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Facebook's Biggest Problem

The social network is making money--but not enough for Wall Street. Here's why small business, in part, is to blame.
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Unless you've been living in a vacuum, you know that Facebook's stock has been reeling. Sure, the company is making money but not nearly enough to satisfy Wall Street.

The company has built the largest trove of data the world has ever seen and is rapidly closing in on one billion users. But Facebook still has to figure out how to monetize its increasingly mobile user base in the post-PC or "PC plus" era.

In this post, I'd like to look at one of Facebook's biggest problems from the perspective of a small business owner.

The Power of Free

For many reasons, I'm pretty active on Facebook. Yes, I like to keep up with my friends (and make new ones), but there are legitimate business reasons for spending a decent amount of time each day on the social network. In my case, I manage six Facebook pages. Why six? Well, I am the founder and owner of two small businesses and have written four books. Because of the ubiquity of Facebook, I easily set up pages for each endeavor. And why not? It took very little time, cost virtually nothing, and allows me to potentially reach some of those 954 million users.

And when someone likes one of my books or companies, Facebook tells me when and who (and sometimes why). That is, I can easily identify the fans of The Age of the Platform, for instance. Because of this, I don't have to run ads. Sure, ads would theoretically allow me to reach more people, but ads are not free and their effectiveness is suspect.

And I'm hardly alone here. The ability to reach potential customers sans payment is arguably the chief reason that General Motors stopped advertising on Facebook, although the company is rumored to be rethinking that decision.

Consider Amazon's approach for a moment, because it serves as an instructive contrast to Facebook here. Anyone can like one of Amazon's products by clicking that button on its page. However, that "like" data is only visible to Amazon employees--not the author of that book nor the maker of that widget. As such, only Amazon can directly identify and market to those people. I as an author and small business owner cannot circumvent Amazon.

In effect, Jeff Bezos has ensured that Amazon will be a part of every transaction on its platform. Affiliate marketing programs incentivize users to promote Amazon products on their own sites. Google does the same thing with AdSense. For his part, Steve Jobs recognized the cardinal importance of the direct relationship with the customer when he negotiated a deal with The New York Times for the iPad.

Simon Says

It's tricky to strike the right balance between open and closed. One one hand, if a platform is too closed, then it may not grow at all. On the other, as Facebook has seen, there's a real risk in giving companies like mine and people like me the ability to directly reach new users and customers (and subsequently circumvent ads and other revenue streams).

What say you?

IMAGE: Flickr/babyben
Last updated: Jul 30, 2012

PHIL SIMON | Columnist | Author and tech consultant

Phil Simon is a frequent keynote speaker and recognized technology expert. He is the award-winning author of six management books, including The Visual Organization: Data Visualization, Big Data, and the Quest for Better Decisions.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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