The Past, Present, and Future of Facebook

January 30, 2014 | Josh Cline

By Josh Cline

In January 2014, a group of Princeton researchers released a study that compared the growth and decline of MySpace to that of an individual becoming infected by – and then recovering from – a disease. Princeton then applied the model to Facebook and suggested that the social network may lose up to eighty percent of its users by 2017.

Despite the ensuing headlines, it is important to note that the study was not peer-reviewed. Facebook even issued a comical retort.

However, the study indirectly hinted at an important point: Social networks are very similar to people (but not the viruses within them) in that they are merely the sums of their users and thus subject to change as the number and types of users change. Princeton’s study made waves because everyone from the dissatisfied user to the anxious marketer wants to know what will happen to “The Social Network.”

For Facebook, this represents a somewhat-bleak future. The primary reason that people originally joined was to connect with friends and family, but pressure from stakeholders is paradoxically causing the network to push away its user base in an effort to monetize.

In order to take a deeper look, we have compiled the following research into the past, present, and future of the global social-media network.

The Global State of Facebook Users

• The number of worldwide users has consistently grown.

Revenue & Profit

• Total Facebook revenue has also consistently grown (especially following the launch of the network’s mobile-advertising platform.)

Age Demographics

• According to iStrategyLabs, millions of young people in the United States (and likely in other western countries) have left Facebook in the past three years. Facebook’s recentgrowth has been a result of older and elderly people joining the network.
• Writing in The Guardian, Jemima Kiss cites a recent European study: “What appears to be the most seminal moment in a young person’s decision to leave Facebook was surely that dreaded day your mum sends you a friend request. It is nothing new that young people care about style and status in relation to their peers, and Facebook is simply not cool anymore.”

Analysis

At least in the near future, Facebook – and those who market on the channel – will have little to fear. Facebook is not going anywhere, and the exodus of teenagers and Millennials from the network is not cause for alarm. As Bob Hoffman, former Chairman and CEO of Hoffman/Lewis Advertising, notes:

Today, marketers are just as likely to target people simply because they are young – even though they have no money and cannot and will not buy their products. Conversely, they are just as likely to ignore people who are old – even though they have lots of money and are prime targets for their products… In fact, marketers are more likely than ever to ignore and insult the people who can actually buy their products and grow their businesses.

B2C companies should be celebrating the fact that Facebook is increasingly comprised of older people who actually have money to spend – well, unless their target audiences are comprised of young people.

Years after its founding, Facebook has now become an adult – both literally and figuratively.

The Future of Facebook

In the long term, the future looks dim for Facebook.

Growth per Country

• According to a November 2013 study by eMarketer, the number of people worldwide who use any social network will continue to grow at an increasing rate through 2017.
• As Hootsuite CEO Ryan Holmes notes at Business Insider: “Around the world, localized, country-specific social networks are expanding, commanding the attention of billions of users in some of the planet’s fastest-growing economies.” A few examples include WeChat and Tencent Weibo in China as well as VKontakte and Odonoklassniki in Russia.

• However, the user growth of Facebook specifically will continue to slow over the same period of time. The largest growth will occur in India.

eMarketer notes:

The US remains the single country with the greatest number of Facebook users, at 146.8 million this year, and India comes in a distant second. But with India’s large population and high expected growth rate, eMarketer believes it will develop the largest Facebook population of any country in the world by 2016.

Analysis

The slowing growth in rich, developed countries and the rising growth in poor, developing countries does not bode well for Facebook’s future revenue. In a brief, general example, we have taken average costs per click (CPC) and the number of Facebook users in India and the United States and assumed one click per Facebook user:

• United States: 166 million users x $1.09 cost per click = $181 million
• India: 62.7 million users x $0.25 cost per click = $16 million

Both people and businesses in India generally have a lot less money to spend than people in Western countries. Therefore, any stagnation in the West will hurt Facebook’s future revenue because India’s growth, while strong, would need to see more than a tenfold increase in the number of Facebook users to equal the revenue that the United States generates.

