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Facebook’s dangerous game

February 3, 2012

When Facebook becomes a public company-it’s obvious that it will be forced to generate ever increasing revenues from its user base. The only way the company can deliver these revenues is by selling more advertising and making more money through user transactions.

The advertising issue is key- currently Facebook is being use by brands to finely target messages to discrete audiences and with below average CTRs, it’s really all about branding. For most brands, it’s all about going where the eyeballs are, so it’s an imperative to be on Facebook, but questions remain around effectiveness and the real ROI on these efforts.

Clearly, with the move timeline and greater integration of applications, Facebook is gathering masses of data that can be used by brands for even better targeting. The challenge is obviously to find a way to go beyond simple exposures and to do something more compelling and powerful for both brands and users. I am not sure we are quite there yet- everyone is looking for the way to crack this and maybe Facebook will do it, or someone in the ecosystem that surrounds it-maybe the next great “start-up”.

The big challenge is how to expand the advertising offering, including in its currently under utilized mobile platform, without creating more clutter and thus undermining the user experience. A recent analysis of the S1 filing suggests that the company will have to “monetize their users by a rate of 5-10X what they are currently doing.”

The privacy issue is also fundamental with the EU already wanting to restrict the amount and level of data collected, which could put the brakes on some other company’s plans for deeper advertising opportunities.

Facebook’s success has been based on delivering a brilliant user experience that facilitates and manages connections in an entirely new way. Its brand power comes from the strength of the emotional ties it helps to build and in from the content individuals use to create and “cultivate” their personal identities.

However, as Zuckerberg understood from the earliest days, there’s a very fine line to tread and the pressures of being public, plus the incentives being offered to its sales people etc, could push the company close.

In the end, like most things, it’s ultimately about trust- if the brand can continue to win consumer trust it will develop and grow revenues, not just through advertising, but also in credits and payments, which could be even bigger than the ad business.

Facebook’s ability to manage its way to future success depends entirely on what it does to maintain the very delicate balance.

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