How Much Are You Worth to Facebook?

Some of the most iconic companies of our time -- Facebook, MySpace, YouTube, Twitter -- attracted millions of users practically overnight, by unleashing what's known as a "viral-expansion loop." In plain English, they grew because each new user led to more users. The trick is that each of these businesses created something people really want and then made it easy for customers to happily spread their products for them to friends, family, and colleagues.

I started exploring the phenomenon 18 months ago, in a cover story for Fast Company about Ning and viral loops, and my research grew into a book, out this month, about how viral loops are at the core of fast-growing social-media phenomena. In addition to the compelling genesis stories of how these startups became media darlings, what intrigued me was this question: What does size matter if you can't figure out a way to make money off a massive audience? Simply layering in banner ads (or ads of other stripes) can alienate your user base and often doesn't even work -- a problem that continues to plague MySpace and YouTube despite any claims to the contrary. And if you start charging, your customers are but a click away from someone who doesn't. Of course, this marketing conundrum afflicts more than just viral-loop companies. It has been the undoing of online news and entertainment, neither of which has been able to conceive of a way to ratchet up revenue through advertising to a point of sustainability.

The culprit: the oft-tried-but-not-true clickable banner ad, whose click-through rates now hover around 1%. It's even worse on social networks, where the rate is a measly 0.02%, a far cry from when the Web was so new that 50% of users clicked simply because they'd never encountered banners before. (Hey, what does this button do?) Banner ads are victims of the modern cat-and-mouse game between marketers and consumers. (They barrage us with TV ads; we get DVRs. They create pop-up ads; we get pop-up blockers.) The more time people spend online, the more likely they are to become inoculated against the latest marketing technique.

There's a move afoot to go beyond the banner, and if successful, it would breathe new life into the ad-supported model that millions rely on -- and by which few are sustained. It could also end the push-pull between marketers and users. Some of the more intriguing innovations would measure both your implicit value to these social networks and the value of all your friends, your interactions with them, and your influence over them. Then it's not about click-throughs anymore. It's about you.

Death to the Banner

Today's conventional wisdom is that marketers can't reach the 1 billion users worldwide on social networks, dooming Facebook, MySpace, and the many other social networks out there. This moment in time is not unlike the one a decade ago when experts claimed that search was not a stand-alone product because there was no way to monetize it. In response, Yahoo and its competitors vied to become superportals where a user's every need was served on one megasite. Search, the thinking went, was good only for attracting users who would stay to sample a variety of other services like news, horoscopes, financial information, chat rooms, and so forth.

Then Google's founders flipped over the conventional wisdom. They introduced a new ad unit, keyword search, which revolutionized the search industry by inferring the intent in users' queries and catching them at the very moment they sought information. Google, by skimming nickels, dimes, and quarters off each click, rode it to a multibillion-dollar fortune.

If history is any guide, social networks won't fade out as a fad -- they just need to find their version of keyword search, the new ad unit that upends accepted orthodoxy. Realize there is power in numbers. If Facebook, which in July passed 250 million users worldwide, were to follow Craigslist's model and monetize a fraction of its site -- worth, say, on the order of $1 per month for each user -- that would yield $3 billion a year in revenue. Marc Andreessen, who sits on Facebook's board, claims that simply by placing ads on its home page, it could probably generate $1 billion a year. For his part, founder Mark Zuckerberg sees the answer in what has earned Facebook its stratospheric growth so far: the social graph that illustrates all the interconnections among people, groups, and organizations. "The message you get, in a lot of ways, is actually less important than whom you get it from," Zuckerberg says. "If you get it from someone you trust, you'll listen to it. Whereas if you get it from someone you don't trust, you might actually believe the opposite of what they said. I think that's the basis of the value that people get on the site."

It's in this insight that Zuckerberg and others seek to find the business opportunity in people's online interactions. Suddenly, the new ad unit isn't about clicks anymore.