Could Facebook Sell Water To Its Users?

The common theory in internet startups is that companies should focus on growth first and then focus on monetization. Facebook stuck to this strategy for all of 2008 and could possibly use the same strategy in 2009, but is that the right thing to do? Many outsiders have been extremely critical of the company that has yet to generate substantial profit worthy of all the hype and perhaps the criticism is well deserved. Last night I was reading Warren Buffett's biography, "The Snowball" which starts off describing the scene at Allen & Company's annual retreat in Sun Valley in 1999 during the peak of the bubble. At that event Warren Buffet gave the last keynote during which he made an interesting statement that was intended to strike out against those participating in the internet hype: "It's wonderful to promote new industries, because they are very promotable. It's very hard to promote investment in a mundane product. It's much easier to promote an esoteric product, even particularly one with losses, because there's no quantitative guideline. But people will keep coming back to invest you know. It reminds me a little of that story of the oil prospector who died and went to heaven. And St. Peter said, 'Well, I checked you out, and you meet all of the qualifications. But there's one problem.' He said, 'We have some tough zoning laws up here, and we keep all of the oil prospectors over in that pen. And as you can see it is absolutely chock-full. There is no room for you.' And the prospector said, 'Do you mind if I just say four words?' St. Peter said, 'No harm in that.' So the prospector cupped his hands and yells out, 'Oil discovered in hell!' And of course, the lock comes off the cage and all of the oil prospectors start heading right straight down. St. Peter said, 'That's a pretty slick trick. So,' he says, 'go on in, make yourself at home. All the room in the world.' The prospector paused for a minute, then said, 'No, I think I'll go along with the rest of the boys. There might be some truth to that rumor after all.' I'm really pushing the metaphor with this joke but the point is that it's easy to get caught up in the hype surrounding the massive growth that the company (Facebook) is experiencing even though the underlying revenue doesn't grow at such a rapid pace. It's easy to hop on board believing that the company is the next Google, which in fact it may definitely be, but there still isn't revenue to support such an argument. The growth numbers (including the ones I posted this morning) are presented as a way to highlight the growing opportunity for monetization that exists within the site. One article I read recently said that Facebook could sell water to its users and make a billion dollars. I'm assuming that the joke wasn't meant literally but was stated to emphasize the opportunity, just like the constant growth updates are a constant reminder to us of the growing opportunity. Personally, I've used a similar model with this blog which has been growth before monetization. It's a far reach comparing Facebook and this blog but the monetization point can still be made. At a certain point a company has to begin selling products or services via their available marketing channels. Facebook is a huge marketing channel and while the company could sell products themselves, offering a platform for others to market presents a much greater opportunity. Facebook has made few updates to their advertising platform though, only recently releasing a basic reporting feature. I would expect the system to get upgraded sometime in the near future but there have been no signs as of yet. That may have also been the reason behind the disgruntled Facebook employee earlier this week. Whatever Facebook's logic is, it would be nice to see some sort of rational behavior in regards to monetization. While the internet industry is the one industry that focuses on growth before revenue, in the midst of a recession it seems almost foolish to continue with the existing strategy (as far as we can see from the public perspective). What would be reassuring is some sort of public facing trials of new monetization models including Facebook's indefinitely postponed payment platform. Do you think monetization planning for Facebook is still premature? Could Facebook sell water or is improving their advertising platform the quickest route to maximizing profitability?

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Could Facebook Sell Water To Its Users?

Nick O'Neill

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Nick O'Neill