facevalue

The Economist gets it wrong when claiming that “social networks lose value once they go beyond a certain size.” (Social graph-iti, October 20th.) The British weekly says that the large scale of the networks makes it difficult to restrict one’s contacts to a select group.

But Facebook consists precisely of a web of small overlapping communities. Users only befriend the people they choose. Increasing the size of the overall network does not necessarily affect the composition of any given community. And if people are “spammed by random friend-requests,” an infrequent event by my reckoning, they only need to decline.

The “snob” effect to which The Economist refers occurs only in venues where individuals can’t avoid some form of interaction with the rest of the users. Examples of this would be upscale restaurants or clubs, where increased patronage is bad for everyone: the business loses its exclusive image, and patrons are annoyed by the presence of riffraff.

On the contrary, Facebook becomes more useful as it grows. The larger the network, the more likely it is to find a welcome addition to one’s exclusive circle of friends.

Andreas Kluth, the author of that article in the weekly newspaper, was kind enough to reply to my comments:

I agree with you about the web of small overlapping communities, although my point was that other platforms, such as Ning, are more explicitly built to enable those. But my bigger point, which I could not fit into my word-count, is this: Facebook can choose to become a money machine by aggregating its communities to turn them into valuable audiences, but then it would become like those restaurants you mention. Or it could restrict itself to enabling micro-communities, but then it would be much less valuable as a business.

Oh, so Mr. Kluth’s point is that businesses will not pay much for advertising unless their ads can reach lots of eyeballs. With its current structure of small communities, Facebook is bound to never make much money. I don’t completely disagree with Mr. Kluth. But the value of the company doesn’t reside as much in its sheer size as it does in the closeness among the members of its communities.

The key difference between Facebook and, say, MySpace, is that on Facebook most people actually know and, to some extent, trust their friends -which makes it an ideal venue to implement the internet version of word-of-mouth advertising. This is how it would work. Companies would pitch their products and services to Facebook users who have lots of friends, and then would ask those users to let them place an ad on their home page. (The ads could take the form of a message on a public wall, or some other “cool” widget, to prevent the social network from becoming “too commercial.”) The idea is that the user is personally endorsing the product or service, not selling it. Because of the mutual trust, her friends would be likely to check out those ads. Moreover, most Facebook friends share common interests, backgrounds or socio-economic characteristics, which would make the ads highly targeted. Ads with a high “click-on” rate and a targeted audience would sell at a premium over ads on other internet sites.


On the other hand, as Mr. Kluth points out, the audience of those ads would be much smaller than, say, on Yahoo, since they would reach relatively small communities. So I don’t know whether this strategy would be enough to turn Facebook into a money-making machine.

The Palo Alto start-up seems to be taking steps to boost its revenues. It will soon unveil a new system that “will let advertisers visit an automated Web site to place targeted ads on Facebook and elsewhere,” reports the Wall Street Journal. It remains to be seen whether this new system or its partnership with Microsoft will turn out to be the company’s particular goose of the golden eggs.

In the meantime, everybody is in the dark regarding how much Mr. Zuckerberg’s brainchild is worth. At a conference on “Graphing social patterns,” reports The Economist, panelists valued the Palo Alto start-up at $100 billion. Microsoft places its value at just $15 billion -the software giant bought yesterday a 1.6 percent stake in Facebook for $240 million. That’s still more than 100 times its projected revenues for 2007 –a lot for a company that has not returned a profit in three years. I wouldn’t take any of those estimates at face value.

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