Facebook’s Backdoor Business Model for the ‘New Economy’

Facebook first achieved a positive cash flow in September 2009. This was the first month that Facebook earned more money than it spent to stock the break room with milk & cookies and energy drinks, keep their data servers online, and pay their programmers to dream the little dreams they dream.Market watchers generally assume that Facebook will remain a free service and that profitability will come through advertising revenue. You are probably already thinking about those ads that appear in the far right column of the site when displayed in a standard browser on a PC or a Mac. (Mobile user’s secret: Facebook on iPhone/iTouch/mobile devices is ad free.)

I’m going to do some reading of the tealeaves here and tell you that Facebook’s future revenue streams (I mean the major ones) are not going to come from these or similar types of ad spaces within the Facebook interface itself.

Would Facebook Actually Deface Itself?
Many users fear that as Facebook grows “the Facebook experience” will become cluttered with fancy ad technologies sprinkled throughout the interface. After such a long free ride in a tidy and streamlined cabin, no one wants ads in the middle of their newsfeeds or highlighted “keywords” within their own photo-album comments. But, I don’t think that is where Facebook is headed.

Facebook may very well continue to make usability mistakes in the implementation of minor improvements and attempts to unify PC and mobile experiences. Strategically, however, the last thing Facebook wants is to disrupt the flow of what its users (presumably you and me) are already doing.

What exactly are we doing on Facebook? Generating a ton of highly granular and personalized data that can be used, and is already being used, to “enhance” experiences that lie outside of Facebook itself. In addition to adding personal content to Facebook, we are increasingly using Facebook as a “portal” to other websites and integrated “applications” which today means games, but that will change. Pretty soon we’ll be buying stuff on these sites and feeling pretty good about it because we’ll be dragging our friends and our personal profiles along with us.

The Two Faces of Facebook
The advertising money that Facebook earns through the placement of ads in the ad column is an example of money that comes in through “the front door.” In the future (and perhaps already), the lion’s share of money that Facebook will make will come through “the back door.”

Front-door Facebook conducts business straightforwardly as the developer of a social-media website and, thus, a connector of people and a publisher and of their thoughts and audio-visual creations. They staple a few ads to a small portion of their simple-and-open page design, which, one assumes, enables you to keep using Facebook for free. Front-door Facebook already knows why you’ve come to Facebook and keep coming back. It’s not just because the door is open, but because the décor stands in stark contrast to the techno-gothic clutter of AOL, MySpace, Yahoo!, and Hotmail. And if backdoor Facebook is successful, the front end will likely remain the same.

Backdoor Facebook, you might say the Facebook of the future, is really a data-collection and database company. Don’t get me wrong; Facebook is not going become an Oracle- or Microsoft-like maker of database software. No, I’m talking Google—or better yet, the Census Bureau, a company that owns an ocean of awesome profile data.

What kinds of data have we helped Facebook develop? Not just vanilla-flavored mailing lists and “six-degree” social maps to virtually anyone on the planet with a computer, but also profile data that can be cross-linked to behavioral data.

Various retailers, service providers, entertainers, and others can use this data for potentially any number of purposes (including academic research). They can use it, that is, if only they can get their hands on it. That’s where backdoor Facebook comes in: to help these people (perhaps you and me) get their hands on it (or at least some of it)—with restrictions, of course, and, most definitely, for a price.

Hiding In Plain Sight
How do I know all this? Facebook told me so (and the world at large) in a new draft of their privacy policy posted at midday on a Friday, 26 March 2010, and announced later that afternoon. These changes can be comfortably assumed to be a form of ‘advance legislation’ for pending announcements, enhancements, partnerships, and other changes that will take effect subsequent Facebook’s upcoming “f8″ developer conference on 21 April 2010.

Under the heading “Pre-Approved Third-Party Websites,” Facebook’s draft policy states that

In order to provide you with useful social experiences off of Facebook, we occasionally need to provide General Information about you to pre-approved third party websites and applications that use Platform at the time you visit them (if you are still logged in to Facebook). Similarly, when one of your friends visits a pre-approved website or application, it will receive General Information about you so you and your friend can be connected on that website as well (if you also have an account with that website).

Of course, Facebook also states that there will be a way for users to opt out and that Facebook will screen its partners based on “an approval process” and have them sign separate agreements to protect your privacy, etc. & etc.

What Facebook does not say is that they will, I believe, be charging these pre-approved third-party websites for their privileges. What Facebook also does not say (and why would they?) is that in the context of such agreements “your privacy” is really just a code for “our data.” But that is not necessarily a bad thing for users.

My Face Is Your Face
Think about it. From Facebook’s point of view, all the data to be shared is proprietary to Facebook. Therefore, not only will Facebook be charging for access to its data, but also, as a matter course, attaching clear licensing restrictions and penalty clauses for violations. This has all the ingredients of a win-win situation. Facebook will be protecting its users in direct alignment with its own vested interests.

