Facebook Toast? Hot Today, Dead Tomorrow--Like AOL?

For now, Facebook continues to take over the world. Its global traffic is about to blow past MySpace's, its image (and Mark Zuckerberg's) has recovered from the Beacon fiasco, and it has raised a big enough cash pile that it should be able to power through any downturn.

There are some flies in the ointment, however:

• For some early users, the thrill is gone. Our campus correspondent described how Facebook lost its appeal as soon as it tried to become everything to everyone, and we've seen evidence of declining usage in Comscore stats. The result has been less usage from the once-core user base.

• For some geriatric users (a.k.a., us), the thrill has never really been there. Having been raised on email and IM, it's hard to get in the habit of visiting a specific site to figure out what everyone's up to, especially when email accompanies us wherever we go.
  

• The company has yet to figure out a truly compelling business model. Despite often being referred to as the "next Google," Facebook's financial performance actually doesn't look that much like the early Google's. Its growth is impressive, of course, but it has yet to develop its own version of AdWords.

• Most importantly, the "walled garden" social networking model--a single site that retains all your information and relationships and forces you to do most of your business inside it--could be analogous to the 1990s AOL: Amazing industry leader for the first few years, ossified, flawed model for the rest of time.

This week's Economist explores the latter two concerns in detail (the Economist refuses to use by-lines, but we suspect the article was written by the sharp SF correspondent, Andreas Kluth).

Business Model: An Improved Beacon Could Still Drive Big Bucks

On the revenue side, the Economist theorizes that social-networking is just a crappy business--like email. Zillions of pageviews and zillions of users, but peanuts for revenue. The piece cites MySpace's disappointing growth, Google's comments about tough social-networking monetization, and Beacon.

We still think it's possible that Facebook will eventually get some version of Beacon right, and if it does, the business could be extraordinary. Even with a whole Internet's worth of product information and reviews at people's fingertips, the most powerful sales tool known to man is still a personal referral, and we still think there ought to be a way for Facebook to capitalize on that without infuriating users. (The site could start by making the system completely opt-in and compensating users for their information and contributions).

We also think Facebook could begin extracting some sort of tax (revenue share or per-user fee) from the thousands of app and ad companies that are now using its platform to reach millions of users. These apps create lock-in for Facebook, increase usage, and make the platform more valuable (the social network operating system), but a tax at some point could still make sense.

If Facebook can't get Beacon right, it will presumably be able to make a decent living on banners and buttons. At least as long as its walled garden lasts.

Facebook the Next AOL: Thriving Model Today, Dead Model Tomorrow?

The Economist makes the same argument that many of the digerati do: If Facebook doesn't open up fast, it's toast:

“We will look back to 2008 and think it archaic and quaint that we had to go to a destination like Facebook or LinkedIn to be social,” says Charlene Li at Forrester Research, a consultancy. Future social networks, she thinks, “will be like air. They will be anywhere and everywhere we need and want them to be.” No more logging on to Facebook just to see the “news feed” of updates from your friends; instead it will come straight to your e-mail inbox, RSS reader or instant messenger. No need to upload photos to Facebook to show them to friends, since those with privacy permissions in your electronic address book can automatically get them.

The problem with today's social networks is that they are often closed to the outside web. The big networks have decided to be “open” toward independent programmers, to encourage them to write fun new software for them. But they are reluctant to become equally open towards their users, because the networks' lofty valuations depend on maximising their page views—so they maintain a tight grip on their users' information, to ensure that they keep coming back... It is a drag.

Historically, online media tend to start this way. The early services, such as CompuServe, Prodigy or AOL, began as “walled gardens” before they opened up to become websites. The early e-mail services could send messages only within their own walls (rather as Facebook's messaging does today). Instant-messaging, too, started closed, but is gradually opening up. In social networking, this evolution is just beginning....

The Economist (Andreas?) goes on to argue that the platform for the next great social-networking revolution may that boring decades-old one: email. And if Yahoo, Thunderbird, et al, can eventually develop compelling products out of the future in-box tools they've been describing, this certainly seems plausible. At the moment, however, it's just a dream.

Will This Transition Kill Facebook? Not If They're Smart (And They Are)

The good news for Facebook, in our opinion, is that the highly visible mistakes made by AOL and others should help it avoid the same fate. Mark Zuckerberg is no fool, and he has presumably watched (and learned from) the same AOL-train-wreck we all have.

The other factor that should help Facebook is the relative freedom of operating as a private company. Unlike AOL, Facebook doesn't have to "make the quarter" and risk enciting the wrath of thousands of impatient shareholders (and employees). In the past six months, Facebook has been making baby steps toward opening up--distributing widgets around the web, allowing app developers to use Facebook social graph info on third-party sites, etc. Over the next year or so, Facebook should be able to expand these moves, and eventually, extend its platform to become the "air"-like social graph that Charlene Li describes.

At this point, therefore, we're not ready to conclude that Zuckerberg & Co. are this decade's AOL. We think they have to evolve, but we also think they will. So even though we buy into Charlene's vision of a site-less social-networking future, we're not ready to pronounce Facebook toast.

See Also:
Facebook About to Pass MySpace in Global Traffic
Why Facebook's Growth Is Slowing: Our Campus Correspondent Explains
Facebook's Financial Performance: Sorry, But It's Not the Next Google