Take a look at the progression of popular social media sites from Friendster to Facebook, and you will find that despite the thousands and thousands of competitors out there, a select few will compete for the top spot. If you remember Friendster then you will probably remember MySpace taking them down and later Facebook devouring them along with all the others. In fact Facebook beat MySpace down so badly they changed their logo and were forced to revert to their only remaining strength, social media. Today, they are the 2nd most visited website in the world behind Google and boast over 500 million users. So why will Facebook fail with so much going for it?
Hit the break to find out why.
One key concept to understand is that Facebook is not a product. Most of Facebook is completely free to use with the exception of a few social media games. They require users and more importantly user information to fuel other key elements of their business. In general, the more activity and growth the better off they are. However, the user must willingly use and enter input into their platform, which means that you are the product and Facebook is a by-product of your participation. This is why growth is the end all be all for social sites.
It is estimated that Facebook's revenues were around 1.1 billion for 2010 but until they go public we won't know for sure. As far as I can tell Facebook has three ways to make money. One way is from the cut they take off of social media games like Farmville. Facebook keeps 30% from the credits sold and the Vendor keeps 70% but their unwillingness to negotiate almost ended up costing them. A second way for them to make money comes from probably their most valuable asset, your information. What you like, who you like, who you associate with, etc. They might not sell your information outright but sharing it with partner sites allows for some indirect channels for that kind of thing to happen. The third major way they can make money is from targeted ads which admittedly they do quite well.
They will have to make some big changes to confront some problems that will occur for them in the future. Facebook is simply the sum of a few major parts that grow as it grows. The relationship between Zynga and Facebook has been on the rocks with Google courting them and thanks to Facebook, social games have really started to take off. Unfortunately social games don't necessarily need Facebook the way it needs them. Once they reach critical mass they can grow on their own. There are also a lot of other possible partners, like Google, who would be willing to make a deal. This also means that Facebook would lose some of its leverage. The same can be said for services like Foursquare; most of them exist on their own platform so Facebook is simply a convenient place to grab users. This also decreases their leverage should they start charging more than just the social games that use Facebook credits for integration.
Ads are probably a good source of revenue but the success they have had with them so far is likely due to taking advantage of a gap in knowledge. For example, all the Facebook users I know personally do not respond well to ads that promote products or services. In fact, they are somewhat intrusive. Partly because your profile is like your Facebook "home." You populate it with the people and things you like and then all of a sudden T-Mobile sticks their head through the window and starts talking at you about their fake 4G network while you're watching Netflix with some friends. Fan pages are a much more effective way to communicate with people since they actually engage them in a more appropriate manner. Eventually many individuals and small businesses that don't specialize in marketing will figure out that Facebook ads aren't the most efficient use of time and money for them. Ads on Google are likely to have more success for the purposes of selling because when you go to Google you have effectively left your "home" in order to do something, therefore no one is invading your "private" space.
Facebook feeds off the integration of other desirable games and services to enrich the experience but it's important to understand that Facebook itself actually consists of a profile and a few features like photos and messaging. They recently added Facebook Places after failing to acquire Foursquare as well. In the next 5 years or so Facebook will probably experience high enough growth to continue on the way they do now but the only way I see them having long term sustainability is to start buying into some of their counterparts before they are taken over by them. I think Facebook Places is just the beginning of that. I also think that Project Titan, their new e-mail and messaging system is really just an attempt to expand the platform from the inside out in order to combat the pressure building up around them.
When I asked, "Will Facebook fall on its face?" I didn't mean to insinuate they will eventually disappear. What I meant was that it is highly unlikely they will be able to continue on as they are today in the long term and continue to experience the success they are now. When all the hype settles down and the growth starts to slow, I think users and investors will find that Facebook and Mark Zuckerberg aren't as revolutionary as they seem.