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Why the social networks are falling apart

The new business model for social: Harvest personal data anywhere you can, then sell ads anywhere you can.

April 26, 2014 07:15 AM ET

Computerworld - Once upon a time, there was a hoodie-wearing college dropout who moved to Silicon Valley to grow a social network.

At first, Mark Zuckerberg and his staff didn't know what their business model would be, but they had a strong suspicion that gathering hundreds of millions of eyeballs on a single site might be worth something someday.

Eventually and inevitably, Facebook introduced advertising to its site. The strategy was clear: Get everybody to gather at a single location (Facebook.com), harvest social signals at that location, and sell ads that would be displayed at that location. Everyone and everything in one place.

Facebook made a lot of money, went public, then made a lot more money. (The company this week reported Q1 revenue of $2.5 billion.)

Everything was fine in Facebookland, except for one small problem: Most users were clearly migrating from desktop to mobile, and nobody was making significant ad revenue in mobile.

Except Google.

How did Google make money in mobile? Instead of harvesting personal data in one place and displaying personalized advertising in that same place, it did both in multiple places.

Ever since co-founder Larry Page took over the CEO spot from Eric Schmidt in January 2011, the secret sauce for Google as a business was the controversial unification of the Google privacy policy in January 2012.

That simple policy enabled Google to harvest user signals and personal data from one service -- say, search -- and use that information to personalize advertising on another service -- say, YouTube.

That change ushered in the future of online advertising, as both Twitter and Facebook would later discover.

Facebook outgrows Facebook

For Facebook, that discovery started with an unwelcome shift in user behavior. It turns out that many Facebook users, especially younger users, got tired of interacting on a single site with their friends, extended families and co-workers -- and everyone else. So in combination with the flight from desktop to mobile, they increasingly embraced little apps for social interaction: Snapchat, Instagram, WhatsApp -- you name it. On these little apps, people could have unfettered interaction with small tribes of friends without the public-pronouncement feeling of Facebook.

So Facebook decided to start buying the apps and services that young users were fleeing to. First, it tried and failed to buy Snapchat. After that move proved unsuccessful, Zuckerberg built his own service, called Poke, but it didn't work out so well.

Then, about two years ago, Facebook bought Instagram. And a couple of months ago the company announced its intention to buy WhatsApp for about $19 billion. This week, Facebook announced the acquisition of the fitness app Moves. (It's marketed as a fitness app, but in fact its purpose is to track exactly where you are at all times and give you incentives to label those places to provide better location data.)

Whenever Facebook acquires such companies, it always says that it's not going to change anything, and that it's not going to fold them into Facebook proper. People tend to roll their eyes at these pronouncements, but I believe Facebook and I'll tell you why in a minute.

These acquisitions were part of a larger "multiple app" strategy by Facebook that has been complemented by homegrown apps like Messenger, Facebook Camera and Paper.

From a data-harvesting perspective, these various apps fall into the categories of "who you know," "where you go" and "what you like." These are the same categories of personal data that Facebook gathers to provide increasingly relevant and customized advertising at Facebook.com.

This week, we learned that Facebook plans to unveil a new mobile ad network at its F8 conference next week. The purpose of the network is for Facebook to sell ads outside of Facebook.com and outside the Facebook mobile app.

If Facebook's direction or strategy isn't clear, let me spell it out: Harvest personal data from multiple apps, then sell personalized advertising in multiple locations.



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