As prepared for IT Strategies, University of Denver PMBA. References John Gallaugher’s “Information Systems: A Manager’s Guide to Harnessing Technology:”

“Often Imitated. Never Duplicated.” Whoever it was that first uttered this famous marketing adage, it is certainly appropriate as a descriptor of Facebook. The darling of Web 2.0, its meteoric rise has seen it hit milestones that seemed simply impossible five years ago

• Microsoft (yes Microsoft) paid $240m for a 1.6% stake, which can imply Microsoft valued Facebook at 15 billion dollars
• Facebook overtook MySpace in 2008 as the largest social network in the world

But despite these heady numbers, we have to ask: is Facebook worth it?

The Issue At Hand

The reach of Facebook into the daily lives of people around the globe is analogous to religion or politics. Indeed, Facebook has played a leading role in the uprisings spreading across the Mideast. Facebook Connect and social plugins now often replace the discussion area on websites. Facebook is used as the login verification system for a variety of websites like LivinSocial.com. As Gallaugher points out, Facebook is enveloping the web and other business models.

However it is Facebook’s business model that is the “issue at hand.” Google’s remarkable stock price increase over the last few years has reflected what its financial statements have consistently shown: its paid advertising is a cash cow. When people visit Google and search for “clearance hiking boots,” advertisers have made the resulting ads their “store windows” for Keen and Timberland boots.

Facebook’s strength is in its social reach. However, Facebook’s own research indicates “an average Facebook user with 500 friends actively follows the news on only forty of them, communicates with twenty, and keeps in close touch with about ten.” So when a user indicates a like for hiking, are they necessarily indicating a need for hiking boots, or will the ads simply seem annoying? When their friend shares pictures from their great vacation to Mexico, the readiness of their friends to make a similar purchase is not necessarily implied.

Can Facebook profit from the gargantuan amount of consumer data it has without creating a privacy debacle (as they have before) that creates a mass exodus? Can it create dependable revenue streams with its partners and advertisers? Or from a Profit and Loss standpoint, is Facebook all bark and no bite?

Potential Solutions

At the heart of Facebook is what Mark Zuckerberg calls the “Social Graph.” Like it sounds, it is the global mapping of users, organizations, and how they are connected. All potential solutions for Facebook come back to leveraging this social graph, and the reach it has into how people connect with one another.

1. Paid Business Profiles: having a business profile on Facebook is becoming commonplace, like the Yellow Pages of today. By charging a nominal fee (say free for 6 months, then $19 a year), Facebook could raise significant capital. They would risk losing market share to Twitter, which already may have the advantage for businesses seeking to reach potential customers.
2. Ecommerce: Some businesses are already providing purchasing opportunities through Facebook, but providing a feature-rich, secure ecommerce platform through Facebook has significant market opportunities. For established businesses it allows them to sell socially, targeting their products to very specific demographics. For new businesses, this could allow them to forego a significant investment to setup their own ecommerce website, and focus their sales on the global Facebook community.
3. Payment System: PayPal has made a fortune on transactions that are low price and high volume. Facebook could become their own payment processor for all commerce done through the website. Making money in this manner requires high volume – something Facebook has in full supply.

Recommended Solution

The solution I recommend is a combination of all three. Together they build a comprehensive business platform for millions of small businesses in the US and globally. Greater adoption of the platform would include greater benefits:

• Those who use the Facebook Payment System also receive their business listing for free.
• The Facebook Payment system could be expanded to mobile devices, extending the social selling to consumer’s pockets.
• Facebook could become what eBay was 5 years ago: THE prime place to start an online business with an active, engaged community of consumers.