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Is Facebook a failed business model? What associations and businesses need to consider.
Created By: Barkan, Terrance On Mon, Jun 22, 2009 12:14 PM
With more than 200 million users, Facebook has yet to prove it has a viable business model. It has certainly been able to attract investment capital with its enormous user base, but that has nothing to do with building a sustainable business model. As the dramatically failed AOL - Time Warner merger and acquisition of a few years ago should remind everyone, high valuations and investments do not automatically generate revenues or results.  

Consider this quote from the May 27, 2009 Financial Times: "Facebook itself, meanwhile, refuses to divulge its financial performance. Revenues apparently grew by 70 per cent last year, and chief executive Mark Zuckerberg expects to produce positive cashflow in 2010. Positive earnings before interest, tax, depreciation and amortisation are claimed for the last five quarters. Independent guesses for sales run at about $500m in 2009."  That equates to gross revenue of about $2.50 per user, not an impressive return on capital invested.

Another warning sign to anyone looking at the "free" services busines model is the loss of momentum for Myspace, mostly due to Facebook. The Internet user community is fickle and a free use business model means that the switching cost to drop one service in favor of another is basically zero (i.e. users switching from Myspace to Facebook to...?). This model allows for rapid growth (ala Facebook and Twitter), but there is little to prevent an equally rapid decline.

As associations and businesses start to deploy their social media strategies and create online communities, they need to be aware of the business models they are adopting. Especially as they will in almost every case not have anywhere near the investment capital that some Internet companies have attracted, allowing them to run their business at a loss for years. It is flattering to rack up the users, Twitter followers or online members on your Facebook Fan Page or LinkedIn group but if you do not have a plan on how to turn those fans into real customers, you will need to decide if having Fans is enough?

Some companies and organizations have developed profitable businesses using these free only platforms. Dell Direct for example, with about 650,000 followers on Twitter has earned, by its estimates, almost $3million directly from its Twitter presence. It has achieved this by offering special "Twitter Follower Only" specials on products for example. Twitter in the meantime has earned exactly $0- from the business Dell has attracted over its platform.

Therefore, when building your social media strategy, you need to plan how you are going to build a sustainable business model around that strategy. Attracting users is critical, but it is not enough by itself. Have you considered how you will eventually (or sooner) monetize your user community relationships?
 
I will write more on the "how to monetize social media communities" in following blogs. In the meantime, I invite you to consider creating your "Intellectual Property Strategy" as a critical component of a sustainable social media buisness model. This is described in a white paper on social media strategy, a flash video animation as well as a recorded webinar and other (free) resources at http://budurl.com/7btl

Cheers, Terrance
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