Facebook is the new king of social networking. But the site is stuck with an old business model that prevents it from cashing in on the increasing affluence of its users and the monopoly it has over their attention. Simply put, Facebook should charge.
A recent study by Nielsen Claritas indicates that the top third of lifestyle segments measured by the researcher relative to income were 25% more likely to use Facebook than the bottom third. Meanwhile, less-wealthy segments were 37% more likely to use MySpace.
MySpace popularized the concept of online social networking, and had relative success handing out free accounts and plastering them with ads. But this model does not appear to be sustainable; the unit of News Corp. which contains MySpace lost $363 million in the year ending June 30, and a rotating executive team is evidence that the business is attempting a turnaround. The youth and lack of spending power amongst its users is at least partly to blame for MySpace’s decline — so too is the downturn in online ad spending.
An international love affair with Facebook is also a culprit. Not only has the site — started in a Harvard dorm room in 2004 — won over many younger users of MySpace, it’s introduced social networking to people in their 20s, 30s, 40s, and older. As the Nielsen Claritas study hints, these users have jobs and bank accounts, and might be willing to shell out a few bucks a month for what is becoming an increasingly valuable communication tool in their lives.
Another recent report from Nielsen says that 17% of the time people spend surfing the Internet is devoted to social sites, up 6% from a year earlier. No doubt, the quick and addictive status updates posted daily by users of Facebook and Twitter have something to do with the increase.
Who knows? Social networking could prove to be an even more valuable business than news, an industry that's giving serious consideration to charging premium subscriptions for online access. One difference working in Facebook's advantage: many consumers have been getting online news for free for the past decade, and have grown accustomed to it. Social networking is relatively new.
Facebook has shot down the idea of charging all of its members (the company's COO Sheryl Sandberg in April said, "We are not planning on charging a basic fee for our basic services"). But the site may have plans to put a price tag on services, such as offering to print the millions of photos people upload to the site. It could also charge a nominal fee, like $1 per month, to let members avoid ads.
The company reports positive cash flow and talks up bold advertising initiatives down the pike. But is it building a business that properly values the deep pockets of its customers?