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Facebook, by stealth, putting the fee into feeds

Mark Zuckerberg appears to be quickly finding out the pitfalls of public markets. Facebook shares continue to be sold down, closing yesterday just above its all-time low at $US26.81 per share,  giving the company a market value of $US56 billion. Before Facebook’s IPO, a company growing from nothing to be worth more than $50 billion in less than a decade would represent one of the great business success stories. But when you’ve got speculators sitting on losses of more than 30% in less than a month, the fanfare is somewhat dimmed.

The main benefit of public capital markets is to provide solid liquidity for owners. The liquidity allows public companies to trade on a higher earnings multiple than less liquid, privately held enterprises. In short, because investors can more easily turn their ownership interest into cash, they are willing to pay a premium for every dollar of earnings. The downside of public markets is that investors are far less patient and problems are magnified. While long-term private owners are willing to slowly build the intrinsic value of a business, investors in public companies will more closely look at quarterly results, or in the case of technical traders of high frequency traders, not consider the fundamental performance of a business at all.

What that means for Zuckerberg is that he no longer has the luxury of time and the ability to prioritise Facebook’s user experience over shareholders returns. This creates a conflict — Facebook has been able to grow its business and create the world’s best network effect to almost a billion members by providing them with a superior user experience, this experience was largely created because Zuckerberg placed product innovation ahead of profits.

It may be a coincidence, but in recent weeks (after its float), Facebook appears to be taking a very different approach to users and clients than when it was a private company. Most notably, Facebook has recently, without any fanfare, started to introduce a system that charges groups to allow them to prioritise posts.

Let me explain.

Most people use Facebook to connect with friends and family — Facebook allows you to keep up with new developments through its “news feed”. (The news feed was introduced in 2006, originally, Facebook users would need to click on each of their friends individually). In addition to connecting with friends, Facebook also allows users to “like” groups — these can be random groups such as “Sydney’s Favourite Restaurants” or a business (like Apple) or group (like U2) can create their own page to post information to fans. When a user likes a group, posts from that group are placed on the users’ news feed (with the placement of the post largely depending on its relevance and popularity). This enhances the user experience — for example, if a post made by Apple or Coldplay is popular (and gets a lot of “likes”) it will appear higher on the news feed of other people because Facebook (correctly) determines that users want to see those popular posts.

However, that virtuous circle has been changed, with Facebook deeming that instead of posts appearing based on news feeds based on their relevance to users, it has recently started charging a fee to groups to place that post higher on news feeds. For example, for a page with 80,000 “likes”, Facebook are charging $15 to reach 4200 people, $50 to reach 14,000 people, $100 to reach 28,000 people or $300 to reach 80,000 people (per post). To compel page owners to pay for posts, Facebook appears to have reduced the visibility of normal (unpaid) posts. This will have two direct effects. First, Facebook users will be deprived of seeing posts that are relevant to them (for example, previously Coldplay could have posted to Australian fans news of their upcoming concerts, but now, those fans have less chance of seeing that post. Or if Crikey posted a popular article to Facebook fans, there’s less chance it would be seen). Second, and more concernedly, Facebook is turning the news feed into a secret advertising steam. This would be like Google suddenly mixing in paid and organic listings all in the same spot and not telling users which is which.

Charging groups for posts appears completely contradictory to Zuckerberg’s principles in creating Facebook as a means to connect people. In an attempt to extract a marginal amount of profit from groups, Facebook is actively diluting the experience for users.

In the past year, Facebook generated just over $US3 billion from advertisements and $US600 million from other revenue streams such as Zynga. But to justify even a $US50-plus billion valuation, Facebook needs to be develop a revenue stream from search and a substantial transactional business while not damaging the user experience. Turning its news feed into a stealth advertising channel is unlikely to help.

2
  • 1
    Mark Duffett
    Posted Friday, 8 June 2012 at 2:14 pm | Permalink

    solid liquidity”??

  • 2
    zut alors
    Posted Saturday, 9 June 2012 at 4:11 pm | Permalink

    I don’t get the point of Facebook.

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