Since lifting its university-only restrictions in September 2006, Facebook has become the poster child for social networks and attracted more than 65 million users. But will it survive 'the next big thing'?
Years from now, no-longer-young former college students will still be logging into their Facebook accounts.
Although the sentence "I'll Facebook you" might not be quite as common as "I'll Google it", Facebook has been a conspicuous success on the social networking scene. While MySpace is generally reckoned to have a larger audience, Facebook's growth rate remains good enough to impress much larger technology companies. It was the subject of a pitched battle between Microsoft and Google last year to invest in the company. Microsoft eventually emerged victorious, ponying up US$240 million for a 1.6 percent share in November.
Facebook must walk a fine line on addressing privacy — this is difficult and to date its performance has been poor.
Elroy Jopling research director Gartner Dataquest
However, recent evidence indicates that social networking may be cooling as a trend. AOL's buyout of Bebo for US$850 million suggests a change in the market's view of the value of such sites.
Gartner research director Ray Valdes points out that Microsoft's investment valued each user at over US$200, while AOL's buyout effectively valued each Bebo customer at a rather more paltry US$28. "The US$15 billion valuation [implied by Microsoft's investment] was a high-water mark," Valdes said in an e-mail interview.
To justify that investment, Facebook needs to make money, primarily by selling advertising. While it can claim an intimate knowledge of its users interests, that hasn't produced much cash so far.
"The consensus industry forecast is that Facebook took US$150 million in revenue in 2007 and approached a break-even position," Gartner Dataquest research director Elroy Jopling said in a SWOT analysis of the company recently. "Facebook employs its users' demographic and lifestyle attributes to pump advertising at them, but there are questions over whether Facebook will garner enough clicks on advertisements that can generate significant ongoing revenue."
Max Kelly, Facebook security chief
As a privately held company, Facebook itself rarely talks about its strategies — the company did not respond to requests from ZDNet.com.au for an interview. The consensus of industry watchers is that while Facebook's success to date has been remarkable, maintaining a dominant position will be difficult for financial, technical and social reasons.
Facebook's challenges
As it has become more prominent, Facebook has faced fresh challenges. The most obvious roadblock in Facebook's monetisation attempts is an ongoing concern over user privacy.
Facebook profiles are frequently fingered as a potential goldmine of information for identity thieves, while the company's 2007 launch of its Beacon advertising technology — in effect, promoting where you've bought stuff online to your friends — caused a major backlash due to confusion over how to opt in or out of the service.
"Facebook must walk a fine line on addressing privacy — this is difficult and to date its performance has been poor," Dataquest's Jopling said in his analysis.
However, some of Facebook's critics suggest that it has improved in this area. "Facebook has been under a fair bit of privacy-related pressure over the past year, from the media and from its own user base," said Paul Ducklin, Asia-Pacific head of technology for security software vendor Sophos. "The results have been positive, with Facebook backing down from various data mining ideas, and improving the built-in security features in its service."
Around 41 percent of Facebook users added Freddy as a 'friend'.
Credit: Sophos
An infamous Sophos experiment to see how carefully users vetted their friends showed that 41 percent of people were willing to befriend a green plastic frog. But even those missteps have some value, Ducklin argued, as they stimulate debate: "This helps to reinforce the idea that security and privacy are important, not just for businesses, but also for individuals."
This week, at the Infosecurity Europe conference in London, Facebook's security chief Max Kelly admitted the site was increasingly being targeted by cyber criminals.
Kelly said the attacks have become serious over the past few months.
"January was the month we became noticed by threatening elements. These are the same threats as any other large network would experience ... We are definitely a target for spammers. Data harvesting has become an issue for us," said Kelly, adding that such harvesting attempts were generally unsuccessful but "that doesn't keep people from trying".
Another difficulty for Facebook is workplaces banning the site and thus potentially reducing its audience.
That argument normally divides along familiar lines: companies with barriers argue that sites like Facebook are a massive drain on productivity, while pro-networking companies say the sites offer both business opportunities and a chance for overworked staff to let off steam.
The number of blocking companies seems to be increasing. A 2007 survey of 600 workers by Sophos found that less than 50 percent of firms blocked access to Facebook, while a regional survey by IDC in January found that more than half of businesses were banning access, suggesting companies may be stepping up their efforts to control use of the site on company time.
However, Sophos' survey also found 8 percent of businesses did not block Facebook because they feared a worker backlash, a situation likely to become more common as more tertiary students for whom Facebook has been a constant presence enter the workforce.
A more realistic attitude may eventually prevail. "There's no shortage of time-wasting activities available to employees on the Web and off, so blocking social-networking sites will not magically make an unmotivated employee more productive," Gartner's Peter Firstbrook pointed out in a recent paper on the topic.
Also lurking in the background is the threat of a takeover of Yahoo by Microsoft, creating a large and potentially hostile advertising competitor. Such a deal might actually be to Facebook's advantage in the short term, as most analysts believe that integrating the two companies would take considerable time and effort, delaying any efforts by either brand to launch a major social networking platform.
However, it would also definitively turn off the Microsoft funding tap, Facebook's biggest single source of cash to date — the company's Facebook stake was the biggest Web 2.0 investment in 2007, according to Dow Jones VentureSource.
Ray Valdes, Gartner research director
Developing trends
Facebook's biggest trump card remains its developer platform, introduced in May 2007, which lets third parties build new applications for the site. While the Google-backed OpenSocial initiative promises greater transparency, to date Facebook has had a lock on the market by virtue of user numbers.
That situation may slowly be changing. Companies seeking to incorporate social networking features into enterprise systems such as CRM have turned to OpenSocial, with Oracle being the most prominent recent example.
If Facebook doesn't embrace such possibilities, it may be overtaken by others, though this will likely take some time. "This limited-scope specification is just an early step in what will be a prolonged battle in the social-platform market," Gartner's Valdes said.
Despite that, market watchers don't see an immediate change. "[Facebook] continues to lead the competitive field in terms of the size of its ecosystem," said Valdes. He estimates that Facebook has 200,000 registered developers and 20,000 deployed applications.
Ray Valdes, Gartner research director
"Facebook has a key strength in its developer platform that enables a community of tens of thousands of outside developers to build new applications that will hold people's interest and attract new audiences. Facebook has managed to 'herd the cats' and remove some of their sharp claws at the same time."
Those new features may be necessary to overcome the "social networking fatigue" which has seen previously dominant sites with similar features, such as Friends Reunited in the UK or Classmates in the US, eventually lose momentum. "Students and youths built Facebook but their fickleness could see them just as easily move their loyalty to the 'next big thing'," Jopling noted.
Yet Valdes argued this may not be a major concern: "I do not see the audience deserting it. Years from now, no-longer-young former college students will still be logging into their Facebook accounts."
But keeping them logged on for a long period of time may be harder, Valdes acknowledged: "Of course, if Facebook slows down its pace of innovation, then the primary activity of these Facebook users may be elsewhere."
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