Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

MSFT: Setting Up Facebook For Failure?

Posted by Tom Foremski - November 27, 2007

Tuesday evening I'm in Roy's fusion Hawaiian restaurant in San Francisco with an excellent group of journalists and industry people. The Conversation Group hosted the event featuring their clients and others, in a panel-type presentation.

The panel consisted of:
Om Malik, Editor & Founder of GigaOM
Jeremiah Owyang, Senior Analyst and Web Strategist at Forrester Research
Salim Ismail, Head of Yahoo's Brickhouse
Chris Heuer, Partner at The Conversation Group (moderator)Jeremiah Owyang

I'm seated in a good spot, between Jeff Nolan and David Spark. Spitting distance opposite me is Dave McClure, another favorite of mine. Unfortunately our end of the table is not very well behaved, in fact, most of the table fights for some of the conversation versus our esteemed panel, some of whom are paying for our dinner [which made for a fun evening].

We talked about social networks, and one question that emerged from The Conversation Group, [the PR agency representing some of the people there] was "how can marketeers involve themselves in our social recommendations?"

My answer is that there is no place for them at all, or if there is, they had better tread very carefully.

I will recommend things to my social network only on an occasional basis. Why should I spam my friends or allow Facebook to spam my friends about my consumer choices?

I would probably avoid any online service that seeks to make money from my recommendations, or that offers me a share of that monetization.

[How much money could I make anyway? It would devalue my recommendations to friends if I was seen to be making money.]

For now, Facebook works for me because it hasn't yet started to monetize my network, it provides a lot of positive value, and very little negative value. Once it does ratchet up the negative value by trying to monetize my "social graph," and if it does it in an offensive manner, then I will stop using it. Once I stop visiting my "social graph" on Facebook then that's it for Facebook's ability to monetize my network.

I think this could be the Achilles' heel of social networks--if you push the monetization too far--you will lose your networks.

If I don't visit my social network because the owners are trying to monetize the heck out of it, then they have lost.

I love businesses such as CraigsList and Dogster because they leave a ton of money on the table. They know that you have to provide ten times the value and more, as you pull out of the business in terms of advertising. And their users are loyal and passionate because of that.

Yet Facebook doesn't understand this yet--and it is on a slippery slope.

With MSFT's recent investment is it is now a $15 billion company but it doesn't have the revenues (yet) to support that valuation.

MSFT's investment could be setting Facebook up for failure. Because it forces Facebook to prove its valuation and the only way it can do that is by increasing the monetization of its service through advertising.

The negative aspects of being on Facebook are set to increase without any additional services that provide a positive value for Facebook members.

That means our experience of Facebook is likely to diminish in quality as it tries to justify its valuation.

Is MSFT setting it up Facebook for failure? It's an interesting strategy.

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