Facebook’s own data supports this assertion:

Facebook’s average revenue per user in the stagnating United States and Canada is more than six times higher than that in growing, developing countries (categorized as the “Rest of the World”).

A U.S. Decline?

The lackluster growth in future Facebook usage among Americans may be even worse than eMarketer predicts – potentially falling into negative territory. As Quentin Fottrell wrote in Market Watch last year, social-media monitoring company SocialBakers reported that Facebook lost 1.4 million active U.S. users in the prior December – and, significantly, it was the first reported decline.

Advertising is Not Cool

Why did Facebook lose so many users? The reason at that time should still strike fear into the heart of Marc Zuckerberg:

Why the fall off? The increased advertising on the site and new experimental fees may be grating on some users’ nerves, experts say. Earlier this month, for example, Facebook tested charging users (with fees peaking at $100 within the U.S.) to send a message to someone outside their “friends” list. And in October, it rolled out the option to promote posts to more friends for a $7 fee. “There seems to be a change every other week,” says K. Jason Krafsky, who co-wrote the book “Facebook and Your Marriage.”

Today, as Facebook increasingly needs to monetize, the network risks losing its original identity.

In “The Social Network,” take the scene in which the fictionalized versions of Zuckerberg and fellow co-founder Eduardo Saverin meet two girls while they are creating and popularizing the network at Harvard University:

This simple sentence from one of the girls to Saverin epitomized the early use of Facebook: “Facebook me when you get home. Maybe we can all go out and grab a drink.” Facebook started as just a way for people to meet each other – especially when their statuses read “single.”

Saverin wanted to obtain advertisers quickly – at least as the film tells it – but did not because of future Facebook founding president Sean Parker’s ability to dissuade Zuckerberg later from taking that direction too soon (just as the network was just beginning to spread to colleges throughout the United States):

“Facebook is cool, that’s what it’s got going for it. You don’t want to ruin it with ads because ads aren’t cool. It’s like you’re throwing the greatest party on campus and someone’s saying it’s gotta be over by 11:00.”

Now, we do not know whether these two events actually occurred. “The Social Network” is a fictionalized account of the early days of Facebook. But Parker’s alleged statement makes a valid marketing point. People primarily use Facebook to interact with people (and play games). They rarely want to interact with companies – and they surely do not want advertising to be pushed down their digital throats.

So today, Facebook treads a difficult line and risks losing its old (in Internet terms) identity. In its pre-IPO days, Facebook could afford to worry only about the happiness of its users while it depended on the venture capital provided by Peter Thiel and others. Now, in its post-IPO days, Facebook must show investors increased profits (or at least revenue) every quarter. The social network must now keep both its product (users) and customers (advertisers) happy.

In January 2014, Facebook announced that the Sponsored Stories type of advertising will be eliminated in April following user complaints and a settled lawsuit. Richard Nieva summarizes at CNET:

Sponsored Stories appear on a user’s news feed when a friend engages with a certain brand that pays for the exposure. For example, clicking “Like” on a retailer’s page might make one of its ads appear in a friend’s stream.

The practice has caused the company problems since Sponsored Stories launched in early 2011. Facebook was on the receiving end of a class action suit filed in 2011, alleging that the company didn’t get proper consent from consumers to use their names and profile pictures. Facebook ended up settling to the tune of $20 million.

Facebook’s Possible Life Cycle

Facebook may be the sixth or seventh stage of the following process (at least in the developed, Western world):

1. The network is created and gets interest
2. Venture capitalists invest
3. More and more people use it
4. The owners and VCs later do an IPO to cash out (as was likely the goal all along)
5. After the IPO, the network is under pressure to increase revenue every quarter
6. The network increasingly pushes ads and monetization to bolster revenue and stock price
7. Users are turned off by the commercialization and leave
8. The network slowly dies
9. The VCs move onto the next big network (though this probably occurred after step four)

This pattern – see Friendster and MySpace as past examples – seems to exist for general, all-purpose social networks that aim to be all things to all users (a place to connect with others in general through status updates, photos, news, videos, games, and everything else under the digital sun). Sooner or later, people end up leaving to avoid intrusive ads, escape their parents, or move onto the “next big thing.”

