Will pressures of being public ruin Facebook?

As founder Zuckerberg wrote, the site's intent was 'to accomplish a mission -- to make the world more open and connected.'

By The Fiscal Times Feb 3, 2012 1:37PM
Facebook IPOBy Suzanne McGee, The Fiscal Times

When is free not really free at all?

That's a question that Facebook's execs are going to have to grapple with down the line, as they adapt their business to the realities of being a publicly traded company.

Being accountable to many thousands of outside investors, not to mention a host of sell-side analysts, is an entirely different kettle of fish from working with a few hundred shareholders, many of them insiders or with close relationships to the management team.

As countless businesses before have discovered, it can be a lot more difficult to focus on long-term plans and non-monetary goals or principles (that's one reason Google put its famous "do no evil" mantra in its S-1 filing before its own IPO) when outside shareholders feel that it is at the expense of shorter-term revenues and profits.

Why does that matter to Facebook? The company has routinely shot down rumors that it was about to levy a fee on users with adamant statements that Facebook "is free and always will be." But as the old adage says -- and as Facebook's S-1 demonstrates -- there is no such thing as a free lunch. Each of our Facebook pages was worth about $3.73 in advertising revenue to Facebook in 2011 -- and the company's goal is going to be to increase that by devising newer and more creative ways to mine the data we all provide.

If you like jazz, or the Montreux Jazz Festival, well, you may end up being pitched ads for airlines that will get you there, or products made by the festival's sponsors. Check in while at Starbucks and Facebook will not only tell your friends where you are but may add a little bit of promotional content to that notification. It's not quite the same as wandering the streets with a sandwich board on your back, but the concept isn't all that different.

Companies have wrestled with the question of how to make money from Internet content for as long as the Internet has been around. One of the most dramatic examples is the newspaper world, as the release of the New York Times' (NYT) most recent quarterly earnings reminded us Thursday. How can a paper put content online -- and make people value it enough to pay for it? That's a conundrum that still hasn't been resolved.

As more and more of us turn to the Internet to get our news, we have grown to expect free access to all kinds of content. Sure, ads surround it, but advertisers pay less for our online eyeballs than they do for big display ads in the real newspapers. So the Times last spring finally decided to stick much of its content behind a subscription fee firewall -- after a few articles a month, you have to pay for access to anything else. It turns out that people are willing to do that -- about 390,000 of them at the end of the year, up from 324,000 at the end of September. But they are still wrestling with the right combination of advertising rates and subscription rates, it seems, as ad revenue fell 5.3% for the quarter, contributing to a 12% slump in fourth-quarter earnings.

Facebook is going to have to wrestle with its own advertising-related issues going forward. Advertisers likely will be willing to pay more to pitch their products and services on Facebook because with every bit of information we post there, we enable Facebook to offer those advertisers a very targeted audience.

Let's say you've got a service that you think will be ideal for 30-something musicians who like sushi and lychee martinis. If you're lucky, you might reach a handful of them via the New York Times, but Facebook can tell you precisely who they are by mining the data you provide. When you and I post information about our likes and dislikes, our habits and purchases, we may think of ourselves as sharing that with our social network. But reading through the language of the company's IPO filing, Facebook refers to that as "information that they have chosen to share with us." The company says its objective is to "give users choice over what they share and with whom they share it" -- but we had all better brace ourselves for that "sharing" to lead to a lot more advertising coming our way.

There are already signs that Facebook users are annoyed by what they see as a blizzard of ads, not to mention the kind of data mining that produces targeted ads. Facebook's ads are different from the list of product recommendations generated on Amazon's website because Facebook isn't a retail site -- it's all about social networking. As founder Mark Zuckerberg himself wrote, Facebook's intent was "to accomplish a mission -- to make the world more open and connected." It has done that, but can it continue to do so if the mission shifts to making money for investors?

Perhaps it's time for Zuckerberg and his colleagues to ponder which of their two adamant statements -- that Facebook will always be free, or that Facebook was built to make the world open and connected -- takes priority. If it's the former, we'll all have to get used to being bombarded with a torrent of advertorials alongside news from our friends and colleagues. That, in turn, may cause some Facebook users to throw up their arms in disgust and walk away, looking for a new social networking model that doesn't view its users as raw material to be served up on a platter to advertisers. (Google+ doesn't exactly fit the bill, although it certainly would like to lure away Facebook's loyal users.) User defections, over the long haul, would cause growth to flatten out and advertisers to pull back or pay less for access to Facebook, and ultimately dent profits.

Another strategy might be for Facebook to follow the lead of other online content companies and begin levying a fee -- or offering users the option of a fee to avoid being bombarded with unwanted advertising material. If Facebook today makes about $3.73 on each user in terms of advertising, how many of its 845 million active monthly users might be willing to pay, say, $10 a year to avoid being a target for those ads? Not all of them, certainly, and perhaps not even a majority.

But as one grumpy blogger wrote more than two years ago, "I would pay a fee to be free from the ridiculous amount of advertising on FB… The plethora of ads are barely tolerable." Maybe, if Facebook makes a conscious decision about which principles are in the best interests of both its users and its new investors, it can devise a strategy that makes sense on a financial basis and plays to the "don't do evil" mantra that still appeals to many fans of Google (GOOG).

Related Links:
Facebook’s IPO: 10 People Who Will Strike It Rich
Google Reminds Us What It's Really Selling: Us
Inside Facebook's New Menlo Park Headquarters

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