember. But outside of the Facebook platform these users will perform actions where the social graph data becomes handy. Think about it for a moment. The real value comes only within the context of a user searching or buying something on-line. That is where the data becomes valuable. Why? Because it helps the marketeer to provide me with advertisement that, in itself, has value within my context. I don’t want advertisement in my social interactions. But I do want them when I’m searching or buying stuff. It’s a knife cutting both ways. The user gets value, and Facebook can maintain it’s trust relationship with its user base. I’m not so sure automatic friends recommendations will work the way everyone hopes it will. if I need a recommendation from a friend, I’ll ask. No automation needed there, unless I can find it at the place I’m buying (e.g. finding a bookreview at Amazon written by someone I know). The newsfeed and beacon implementations of it do not even get close to real life recommendations. We need conversations, not Orwellian messages telling us about the shopping behavior of a friend.

I agree with Paul Buchheit that with imagination there is a lot of value to be gained from knowing the identity and relationships of people. But I also believe that leveraging that value is pretty difficult and requires a constant balancing act. Facebook has the users the traffic, the data. But it remains to be seen if they will be able to convert that into enough revenues to justify a $ 15 bln valuation.

I’m sure there are many other ways possible too. Let me know what you think.