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Facebook's IPO: What's Its Game?

Facebook's IPO: What's Its Game?

I don't believe Facebook has fully figured out the best way to make money. The ads on it, to me, are irrelevant. I've never clicked one -- ever. The pressure to go public and convert insider wealth to liquid currency often drives decisions at companies. Yet it also can lock in a company to the numbers. I don't believe Facebook has tapped its natural business model yet. It's not advertising.

By Steve Harmon E-Commerce Times ECT News Network
02/07/12 5:00 AM PT

As Facebook prepares for an IPO of its stock that may value the company at US$100 billion, it's important to know what sport it's in and if, like the Chicago Bulls with Jordan, dynasties can last.

Michael Jordan was probably the best basketball player to play the game of hoop. He averaged 30 points per game in his career and did things on the court that resembled gymnastics more than b-ball.

He made basketball an art -- made everyone else in the game look like they wore lead shoes.

He had a halo effect. Playing, selling Gatorade, shoes. But Michael didn't come anywhere close to being the best when he tried his hand at baseball. It just wasn't his sport at the level basketball was.

I remember the halo effect for Google from 2003 to 2010, when the company seemed untouchable, unstoppable and maybe even un-topable.

It seemed Google had the Web "locked up" -- that everyone had to pay a toll to be found.

And it did.

Strengths and Weaknesses

The one thing that's true is that every company's strength is also its weakness. Just as an athlete who has muscles developed to be good at jumping may be grounded in a sport that requires no jumping.

Consider that Google's focus on AdWords -- the search keyword ad business that generates most of its revenue -- was a solution for businesses to be found above the noise of search results.

However, not all businesses used it or use it today.

That created a hole that spawned opportunities for new companies that provide businesses with newer and different ways of advertising. In other words, search ads weren't the "be all, end all" of advertising. Neither were display ads, despite Google acquiring DoubleClick to address that sector.

Google's focus on search ads opened the door for these companies:

1) Facebook

2) Twitter

3) Yelp

4) Foursquare

5) Groupon

and many more.

Facebook blindsided Google as the Web expanded from being "information-centric" to being "people-centric." Sure, Google had its first social networking foray, Orkut, but few outside Brazil and India used it. The name was wrong, the marketing was wrong, and the execution was wrong to be a "global" winner.

Basically Google neglected to grow Orkut. It stood in "beta" form for seven or eight years. Finally, last month, Facebook overtook Orkut even in Brazil, where it was the dominant social network with 90-plus percent market share.

Now Google is trying to push Google+ to mix friends with search. It claims 90 million users. It's too early to tell if G+ will be a winner, but it still feels like more of an experiment than anything else. I've tried it and found no "must have" reason to use it. There is no obvious benefit. And showing my "friends" results in search is not relevant to me. It bucks the tenet I believe -- that showing a statistically relevant number is better than a few friends' suggestions.

I think Google could use some critics inside the company to help take it forward, those who challenge the assumptions of things it is doing.

People Directory

Facebook is wearing this year's "halo," having just filed for an initial public offering. Similar to how the media treated Google with awe from 2003-2010, it's now Facebook's turn to be the media darling.

Facebook did what Yahoo's Four11 (an early Web people directory) could have done had it continued to evolve. In many ways, that's what Facebook is -- a people directory. Who, where.

That directory function opens up photo sharing, etc. but you have to have the people finder function at the core, as Facebook does.

Facebook is playing a different sport than Google. Its strength is as a directory of people. Once connected, the network effect and everything it spawns can be applied.

Yet Facebook also has its weakness. Like any information exchange, there's an overabundance of information not relevant to the user. The underlying assumption -- that just because I know a person I want to see what they do/say/think/feel/share -- is not always true. In fact, how many times would you want any friend to be constantly updating you on their inner self, etc? Or how many links reposted from people can you handle?

There's a limit to how many cat videos, weird news items, photos from events, etc., we are willing to digest. And this is Facebook's Achilles' Heel.

The second Achilles' Heel (he had two heels, right?) for Facebook is the overmarketing on the network. This is what happened to MySpace, and it's a main reason MySpace failed. It became a place to tout wares -- radio stations, music groups, and then consumer packaged goods, etc.

Same thing is happening to Facebook. Consumer packaged goods, brands, media companies, TV shows, etc., are inundating it with unwanted information -- the same information they publish on their websites, in many cases.

The unique factor is getting buried as Facebook turns into StumbleUpon meets MySpace and Instagram.

The fact that advertisers and brands are on Facebook is owing to its user base -- No. 1 -- and the lack of a solution from others such as Google. What if you don't want to keyword advertise?

Not There Yet

Despite big numbers in advertising, I don't believe Facebook has fully figured out the best way to make money. The ads on it, to me, are irrelevant. I've never clicked one -- ever.

The pressure to go public and convert insider wealth to liquid currency often drives decisions at companies. Yet it also can lock in a company to the numbers.

I don't believe Facebook has tapped its natural business model yet. It's not advertising. That's just what companies do when they don't want to think about the future or innovate. We have an audience -- let's sell them to advertisers.

That's OK. But I think Facebook is missing a better model and larger opportunity. Somewhere along the way, what's happened to Google will also happen to Facebook. They're both one-sport winners, but they're leaving holes open for others to change the game entirely.


Steve Harmon is a veteran Internet industry entrepreneur and cofounder/CEO of Taleee.com, a company that connects consumers to the best local businesses and products.


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