Value Creation and Monetization at Facebook

Combined business models, micro-transactions, mobile & tablet commerce and the use of data based on personal interests

Value creation and monetization at Facebook: to succeed, other revenue streams than advertising and app revenue share should be developed now.
For many people, like Google, Facebook became a stop in any Internet session. The firm has developed an engaging experience for users that make them dependent from the social network: almost all their “friends” are there and this volume of contacts is not available elsewhere.

Facebook should look at the successful business models developed in China.

Current data are available for free

Facebook offers its service in exchange for the right to capture and collect a huge volume  of demographic and preference data from its users. That data is extremely valuable to brands. Marketers and advertisers can use the data efficiently because it is detailed and personal.

The social graph is a core asset of Facebook representing people and the connections they have to everything they care about. Today, the social graph, or profile information database, is not used for business with third parties outside the Facebook website: Facebook has restricted its business partners to using the data it provides to approach users exclusively within Facebook website. From the social graph, it is free to find and score similarities in the social data of different groups of people. It is possible to produce a graph of preferences and identify people who share a common brand affinity.

The Graph API presents a simple, consistent view of the social graph uniformly representing objects (like people, photos, events, and pages) and the connections between them (friendships, likes, and tags) (Facebook Inc, 2012). The Graph API enables partners to read and write data to Facebook. Through “Facebook Connect”, the protocol allows businesses to have on their own websites all the features currently found on Facebook such as the “Like” feature, allowing user actions to show up on people’s profiles, publish that action across their friend’s newsfeeds. Facebook is now better implemented building a higher volume of data on how Facebook users interact with sites within and beyond the Facebook walls. The feature called “Facebook Connect” is a win-win situation: the firm gives to the brand access to Facebook users real name, email address, profile picture and list of friends. In exchange, the brand shares the activity of Facebook users on the site of the brand. Both Facebook and its partners can understand better users’ habits across the larger web. Knowing interests of an user is a key piece of information. 

The Open Graph Protocol allows third-parties to access most, if not all, of any Facebook user’s data as long as they are opted into the program through their security settings. We can note that all users were automatically opted into the Open Graph Protocol (Open Graph protocol, 2012).

The volume of participation is a critical component. With the right level of engagement and participation, a social circle may influence another social circle to participate with the external offering, whereas, previously, I mean without a “friend” connection, that level of comfort to engage with an external site may not have existed. Brands have the opportunity to track and offer incentives for people promoting their brand.

Facebook might be able to build a web ecosystem where a user’s needs can be anticipated, understood and personalized for them: it is called semantic web.

Facebook Inc. understood the opportunities of collecting user data on interests much more of what we can believe. Today, Facebook is mainly an advertising platform. The business model of Facebook will change from the advertising model to combined business models (advertising, payment, merchant, and infomediary).

Advertising Model

Facebook sells ad space on its site. Like other Internet firms, Facebook is offering personalization in online advertising with one-to-one advertising. Facebook helps its clients to aim their ads at specific groups of Facebook users, based on elements of its users’ profile data.

Facebook Ad

In the online-advertising ecosystem, the brand or individual is able to collect metrics and analytics. That‘s mean, the brand or individual knows the impact of its campaign. This demand of brands for user data is important for Internet players.

An issue with the advertising model is the impact of the world economy on the business. With the crisis, Google’ revenue was impacted with a light decrease of advertising revenue on the first semester of year 2009. However, the main challenge for Facebook is the behavior of users: advertising on smartphones seems less efficient than on computers. Advertising on tablets shows good results and the growth will come as well from this kind of other connected devices.

Payment model: applications and virtual goods

App Revenue

Facebook takes in a percentage of revenue generated by applications hosted on Facebook through revenue-sharing agreements with developers who created and own the application. Facebook hands over a few categories of public profile data (sex, age, location…) to the app makers, enabling them to personalize the experience of the app’s end users.

Zynga

In 2011, Facebook got 12% of revenue coming from Zynga thanks to a 30% revenue share to Facebook (SECURITIES AND EXCHANGE COMMISSION, 2012). To rely on a unique and main supplier is too dangerous and it is not a strategy.

Micro Transactions & Virtual Goods

The business of micro transactions for virtual goods is booming. When users purchase virtual goods using Facebook payment infrastructure, the firm receive fees that represent a portion of the transaction value. The opportunity for Facebook is not only in social games. Taking the example of Tencent, virtual goods can be used for many other purposes like avatars and other online benefits internally or through other business partners.

According to the report of Strategy Analytics called “Virtual Worlds Market Forecast 2009-2015” (Gilbert, 2009), the worldwide revenue generated from the sale of virtual goods is forecasted to increase to $17 billion by 2015.

