Facebook’s woes and what it could have done instead

August 1, 2012 by Joshua
in Blog, Entrepreneurship, Leadership

If you know me, you’d expect Facebook’s woes to mean the problems Facebook inflicts on its users who haven’t left it yet. After all, leaving Facebook is easy and fun. Yes, they’re reaching a billion users, but I’m no longer one of them and once you leave the site seems weird, like why would you do business with such a creepy company.

From the New York Times, Facebook Shares Plummet in an Earnings Letdown: “Unhappy with Facebook’s first financial report as a public company Thursday, investors fled the stock in droves…”

Most of you probably expect the drop resulted from my calling the company creepy and you may be right, but I think the greater problems come from inside Facebook, and decisions they made based on their models of what they do.

Facebook’s strategic blunder: choosing the wrong model

To clarify, my measure for right and wrong in the headline above is not total profits, but how much users like the site. Personally, I like social networking sites and I skipped Myspace when I switched from Friendster to Facebook because it had a clean interface and was started by a college kid. I didn’t like Myspace because I didn’t want to do business with Rupert Murdoch.

I’ll describe Facebook’s models, how they led to a company poised to fail, and what they could have done instead that make their users love them.

The New York Times reports what we all know: “Facebook has been aggressively experimenting with how to exploit all this data for its advertising efforts.” As most of us eventually realize, Facebook’s users are not its customers. Facebook’s users are its product. It’s customers are the advertisers.

Facebook’s old model: who it was

When I joined Facebook it was something of an upstart — started by a college kid, overtaking Murdoch. Since its ownership made it feel more human, I felt more comfortable using it. It had a cleaner interface that I found easier to use.

So Facebook’s model seemed to be to deliver what the user wanted.

Facebook’s model: who it beat

In Friendster’s day, anybody would expect the first player to achieve a network effect would win the market. Then Myspace overtook Friendster. Then Facebook overtook Myspace. It seems clear that expectation can be wrong.

As Facebook grew, its model seemed to morph into becoming a profitable media company. Its model seemed to resemble Myspace’s, an odd choice, considering that model just got beaten.

The consequence: Facebook’s interests conflict with its users’

Now Facebook has nearly a billion users. How many advertisers do you think it has? Thousands? Tens of thousands? Since the advertisers provide all the money, it has to please that roughly one-millionth of the entities it interacts with, sometimes at the expense of its billion users.

Think about that — Facebook has to act against the interests of a billion to please the other 1/1,000,000th.

Users’ privacy stands in the way of its profits. It makes the company creepy, the site byzantine (especially opting out), and its policies slippery and deceptive.

A model Facebook could have adopted

Facebook’s original appeal included its being entrepreneurial and simple.

Could Facebook have modeled itself on Craig’s List? Craig’s List is one of the most trafficked sites on the web, yet last I checked had fewer then two dozen employees. It’s not trying to maximize profits or sell its users to advertisers. And what do you know, it remains profitable and popular.

I remember seeing Craig Newmark speak at Columbia some years ago. I forget the overall topic, but it was partly about the post-tech-bubble recession that bankrupted many ventures. Since he talked about starting the site, people asked him why they didn’t try to maximize profit. They showed that attaching just one ad per page view would make the company hundreds of millions of dollars.

I think he understood the slippery slope that change would bring. As questioners prodded him about making more money he asked them, politely and much less directly than I’m writing here, “I’m running one of the biggest and most loved-by-its-users sites on the internet, it’s survived unscathed a recession that brought down most of an industry, and you’re suggesting I be more like the failures?

Facebook’s social networking aspect is simple relative to managing all its users privacy. Don’t get me wrong, I know the social networking aspect is complicated — I once helped build a social networking site — but passing messages around is much simpler than managing permissions. And managing permissions when the interests of the company itself conflicts with the users must be extraordinarily complex — technically (relatively easy) and socially (relatively yet more complex).

Take away the conflicts of interest between the company owning the data and its users and you probably have a much simpler site — more complex than Craig’s List, but simple enough to be run comparably — with a small staff (not as small as Craig’s List’s 31 people) focused on maintaining the user experience above all.

Why this post?

This point makes little difference now to Facebook. I’d like to think another site, maybe more like Craig’s List (Diaspora, perhaps), will overtake it like Wikipedia overtook Encyclopedia Britannica. And maybe one of my readers in a leadership position today or later will value their users a bit more than they would have otherwise.

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2 responses on “Facebook’s woes and what it could have done instead

  1. Hi Joshua,

    I just wanted to leave a small feedback and believe you appreciate it. I think you have some good points here, but the question is: How can you make money from 1 billion users so that the website can be maintained and developed?

    You compare Facebook to Craigslist, which is not a great comparison, because Facebook is a major player world-wide. Craigslist on the other side, is completely irrelevant outside the US. They might have a few major cities in Europe for example, but nobody uses that site. Nobody outside the US knows about Craigslist. But everyone knows Facebook.

    The US has roughly 330 million people. That means, if everyone in the US has a Facebook account, there are still 670 million people outside the States that use Facebook.

    Craigslist however is smaller by several magnitutes (and thus can probably allow less employees, less servers, less money spend on infrastructure), because it is restricted basically to the States.

    This doesn’t change much of your point – to care more about customers and honestly, I have no idea how Craigslist makes money anyways – but I believe Facebook is in a way different position and requires to make much more money.

    • I agree with your points about Facebook now. I was trying to look from a leadership perspective, to look at the choices Facebook’s management made when it was smaller and they could choose its direction. From Zuckerberg’s choices, it’s hard to imagine him choosing not to go as big as possible, but they once could have. Now, as a public company, they can’t so my post is academic for them, but possibly something others can learn from.

      Craig’s List may be small, but it basically displaced all newspaper classified ads, a long-established market. Well, I haven’t researched them, so I could be wrong, but it looks like that to me.

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