Research Notes

The Future of Facebook

At Strand Consult, our job is to look into the future and make an assessment of how today’s world will change.  In this article we discuss the future of Facebook, what past experience of the web means for Facebook, what Facebook can do to get success, and what value Facebook can create.

Let’s put Facebook within an economic context and the internet industry that emerged about 15 years ago. We can look at the evolution of the industrial revolution to understand what has happened with the information revolution. When a new industry is founded, such as oil, automobiles or telecommunications, there are many players.  After a time, the players consolidate. A single monopoly player, or perhaps an oligopoly, results. From that point, the product or service becomes commoditized. Think of utilities. Do you know who provides your electricity or water?

The same economic process has happened in the internet industry, only the timeline has been compressed.  The web exploded in the late 1990s with many portals and search engines and later with social networks.  Google emerged as the monopoly for search, Facebook; for social networking.

The role of labor is also transformed with each economic revolution.  In the 19th century peasants left the country to work in the cities. In the 20th century we saw labor mechanized in an unprecedented scale in factories.  Now in the 21st century, we see labor transformed again.  We can say that Facebook is the world’s largest sweatshop. Almost one billion people are creating content in personal profiles that are used to sell advertising.  It is the ultimate form of digital slavery.

Of course the users of Facebook don’t think of themselves as slaves.  They think it’s cool to post pictures and share details of their personal lives. But make no mistake. Facebook is a public company bound by the laws of the United States of America with its majority stock controlled by a single individual, Mark Zuckerberg.

To understand the world in which Facebook operates is to under the global advertising industry, almost $600 billion. Consider that just 15 years ago that market was comprised of TV, print and radio. Digital advertising world has managed to take about 1/3 of that total.  The decline of the American newspaper industry, $40 billion in the last 15 years, is equal to Google’s revenue today.

Facebook has looked for other sources of revenue, such as partnerships. It makes half a billion dollars from microtransactions within social games (Zynga’s Cityville for example), but they gaming industry pales in comparison to advertising.

Facebook has tried hard to avoid the MySpace effect, the danger of becoming the uncool nightclub because your mother shows up.  As such Facebook has made deals and acquisitions for cool user-driven technology such as the streaming music service Spotify and photo sharing service Instagram.

Facebook impressed investors with its results: some 900 million users on a relatively low cost basis, just 3200 employees and few server farms.  Facebook can provide its platform at $ 0.30 per user/year while it monetizes at a rate of $ 0.40 per year/year.  However investors are not totally satisfied, especially because Facebook does not have a monetizable mobile strategy.  

The internet paradigm has evolved from portals to search engines and now to social networks. Mobile is obviously the next paradigm.  Consider that half of the world’s Facebook users access the platform with a mobile device.  Users don’t see ads when using a mobile version of Facebook.

Indeed Facebook would like a future in which its website disappears but its technology it is completely integrated in the world through augmented reality and location-based services.  But making money on a mobile device is not so simple as adding ads. Indeed the ads on Facebook itself don’t have click-through-rate in comparison to Google paid search. 

The key to Facebook future is mobile, and there is no better entry than the mobile browser.  The browser controls access to the internet. 

The world’s single most used mobile browser is made by Opera, a Norwegian company that monetizes it browser by selling it to mobile operators.  It appears this match would be made in heaven for a number of reasons.  By purchasing Opera, Facebook will immediately gain commercial relationships to many of the world’s largest mobile operators. The mobile telecom industry itself borders on $1 trillion annually.

Opera does not only have one, but a number of browsers that work across many platforms including feature phones, smart phones, tablets, PCs, TVs, set-top boxes etc. In practice, Facebook could launch their own browser if they wanted to, just like Yahoo is currently doing. If Facebook purchases Opera they will from day one own a browser that is already installed on many different devices across the whole world. Yahoo on the other hand will need to convince all their customers to try their new browser.

With their purchase of AdMarvel two years ago and more recently Mobile Theory and 4th Screen Advertising, Opera has ensured that they are well placed on the mobile advertising market. This is a good position that Facebook can further expand and also a very interesting part of Opera’s business that can take advantage of the mobile traffic that Facebook already has.

Opera has built a very successful App Store which Facebook can use to expand the distribution via Facebook.  Perhaps most interesting to Facebook with its saturated Western markets is that Opera monetizes its activities in India, Russia, Brazil, Africa and Asia, places where Facebook has little to no revenue. 

Facebook and Opera would be a match made in heaven, and it a future that Facebook should acquire as soon as possible.
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