Facebook economics
Jan. 11th, 2010 09:26 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
amanda_loddenOver the course of the last year or so, I've noticed that a number of people I know have joined various "I will not pay for Facebook!" groups. Recently, one of them sent me a message, asking my opinion of the matter. While I've already replied directly to her, I opened Facebook this morning to find another person had joined the exact same group she had been asking about.
Perhaps it's time to discuss, rationally, the economics of social media sites such as Facebook.
Mind you, it's entirely possible that Mark Zuckerberg, co-founder and CEO of Facebook, will go off the deep end and start charging. Just because it makes no sense doesn't mean it can't happen. But Zuckerberg has built himself a rather nice empire, and I doubt that he'd be so quick to topple it.
Social networking sites work only as well as they can rope people in. It's no good having a site where you can tell all your friends about your breakfast of salmon pancakes with strawberry-dill syrup and chocolate whipped cream if none of your friends are actually using that site. There's a tipping point, a point at which people will join your site simply because so many other people have joined your site. Why did *you* sign up for Facebook? Chances are, it's because enough of your friends signed up for Facebook that you finally gave in just to see what you were missing. And, if you look closely at your friends' status updates and notes and shared links, you can pretty much figure out which people are the heavy Facebook users and which ones are just there because everyone else is.
So where does Facebook get its income from? See those ads over on the right? That's where Facebook gets its income (which, in 2007, was $150 million dollars.) The more pages you click on, the more ads you get shown, so Facebook encourages anything that makes you click on more pages-- games, groups, events, whatever. Games make their money by getting you to pay (directly or indirectly) for premium points, be it Farm cash or Godfather points or Museum dollars or whatever. When you consider that Zynga (maker of Farmville, Fishville, Mafia Wars, Vampire Wars, Pirates, and others) earns upwards of $30 million per year, it becomes apparent that the folks who make applications for Facebook also have a vested interest in having as many people as possible use Facebook (though it should be noted that Zynga's games are playable on other platforms, including MySpace, and it's reasonable to assume that if another social networking site popped up, Zynga would port its games to that site as well.)
But if Facebook were to start charging, they'd lose a substantial portion of their user base. That means they'd lose a substantial portion of their ad revenue, right off the top. And then that same tipping point that made people flock to Facebook would start to slowly but inexorably drive them away, as more and more people realized that the friends they used to connect with on Facebook were no longer there. The value of a social networking website comes from having as many people as possible using it.
Business ventures being what they are, it wouldn't take very long at all for a new social networking site to come out on top. Perhaps it would be a brand-new site, or perhaps it would be a major re-design of an existing site. Either way, it would take approximately two seconds for budding entrepreneurs to notice the massive opportunity to build a new community, and the race would be on.
Facebook knows all this. They've bet the farm on their ability to get and keep users. So they are not likely to force any of their users to pay a monthly fee. That doesn't mean that they won't introduce a "premium" account level that involves paying a fee, but they'll leave the basic account free. It would be suicide for them not to.
Perhaps it's time to discuss, rationally, the economics of social media sites such as Facebook.
Mind you, it's entirely possible that Mark Zuckerberg, co-founder and CEO of Facebook, will go off the deep end and start charging. Just because it makes no sense doesn't mean it can't happen. But Zuckerberg has built himself a rather nice empire, and I doubt that he'd be so quick to topple it.
Social networking sites work only as well as they can rope people in. It's no good having a site where you can tell all your friends about your breakfast of salmon pancakes with strawberry-dill syrup and chocolate whipped cream if none of your friends are actually using that site. There's a tipping point, a point at which people will join your site simply because so many other people have joined your site. Why did *you* sign up for Facebook? Chances are, it's because enough of your friends signed up for Facebook that you finally gave in just to see what you were missing. And, if you look closely at your friends' status updates and notes and shared links, you can pretty much figure out which people are the heavy Facebook users and which ones are just there because everyone else is.
So where does Facebook get its income from? See those ads over on the right? That's where Facebook gets its income (which, in 2007, was $150 million dollars.) The more pages you click on, the more ads you get shown, so Facebook encourages anything that makes you click on more pages-- games, groups, events, whatever. Games make their money by getting you to pay (directly or indirectly) for premium points, be it Farm cash or Godfather points or Museum dollars or whatever. When you consider that Zynga (maker of Farmville, Fishville, Mafia Wars, Vampire Wars, Pirates, and others) earns upwards of $30 million per year, it becomes apparent that the folks who make applications for Facebook also have a vested interest in having as many people as possible use Facebook (though it should be noted that Zynga's games are playable on other platforms, including MySpace, and it's reasonable to assume that if another social networking site popped up, Zynga would port its games to that site as well.)
But if Facebook were to start charging, they'd lose a substantial portion of their user base. That means they'd lose a substantial portion of their ad revenue, right off the top. And then that same tipping point that made people flock to Facebook would start to slowly but inexorably drive them away, as more and more people realized that the friends they used to connect with on Facebook were no longer there. The value of a social networking website comes from having as many people as possible using it.
Business ventures being what they are, it wouldn't take very long at all for a new social networking site to come out on top. Perhaps it would be a brand-new site, or perhaps it would be a major re-design of an existing site. Either way, it would take approximately two seconds for budding entrepreneurs to notice the massive opportunity to build a new community, and the race would be on.
Facebook knows all this. They've bet the farm on their ability to get and keep users. So they are not likely to force any of their users to pay a monthly fee. That doesn't mean that they won't introduce a "premium" account level that involves paying a fee, but they'll leave the basic account free. It would be suicide for them not to.
