Facebook’s Beacon – What Were They Thinking?

If you don’t follow the Silicon Valley technology gossip train, you probably have never heard of Facebook’s Beacon project. On November 7, 2007, Facebook announced the launch of its Beacon platform, which was basically a way that internet retailers and other sites could alert Facebook of actions that Facebook’s users took on their sites. Needless to say, there was a loud backlash from the Facebook community over privacy concerns, and a number of launch partners backed away from any association with Beacon. In this post I’ll explore the possible motivations behind this move.

In considering why Facebook made a move like this, we should familiarize ourselves with the situation faced by its executives and board. Facebook is a huge site with 35 million monthly unique visitors in the US. It recently took a $240M investment from Microsoft, giving the company a hefty (and utterly ridiculous) $15B valuation. Microsoft’s investment was coupled with a banner syndication deal that guaranteed Facebook the virtual entirety its estimated $150M revenue. Microsoft’s revenue deal is very generous, and likely wouldn’t be nearly as favorable if the Facebook weren’t such a hyped and sought-after venture. However, in reality, social media has had a tough time monetizing through the old tried-and-true internet CPM and CPC models, as discussed in this Economist article.

Given this backdrop, what’s likely happening is that Mark Zuckerberg and investors are scrambling to find a revenue source to replace Microsoft’s generous deal and get Facebook’s annual revenue up to $1.5B (a 10x jump from today), which would allow it to be reasonably valued at $15B. What’s an obvious tried and true way to make bucket-loads of money on the web? Become your own advertising syndication network! This can bee seen by the sheer number of companies in this space. If you were a management consultant, what advice would you give Facebook on how to enter this market? Leverage whatever competitive advantage you have. Well, Facebook has several:

• Media attention- Facebook’s actions draw a lot of press attention
• Traffic – lots of it
• Context – users’ actions, friends, interests, jobs, sex, age

Of these, traffic is key. Having enough users so that a random user surfing around web properties is likely to be a Facebook user with a Facebook cookie in their browser history. Check. Second, context: Facebook knows your age, your gender, and what you like (you said you like Led Zepplin on your profile, and your wall posts indicate you’ve got a penchant for drinking Coors Light). Is this enough for Facebook to claim they can do better banner ad targeting than Doubleclick, which already has a lot of context on you as well, in the form of what sites with Doubleclick banner ads you’ve been to? How could Facebook get more information on what kind of transactions you’re likely to want to make?

Here comes the Beacon strategy (genius!). Facebook has a lot of media attention and momentum – it can use this to its advantage. It dangles a carrot to retailers and companies the web over – send us information about your users’ activities and we’ll advertise it in their friends’ news feeds, free of charge. That’s exactly what Beacon does. The retailers and publishers jumped at the opportunity, hook, line and sinker, including Coke, New York Times, eBay, and Fandango. Just before launch, it seemed like Facebook might just make out like a bandit.

In the end, Facebook’s lunch got thrown in their face by their users. Beacon’s down, but not out. It’ll be interesting to see whether or not they can resuscitate it and realize their goal of advertising syndication domination.

~ by onthejohn on April 21, 2008.