Facebook Has A Business Model Problem

I spent some time this week trading email with Mark Cuban about Facebook and hearing his frustrations about the way Facebook is treating its corporate customers and brand partners.

The deal with Facebook, now and apparently forever, is that if brands want to reach all (or even just a large part) of the people they have rounded up over the years, it’s going to cost them a fortune.

Like Cuban, a lot of brands are feeling betrayed because that wasn’t the deal when they first got on Facebook. They’ve invested time and money building up a large audience of followers, only to have the rug pulled out from under them.

Cuban Isn't The Only One Who's Angry

I’ve heard anecdotally about a huge brand that was complaining recently because it has spent four years building a following of millions of people, promoting its Facebook presence (and, by implication, Facebook itself) on expensive television ads - and now Facebook has flipped a switch and, overnight, their reach dropped by 40%.

So now they’re done. They’ve been burned, and, like Cuban, they’re looking elsewhere.

You might argue that Facebook has an integrity problem. What it has done here is a classic bait-and-switch maneuver, one where you change the rules after you get everybody into the tent. It’s the kind of thing you expect from a used-car dealer, not a big publicly traded company.

And it’s certainly not what you expect from a company that makes such a big deal about how it doesn’t care about money, but is instead driven by a social mission. If Facebook really doesn’t care about money, why is it shaking down its best partners in such an ugly way?

The Real Problem

But Facebook has a much larger problem than a lack of integrity. Facebook has a business model problem.

To be sure, Facebook will rake in $5 billion this year. But Facebook will celebrate its ninth birthday in a few months and the company still keeps poking around and testing new ways to generate revenue.

Facebook's long-term problem is that it is trying to make money via advertising, even though Facebook simply isn’t a very good vehicle for advertising.

And while there are things Facebook could do to make itself into a nice platform for advertisers, those things would drive away members. That's the conundrum.

“A really nice big video ad or interstitial ad would increase their brand advertising revenue,” says Jeff Rosenblum, CEO of Questus, a digital ad agency in New York, “but the ad would be like interrupting a conversation between friends - annoying and unacceptable.”

Rosenblum says a possible long-term play for Facebook might involve selling data about its members to advertisers, which could use that data to target ads on other platforms, like TV. He offers an example of two 40-year-old guys who are car shopping - one for a Volvo, the other for a Porsche. Their Facebook data could help advertisers figure out which is which.

That’s a great idea, but making it happen, and turning it into a billion-dollar business, won’t be easy.

“Personally, I would never bet against someone who dropped out of Harvard because he had better things to do,” Rosenblum says, “but Facebook is facing some real challenges.”

Google+ Takes A Different Approach

Meanwhile, you know who stands to benefit in all of this? Google. See, Google is approaching social in a different way.

Google lets you - not some algorithm - control which posts you see. And Gogle doesn’t put ads in your Google+ news feed.

Instead, Google pulls info out of Google+ and uses that data to improve the results people get when they do a search.

Google argues that ads work best next to search because people doing searches have reached what’s known as “the moment of commercial intent.”

For example: You’re shopping for a new dishwasher. You go to Google and type in a search query. Google brings up organic resuts, plus some ads - plus some information from Google+, like the fact that your brother bought a GE dishwasher and highly recommends it.

In other words: Google is using social to boost the effectiveness of its existing search business. Facebook doesn’t have a search business, so it is stuck jamming ads into your social space, which nobody likes.

And now, desperate for revenue, it is shaking down members and brand partners alike, pushing them to pay Facebook just to stay in touch with each other.

An Opening For Google?

Google+ doesn't have anywhere near the 1 billion members that Facebook claims. But it is growing quickly, with 400 million members and 100 million monthly active users.

I imagine a lot of brands that are feeling burned by Facebook are having some very deep and thoughtful conversations with Google these days. They’re all advertising on Google already, of course. But I’m sure Google sees this as a way to grab a bigger piece of their ad budgets.

Long term, which business model do you think makes more sense? Is Facebook going to drive brands away? Let us know in the comments.