Although Hoffman’s quote below presents his (inaccurate) opinion of all social networks, his thoughts are accurate in terms of Facebook:

In fact, all of “social media” is quietly in the process of morphing into just another channel for carrying traditional advertising. The delusion of “permission marketing” and “the conversation” and the “sharing of content” as the foundation for web advertising still gets lip service, but is being undermined by social media companies who are interrupting the shit out of us with ads. (emphasis added)

And no one likes that.

The Rise of Niche Social Networks

Niche networks (unlike Facebook) are currently growing in popularity – either despite the advertising within them or because they have not monetized yet. Look at LinkedIn’s revenue growth:

LinkedIn has become the specific, niche social network for job networking and B2B marketing. Anyone can leave Facebook and still keep in contact with friends and family members. It is becoming increasingly difficult to find a job or recruit quality staff without LinkedIn.

Moreover, LinkedIn is successful despite its advertising. When people use a social-media network, they subconsciously make a value judgment and weigh the pros and cons: “Is the value I receive from using this network worth more than any annoyance that I have with its advertising practices (or other actions such as personal data collection)?” For Facebook, the answer may increasingly be “no.” For LinkedIn and others, it is “yes.” After all, only 23% of the network’s revenue comes from advertising. Facebook’s primary source of income is ads.

In addition to LinkedIn, there are numerous, popular, niche social networks. The Internet’s anarchic diversity has led to an online world in which there is not (with apologies to J.R.R. Tolkein) “one social network to rule them all” but rather a set of countless networks that people can select to use based on their individual interests.

MySpace has successfully rebranded itself a smaller, niche network for independent musicians. Twitter is a great channel for instant communications, marketing, and PR. Here are a few more niche networks (that would also interest digital marketers in specific sectors):

• Care2 – 16 million people who care about living a “green lifestyle”
• CafeMom – 1 million mothers (who are a very valuable B2C demographic)
• Kaboodle – A community of people who love to shop
• Gentlemint – Deemed “Pinterest for men,” it is all about guns, cars, and more
• ThirdAge – A social network for senior citizens
• BlogHer – Another network for women

Say a person happens to be an older, Russian woman who is environmentally conscious and has come to hate Facebook. She might use VKontakte (the Russian-specific network mentioned above), Care2, and ThirdAge instead.

Such niche social networks can monetize (if they even choose to do so) via advertising or other methods such as e-mail marketing (which is highly undervalued by marketers) or even affiliate marketing. The value that is offered by these networks – in which a person will have an intense interest in the specific topic – will usually be far higher than any annoyance at their monetization methods. The same cannot typically be said for Facebook.

Moving Beyond Facebook

At the present, most marketers should not dismiss Facebook – especially if they work for B2C companies that target people in their mid-twenties and beyond. However, such businesses that operate in the Western world should start to develop medium-term strategies that go beyond Facebook in the event of any possible stagnation, decline, and abandonment. For marketers in the developing world, Facebook is a safer bet – at least for the next several years – but growth will likely slow later.

In today’s digital, multi-channel world, businesses need to create and executive marketing strategies that align with their business goals. Those strategies can consist of a seemingly-endless range of channels and tactics – including Facebook. The network has typically been a B2C channel for marketing, communications, and sales, but marketers now cannot afford to put all of their eggs in Mark Zuckerberg’s digital basket. In the future (if not already), a diverse social strategy will increasingly need to include niche social networks along with many other digital channels.

Facebook will probably not disappear anytime soon – but it may have reached its peak.

http://www.theclinegroup.com/2014/01/30/facebook-past-present-future/