Stephen Baker

The Numerati
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Maybe Mark Zuckerberg is in the wrong business

January 5, 2013General

 As I researched the social media story that ran in today’s Times, I kept wondering whether Facebook is really made for the advertising business. Could Mark Zuckerberg be in the wrong line of work?

Facebook of course has enough going for it, including a billion networked members, to make a good business in advertising. Revenues top $4 billion. But despite its towering strengths and limitless potential, the company struggles to please traditional advertisers and investors. The company reminds me of a brilliant student who's following the path his parents have mapped through med school, even though he'd rather be building skyscrapers or writing songs.  

The difference, though, is that Facebook is capable of transforming the very industry it's trying to fit into. You could argue that that's already happening, as I'll detail below.

Clearly, in the short and medium term, Facebook has little choice but to pursue a career in advertising. At the moment, no other business model can raise billions, which the company needs to build a global enterprise with huge data centers, employing thousands of brainy engineers and scientists. Still, there a sense that Facebook's mission is bigger, and perhaps more transformative, than advertising. “If Mark Zuckerberg didn’t have to pay back the venture investors and run the risk of losing his talent, he would have taken a different route,” says Rishad Tabaccowala, chief innovation officer at VivaKi, a digital arm of Groupe Publicis.

In fact, Facebook's very strengths lead the company along a different path. The ads that work best on social networks represent a new model, a blend of advertising, word of mouth and viral connections. These defy traditional definitions and measurements. One example. If you're an American woman over the age of 45, you might have seen cute photos of kittens and puppies pop up next to your news feed. Those are ads. Click one, Facebook gets around 25 cents, and at least in this case you subscribe to updates from Petflow, an e-marketer. The company has 620,000 followers now. In the news streams that carry updates about their neighbor's pork roasts and cousin's birthday parties, those people also receive several updates from Petflow. And if they click "like" on one of them, Petflow's news flows out to all of their friends. It goes viral. Should Petflow want the update to linger longer in news feeds, reaching more of its followers, it pays $500 to $2,000 for a promoted post. Petflow's co-founder, Alex Zhardanovsky, says the company generates more than 30% of its sales from Facebook.

Nonetheless, success that justifies a $100 billion market cap will come only when the big traditional advertisers, like Proctor & Gamble, Apple and the car companies, move from social media toe-dipping and take the plunge. To satisfy them, Facebook has taken extraordinary measures. The company has teamed up with Datalogix, which has a vast  database of customer loyalty cards. The two companies have matched the ads people see on Facebook with the purchases they register with customer loyalty cards in the physical world.

The link is the common e-mail address. Many of them show up on both Facebook and the supermarket lists. To shield identities, the two companies have devised a convoluted process, hiding both the consumers and their loyalty cards behind numbers known as hash tags. (More details from TechCrunch and Facebook itself.) The point is not to track the individuals (nor to find themselves in another bruising privacy battle), but simply to demonstrate that anonymous beings are more likely to buy certain soaps or cereals after seeing ads on Facebook. So far, according to Sean Bruich, Facebook's head of Measurement Platforms and Standards, the response more than justifies the ad spend. They have carried out 50 studies for big advertisers, he says. In 70% of them, the return on investment reached at least three times the ad spend. On 49% of them, it was 5X or better.

Still, the numbers-driven ad market will press relentlessly for more data. That's the nature of the Numerati world. It never stops. The goal is to monitor and measure all of the stimuli that lead us make a decision, such as whether to buy a certain bar of soap. The way it is  now, a person sees different ads on TV, billboards, in newspapers, and a sponsored post on Facebook, and each one of those media players claims a portion of the credit--probably more than its share. Now, Facebook and others developing a complex analysis called "multi-touch." The idea is that it will divvy up the credit for each interaction, and each media player will be able claim its share.

We've already seen how this ends. The more data that arrives, tracing our movements and activities, the more analysis it generates and questions it raises. Arguments are inevitable. The losers will hunt down more data of their own launch their own studies, challenging the status quo. As a result, we're be scrutinized in remorseless detail. The market would have it no other way. The process is barely begun. And no matter how much they know, advertisers, on Facebook and elsewhere, will always come up with reasons to dig deeper and a little more. In the process, they learn more about us--and perhaps that process, or insights derived from it, will lead them into entirely new businesses.

Below, today's Times story. A few minutes ago I saw a bit of blue reflected in the front door. I ran out to the driveway and grabbed the analog version of the paper, which resonates for me emotionally. (I broke into journalism writing on manual typewriters, after all.) But then I promptly get to work with my camera and computer to render it back to digital.



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