@andrewchen

Subscribe · Featured · Recent

As Facebook saturates in the US, what’s the next step?

Facebook is winning on traffic
Several articles have recently come out that speak to Facebook’s tremendous growth overall, and particularly, overseas:

As TechCrunch points out, among the key factors that have led to the growth relate to the Facebook’s strategy of letting users translate the site, allowing it to roll it out quicker to new countries:

Most of Facebook’s growth is international, where they’ve executed on a brilliant strategy for quickly rolling out localized versions of sites by getting their users to do the translation work for them (MySpace, by contrast, expands via a command-and-control infrastructure that puts people on the ground in each new international market).

This will have a big impact on the global outlook for social networks. The international market has traditionally been much more fragmented, more viral, and as a result more startups have targeted it as a niche to get some traction. But as MySpace and Facebook strengthen their grip in more countries, perhaps even that will be harder

International users suck at monetization
As I’ve discussed many times on this blog, international users are extremely hard to monetize, unless you’re Japan/UK/western Europe.

Mostly the reason for that is 3-fold:

  • For direct response advertisers, payment processing for credit card transactions is a pain – either they don’t have credit cards, or there are potential fraud problems or high transaction costs
  • There are natural inefficiencies like language, culture, and geography which may cause advertisers to convert more poorly and otherwise not be able to deliver their goods and services
  • Brand advertisers mostly care about influencing US spending, or spend their dollars with US-based agencies and multi-nationals, unless your social network has reached scale

An interesting follow-on to the last point is that for some companies – and Hi5 and Friendster come to mind – they may have achieved enough scale that they have an interesting flow of brand advertising dollars from local international brands. When you’re a top 5 site in a country, dollars might follow you, and that’s a good thing. Certainly Facebook has reached this point in countries like Turkey or Canada.

My argument here would be that Facebook knows that international users suck at monetization, and if the primary source of traction is overseas, other than acting defensively, the company will start focusing on the next stage of monetization for the site.

The next steps for Facebook monetization
Given the fact that the team around Facebook hasn’t stumbled much in the past, it’s likely that they will continue trying some Hail Mary products around advertising that, if they work, would generate a huge amount of revenues. Among other ideas, this would include variations on Beacon (both inside and outside of Facebook), trying to monetize their user data via sharing or syndicating newsfeeds, integrating ads into Facebook Connect, etc.

If they decide to get boring and try to monetize in normal ways (and in particular following MySpace’s lead), then it would make sense for them to:

  • Build out contextual sections like Games/Music/TV
  • Add advertiser-friendly ad units like leaderboards rather than tiny proprietary spots
  • Allow for homepage takeovers by brands

OK, let’s just admit that none of these things are likely to happen :-) And if they do, it’d be a big deal because of Facebook’s very user-leaning stance on interfaces, clutter, etc.

And yet these things were there from Day 1 on MySpace.

MySpace’s secret weapon: FOX ad sales
This brings me to my final point – Techcrunch says that Music is MySpace’s secret weapon. I disagree.

It’s a possible reason why users like MySpace, but ultimately I think that the key issue around monetization will be that MySpace has access to the FOX ad sales team where Facebook does not. This leads to a huge increase in brand dollars flowing MySpace’s way that would otherwise be difficult for Facebook to access. Think about it this way – here’s the revenue information for News Corp/FOX:

Revenue for the year ended June 30, 2007 was US$28.655 billion with an operating income of US$4.452 billion. Almost 70% of the company’s sales come from its US businesses.

And of that $28B/yr in revenue, obviously a very large portion of it comes from advertising. Now it’s not like MySpace has access to everyone who’s selling ads across News Corp, but certainly the conglomerate knows its way around the ad inventory. And very importantly, some percentage of the entertainment-related properties across FOX/News Corp will likely bundle MySpace inventory as part of every deal. This makes it so that a big record studio can go and launch a new artist, reach millions of people, and only talk to the folks at FOX to make that happen.

Ultimately, my guess is that the monetization futures of both Facebook and MySpace will diverge strongly as they establish themselves to be very different companies with different goals and strengths. It’s fun to pit two folks in a sorta-related category together, but I think that Facebook and MySpace are after very different goals and that will play itself out soon enough.

PS. Get new essays sent to your inbox

Get my weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.