In the beginning -- what will surely be known as the pre-IPO phase of its history -- Facebook built itself into a gargantuan presence on the web by mostly offering itself up as the ubiquitous photo album, as well as a means of keeping tabs on "friends." It sold advertisements, making more and more money as its user base grew.
But that business model, it turns out, can only take even Facebook so far: The value of all the things people post to Facebook from an advertising standpoint comes out to less than five dollars a year per user. In its post-IPO period -- an era that begins Friday, with the sale of shares estimated to give the company a market value north of $100 billion -- Facebook has plans to get its fingers into many more lucrative crevices of Internet life. Specifically, the company plans to turn its users into customers.
Despite Zuckerberg's vow that Facebook is and always will be free, experts say users will find themselves paying Facebook in the near future -- not necessarily to use the service, but to promote their posts, pay for apps, subscribe to magazines, or even refresh their wardrobe. Having opened their lives to Facebook, users may soon open their wallets to the social network, too.
While many experts see this as a wise strategy for the web goliath, some see a tension between the past and the future: Can Facebook turn its users into more cash without turning them away? Will the increasing commercialization of a space that once felt like an extension of people's college yearbooks cause some to stop visiting the site, or to share less frequently? Can Facebook stay intimate and authentic -- a place users share updates about their love lives or trade photos of their newborns -- even as it feels increasingly like Times Square, crowded with merchants, billboards and stores?
"Brands selling on Facebook is just not the kind of thing that users are accustomed to. It's not the way they're thinking about using Facebook," said Forrester analyst Melissa Parrish. "It's about connecting with friends, not having a transactional relationship."
Facebook has already started hawking digital goods on its site, from virtual tractors in Zynga games to movie rentals, and takes a cut of all sales on the social network by requiring users to pay with Facebook Credits, the company's virtual currency. These purchases make up a small fraction of Facebook's revenue -- less than 15 percent of its income in 2011 -- and a paltry 1.8 percent of users have ever shopped on the site.
Yet Facebook is poised to set up more storefronts and could soon be charging for books, clothes and even popularity. Facebook is already testing a feature that allows users to pay if they want their posts to be seen by more friends, an option previously available only to brands.
In Facebook's IPO roadshow video, and during its meeting with investors in New York City, company executives said they planned to give users more opportunities to purchase goods on Facebook.
"They talked about applying the payments concept across not just games, but across news and music, and they want to encourage platform developers to create payment opportunities," said Thomas Vandeventer, a managing director at Tocqueville Asset Management who attended Facebook's roadshow in New York.
Facebook could eventually leverage its newly-launched App Center to sell applications, movies, magazines and books, much as Google and Apple have done with their own online marketplaces. Facebook could even expand into other areas of business, and be the digital credit card used to pay for coffee at Starbucks or shorts at the Gap. Facebook, already integrated with over seven million apps and sites around the web, could offer an equivalent of Amazon.com's "One Click" check out, enabling people to use their Facebook profiles to buy products on other sites.
"Right now, Facebook is used for buying virtual goods and digital goods. Tomorrow, it could be like PayPal or going to eBay," said Clara Shih, CEO of Hearsay Social, a company offering social media software for corporations. "You could start to use Facebook as a wallet for offline transactions. Facebook could become a payment platform."
Facebook could face difficulties persuading users to shop where they socialize, however. Previous attempts at setting up storefronts on Facebook have failed: Gamestop, J.C. Penney, Nordstrom and the Gap all launched, then shuttered, shops on the social network.
"So far the evidence is that people, in general, do no want to make purchases while having intimate conversations with friends and family," said Brian Blau, an analyst with the research firm Gartner. "It's not a natural place to do your shopping, but it is a natural place for businesses to do brand marketing."
Even as it pursues new lines of business, Facebook will be challenged to evolve its advertising offerings to satisfy marketers, some of whom remain unconvinced by the merits of Facebook ads. Doubting the efficacy of the social network's $10 million campaign, General Motors has plans to cease advertising on Facebook, the Wall Street Journal reported earlier this week.
But Facebook could sweeten the deal by giving marketers the ability to tap into data about its users in more sophisticated ways. The social network currently allows brands to target members based on their interests, location, gender and other data. Given how much Facebook knows about its users -- and how much more it's likely to learn -- it should be able to offer increasingly personalized ads, and eventually even tell marketers which customers to target. For example, if Facebook notices that 23-year-olds in San Francisco who listen to Lady Gaga have a penchant for Pepsi, the company could either tell Coca-Cola to run ads targeted at this demographic, or suggest that Pepsi launch a campaign featuring the Queen of Pop.
"Right now, they [Facebook] are stingy with what they allow marketers to understand about the pool of people they're reaching," Parrish said. "With its scale, Facebook could extrapolate a piece of customer intelligence and apply it to all marketing programs. It could be a more integrated part of marketers research ecosystem at that point."
Facebook ads may also look less like actual ads as brands take on the guise of friends. Facebook has pushed advertisers to shift their spending from display ads to "Sponsored Stories," posts from brands or individuals that a company has paid to promote.
Making money off of the 488 million users that access Facebook from tablets and smartphones will also consume the company over the coming months, experts say, though they add that Facebook is not alone in its struggle to turn mobile devices into sources of cash.
The social network isn't likely to stop with smartphones, either: Facebook has already started colonizing televisions and cars, and it is sure to continue its spread to other screens, analysts say.
"In the future, social connections will be built into all connected technologies," Blau said. "It will be in your car, in your house, in your refrigerator."
That social ubiquity is Zuckerberg's dream.
"I think that we're going to reach this point where almost every app that you use is going to be integrated with Facebook in some way," Zuckerberg said in his roadshow video. "We make decisions at Facebook not optimizing for what is going to happen in the next year, but what's going to set us up for this world where every product experience you have is social, and that's all powered by Facebook."
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Posted: 05/18/2012 8:06 am