Forget the Phone, Facebook. Just Charge Users
Here are three facts about Facebook that are related:
- It received $2.24 billion in funding while still private.
- The investors eventually want a big payday given all the hype and expectations.
- Facebook stock is still down close to a third from its IPO price in May 2012.
Those three facts drive much of the company's focus. Revenue must justify all the attention and investment controls everything the company does, and that translates into virtually every decision that Mark Zuckerberg and his management team make, whether charging for the right to send messages to anyone or enraging users by modifying the site's interface to generate ever more advertising dollars.
Zuckerberg revealed what appears to be the latest approach to the revenue question Thursday at a press conference: the rumored Facebook phone, called Facebook Home, which will integrate the social network into the home screen, making it the place to go for "your messages, photos, recent stories." An icon of your face lets you swipe up and reveal apps, with real-time Facebook message alerts popping up over everything else. Yes, this is the phone that Zuckerberg categorically said his company was not involved in developing and had no interest in pursuing. Although, to be fair, Facebook isn't developing the hardware; this will be "a family of apps" highly integrated with the software of Android phones. Facebook Home will be available as a free download from the Google Play Store starting April 12. HTC and AT&T are working on a device that will come pre-loaded with Facebook Home.
Same Strategy, Different Tool
The rationale is understandable. Drive notifications to the home page and you might get people to spend more time exposing themselves to Facebook ads. Own a variation of Android (like Amazon has done with the Kindle) and you can collect data that becomes valuable to advertisers. It's the whole litany of reasons you could predict.
But independent of how many people really want Facebook in their faces so often and so prominently, what the company is effectively demonstrating is a problem that can snag almost any entrepreneur, no matter how wildly successful. Find one approach to the revenue problem and it can become too easy to look on every financial challenge as one that calls for the same tools. Google is an example. Even though the company has become huge, it still derives almost 95 percent of its revenue from advertising. If anything in the future disrupts its business model, Larry Page and company have no alternative available.
Facebook has gone down a similar road. In 2012, 84 percent of its revenue came from advertising. In 2011, ads provided 85 percent of the revenue. To make more money, it looks at how to get more advertising dollars.
When you only use one tool, you can get miss other opportunities as well as subject yourself to the limitations of that tool. For Facebook, the limitation has been in the amount of money it can make per user. In 2012, the average across all users was $5.32, a fraction of what Google manages. In its most lucrative territory, North America, Facebook made $13.58 per user. But that's still a limited amount of money to make from monetizing use.
Think Broader, Facebook
Maybe it's time for Zuckerberg et. al. to think outside what are largely self-imposed limitations. Why not offer a paid membership for those who don't want to see ads? Facebook could likely charge $5 a month as a solution to the first-world problem of ad irritation. That would be $60 a year, or about 4.4 times as much as the company makes off those people today. Charge even more for special services, in a nod to working freemium business models.
Perhaps there are other services that the company could consider. With due consideration to privacy issues, perhaps Facebook could offer some sort of employer or school screening service. Maybe recruiters would pay for enhanced access and the ability to email users (with perhaps an option for people not to receive such solicitations).
This is not just a Facebook issue. Any company will eventually hit plateaus in performance. That's when an entrepreneur has to break out of the business-as-usual box and find a new solution to problems. It's not easy, of course, but who said that running your own business should be?
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.