February 04, 2012

Membership has its Privileges (at a cost)

How important is it to feel like you belong? To many of us, very important. We are social animals that constantly feel the need to be accepted. Religion, sports teams fan clubs, political parties. All examples of groups of people that share something in common. Networks of people. The concept goes beyond human association based on interests or values. Networks are formed around the use of common instruments: languages, gadgets, credit cards. Why join a network? Because you benefit from the fact that other people belong to that very same club. As a non-native English speaker, you learn English because the world of international business speaks English, not Russian, Greek or Arabic. You get a Visa Card instead of a Discover or Diners Club because you want to have access to the biggest network of POS in the world (87% of merchants worldwide accept it). You buy a gasoline-powered vehicle instead of one using Natural Gas because you want access to the well-established network of gasoline stations -as opposed to Natural Gas or Hydrogen stations. The value of the Network increases with every additional member that is incorporated: The Network Effect.

Facebook leverages the Network Effect beautifully. It leapfrogged Myspace and Friendster by starting off with a halo of exclusivity (only Harvard's students were allowed at the onset) and then capturing a massive population (845 million and counting) of people willing to dump their personal information on the platform (date of birth, marital status, educational background, religious inclination, sexual preference, books read, favorite movies, music and even real-time consumption patterns) in exchange for the promise of other people's attention, and of course, access to the network called "Facebook". We feed the Network --and other people's Voyeurism-- with the refined online version of ourselves. But think about this: if a person knocked on your door every 6 months to ask you about your personal tastes and demographic, political, religious, and family information --the same information you publish on Facebook-- would you give it away? Probably not, or at least not as candidly as you do online. This gigantic collection of personal data poses an ethic dilemma. What does Facebook do or intend to do with it in the future? How safe is it?

People is going nuts about Facebook's IPO. It is going to go public valued at 26.5x revenue --almost double the ratio of Linkedin's (14.5x) and almost 3x that of Google (10x). The markets are obsessing about its growth rate, about how it can make its ads more effective, about how Zinga represents 12% of its revenue, about how it has no presence in China, and about how Zuckerberg holds 57% of the controlling vote. No one seems to focus on the real issue, which is that of privacy. No one has questioned how Facebook uses our personal information. Well, according to the company (from the S-1 filing):
As our users maintain and expand their authentic identity on Facebook, they are increasingly choosing to share their interests and preferences regarding products and services. We use this information to improve our ability to deliver relevant ads that we believe are more interesting and compelling for each user. 
Harmless, right? Not so fast. They actually use your name to push ads to your "FB friends" (which in many cases are people you have met once) as a form of endorsement, like this:


Still comfortable? What about when you "check-in" at a restaurant, coffee shop or deli?
...when a user posts on Facebook that he or she has “checked in” to a Starbucks store, this check-in creates a story that can be shown in the user’s friends’ News Feeds...Starbucks can purchase sponsored stories to significantly increase the reach, frequency of distribution, and prominence of this story to the user’s friends. 
You are actually doing the job of advertising for the company, and your post will populate more people's News Feed than you think if Starbucks paid Facebook to push your "check-in" status harder.

No one has questioned how secure is our personal information either. For example, no one has actually mentioned that they have been investigated and disciplined by the FTC for doing a bad job at keeping our information safe, as stated in the S-1:
...in 2011, we reached agreement with the Federal Trade Commission (FTC) to resolve an investigation into various practices by entering into a 20-year settlement agreement that, among other things, requires us to establish and refine certain practices with respect to treatment of user data and privacy settings and also requires that we complete bi-annual independent privacy audits.
But most importantly, no one has asked Zuckerberg how his company will use that information in the future. Now as a public company, Facebook is going to be under huge pressure from the markets to keep growing like it did in its infant years (close to 100%/yr). How is the company going to monetize our personal information to keep growing? What new initiatives will roll out, or what advertising techniques will it create in order to keep it growing? These are important questions we need to be vigilant about. In a world where the rights of internet users are becoming more and more important, this is an issue we have put pressure on. Yes, Networks are beneficial for every one of its members, but we need to understand well what are the costs of entry (implicit or explicit). We know that "Membership has its Privileges", but we need to make sure the privileges do not come at an unreasonable cost.