Premium Access

Like SinaWeibo, Facebook could charge more for a better and extended experience. The user is able to pay to get additional features.

Facebook currently requires payments integration in games. The firm should seek to extend the use of payments to other types of applications and mobile tools in the near future. The App center will help. Facebook could encourage users to build their own virtual world through virtual goods. Multiplying the number of micro-transactions by giving user the choice to obtain a new and better experience is the right solution. The business model to follow is coming from China: Tencent.

The use of a virtual currency like Facebook credits makes easier micro transactions of real and virtual goods over the Internet. Those credits could be used both within Facebook and on partner websites. The decision to have credits in local currencies should accelerate the use of micro payments over the platform.

Infomediary Model: anonymous social marketing?

Facebook should start charging for access to its user data. User data is potentially highly valuable. Facebook collects a rich set of information from its user profiles. Each profile contains not only the user’s demographic data, but also data about the user interests. Every action adds an additional piece of information: adding a friend, liking a brand, looking at a page or a video…The tastes and buying habits of the users and connections (“friends”) are much better predictors of what the user is likely to buy, than is age, sex, and location data. As a consequence, selling anonymous user data is a good way to make money sharing knowledge of people interests, those people being potential buyers of products.

Application developers could have to share a higher percentage of revenue in order to benefit from user data.

Facebook could decouple its user data from its platform and license it to large web marketers or directly to large marketers like L’Oréal, but in an form with anonymity that contains no personally identifiable information. External marketers and advertisers might be interested by the use the data to target ads or other content to potential customers either online or offline. A marketer from firms such as Procter & Gamble or LVMH, could compare this combination of demographic and preference data, and determine similarities with people who have already bought their products.

The sale of user data is an easy way to quickly monetize assets.

Market insights are another value that could be created by Facebook. With its huge database, the firm can sell specific insights corresponding to the needs of their clients.

Merchant model with e-Commerce Transactions: Facebook can become a key tool in the purchase decision process

Merchant model with e-Commerce Transactions: Facebook can become a key tool in the purchase decision process

e-Commerce is appealing downstream opportunity to leverage the existing platform thanks to the following strengths: a massive logged-in user base; insights into users’ interests; and the network’s ability to enhance “word-of-mouth” effect by users. Facebook should build payment relationships with consumers; and promote the existing billing system.

With the amount of volume of activity and users the firm has, extending a business model with current customers is easier and faster (Zhenga Lindgardt, 2009).

The firm should develop new features in order to become a main source of commerce. An advanced and innovative search function with an option based on interests would be a powerful tool. The company should be able to charge a fee based on a percentage of revenue generated through the platform.

The knowledge of actual tastes and preferences of Facebook users makes the social network very attractive for discovery of products and services, and online purchases. If Facebook changes and improves its mobile strategy, mobile commerce could become beyond year 2020 the first source of revenue. The firm could charge for the store and asks a percentage of each transaction (1%-3% according to the product or service). We can expect Facebook being the link between a brand and a potential customer through her/his history of interests. Douban developed mobile applications based on interests. Facebook is able to do better.

For most users, Facebook is able to personalize better than any other firm the purchasing experience around the data the American firm owns. The process could take into consideration the world and interests of a unique user.

A the time of decision to purchase or not a product or a service, the social connection gives confidence in buying if the perceived value and benefits of the products are recommended by “friends”.

Nobody knows well the future of the firm, even the task is difficult and risky, below is a wise forecast:

Conclusion

To conclude, as explained, Facebook Inc. is likely to generate much more revenue from user data through mobile & tablet commerce, and infomediary in the years to come. Personal data on Interests are the key assets and should be used through mobile applications and search. The profitability of the firm could also increase under the condition the company follows the path of Tencent, one of the world leaders in the business of micro transactions. The business of virtual goods is growing and highly profitable: Facebook should take advantage of this kind of opportunities.

Bibliography

Facebook Inc. (2012, May). Core Concepts – Open Graph – Tutorial. Retrieved May 29, 2012, from Facebook Developers: http://developers.facebook.com/docs/opengraph/tutorial/

Gilbert, B. (2009, June 1). Virtual Worlds Market Forecast 2009-2015. Retrieved January 21, 2011, from Strategy Analytics: http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=4779

Open Graph protocol. (2012, March 22). Open Graph protocol. Retrieved April 12, 2012, from Open Graph protocol: http://ogp.me/

SECURITIES AND EXCHANGE COMMISSION. (2012, February 1). REGISTRATION STATEMENT ON FORM S-1. Retrieved May 27, 2012, from SEC: http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm

Zhenga Lindgardt, M. R. (2009, December). Business Model Innovation. Retrieved April 23, 2012, from BCG: http://www.bcg.com/documents/file36456.pdf

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