But, to be a stickler about it, as far as the choo-choo-choo of the (anti-)privacy train goes, the instant that “private data” is shared with any third party, it has been by that very fact been diminished in its privateness. To share “private data” with anyone is, by definition, the opposite of protecting it. We’ve all done this with our real, live, fleshy friends at some point in our adolescence, right? Facebook is doing two things at once.

Facebook is certainly not protecting private data from people who pay to see it. But Facebook will assuredly protect private data from the people who DO NOT pay to see it. That’s just business. Failing to protect “you” from “fourth parties” would be ridiculously self-defeating. You want to use “my” (I mean Facebook’s) data for free? I don’t think so. You want to pay me for access to my data and then use it in a way that discourages my users from continuing to grow and perfect my database? I don’t think so.

If users stop making friends, stop chatting with each other, and stop posting pictures of the new baby for mom and dad to see, the Facebook ocean will evaporate.

The Threat of Multiple Personality Disorder
At this point, you can take this analysis in at least two directions: 1) down the right-hand slippery slope of privacy concerns by exploring the potential negative impacts, plausible equilibriums, and win-win scenarios for individuals, groups, and global social fabrics. Today’s relatively sane and even-keeled Facebook could be tomorrow’s nut job. There are some legitimately sticky issues here, and not just ethical issues, but legal issues as well. Or, 2) we can hop up onto the left-hand trail and explore the switchbacks of Facebook’s upward wending path to profitability.

Truth be told, I think most people who read the news know the basic landscape of the privacy debate. For better or worse, this is hardly a debate at all among younger people and will likely not be for some time. It is an easy bet that most Facebook users will continue to do what they have always been doing regardless how far Facebook expands the circle of secret holders.

Facebook might lose me. They might lose you. But, that does not mean that we are not going to be keen on investing in Facebook or buying data from them (or similar ventures). So, let’s take the frosty path and consider what the prospects are for the leasing of Facebook’s data mines in exchange for cold hard cash from third parties.

The Face that Launched a Thousand (Cargo) Ships
Facebook’s prospects are very good. The fact is that the really important data that Facebook has to share is not the embarrassingly personal profanities and promiscuous pictures of its users. The really important data is the metadata, the profile data of its users. Who exactly is in your photo is a negligible thing. It is more about how many photos you have. How many are indoors? How many are outdoors? Are your pictures of groups or couples or are they all landscapes?

Can Facebook determine that!? The technology does exist, along with ability to make correlations with other online behaviors. My widget works equally awesome for everyone, everywhere. But if you have the impression it was designed especially for you, you may suddenly need two of them.

Otherwise, you’re just not a one-size-fits-all kind of person. You could use my widget, but you don’t want it. Marketers of course can tell want kind of person you are (in narrow terms) by correlating even a subset of your profile data with your past behavior.

Do you have “a lot” of friends? How many of those have a lot of friends? Are you a super connector? If so, your “enhanced” offsite experience deserves special attention. My marketers need you to feel especially good about us. Did you leave feedback? Your feedback will be far more important than feedback from the cave dweller with twelve friends who just left us a 15-page expose on why our logo colors are wrong.

A Smiling Face for Everyone
Knowing which of our customers are super connectors and how they line up with other customers is gold. The richness of its profile data gives backdoor Facebook a serious chance at becoming a premium provider of ‘census data’ at a premium cost.

Backdoor Facebook wins by charging for access to this data. Front-door Facebook wins by moving additional advertising, sales, and other third-party interaction “off-site” without disruption to its user base—all those “eyeballs” connected to fingers that “click” to make payments. Third-party sites win by using Facebook data for targeted messaging and potential access to private social networks of common interest and buying habits.

Front-door Facebook users win by continuing to get Facebook for free, by experiencing the pleasure of “being known” no matter where they are, by receiving fewer, more highly targeted advertisements that reduce overall noise, and by being able to bring their friends along.

Right now, it seems that most business people are still trying to wrap their heads around what it means to get “on” Facebook, but the real smart ones are already thinking about getting under it. Indeed, it is  a hard case to make that it is not a good idea to get a glimpse every once in a while of what’s bubbling up to the surface, how fast it is rising, and what it is feeding on.

Is Facebook a guaranteed business success in the making? Can it really deliver the kind of marketing intelligence that marketers think it can provide? Having just barely transformed itself from seed to sprout, its first fruit is obviously yet to come. But a few things are certain: it has plenty of water and will almost certainly get lots of sun.

Additional Reading: A report on GigaOM by Matthew Ingram, Facebook Data Deleted After Lawsuit Threat, which I noticed subsequent to finishing this article,  substantiates most of the assumptions I am making. Indeed, the focus of the research and the data set discussed in Ingram’s reporting is miniscule compared to the aggregate data that Facebook itself holds.

This entry was posted on 2 April 2010 at 10:05 and is filed under Daniel Newell. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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