As some have noticed, Facebook’s impending 2012 initial public offering has cast a mainstream spotlight on behavioral ad tracking. Many of us believe that online surfing is a private act akin to library browsing. Sure, we may be willing to give up our private browsing habits—but only for a price. The problem, as I see it, is that the deal has been struck without us, and we users are now collectively renegotiating the terms.
About a year ago, I proposed the idea of striking a deal with users on being Tracked or Charged (see Our Privacy is Worth $5 a Month). Those of us that hate “creepy”, privacy-violating tracking will pay for online services like Facebook. Those of us that don’t pay will see (re)targeted ads based on our online browsing behavior. It seems like a reasonable way to pay for an amazing, innovative service like Facebook. I’m not sure who originally said it, but “if you’re not paying for the product, you are the product.” Give us the choice. [Update: Thanks to Kevin Marks for sleuthing and documenting the etymology of the “you are the product” reference].
This ad-versus-paid model has been used for years with free ad-based network television (e.g., NBC, CNN) and subscription television (e.g., HBO, Showtime). Online music sites, like Pandora and Spotify, offer a free version with ads and an ad-free paid version.
Facebook, however, is clinging to its “free” model. In a recent bulletin to users, Ami Vora (Facebook’s senior advertising product manager) explains why the site serves ads. At 0:18 into the video, Ami says:
“It takes a lot of money to hire the best engineers and build the technology needed to keep Facebook up and running. Last year, it cost over a billion dollars. From the beginning the people who built Facebook wanted it to be free for everyone. Delivering ads is how Facebook can pay for this, so you don’t have to.”
Later in the video she explains that Facebook serves ads based on your location and interests.
The challenge for Facebook is to reconcile its founding vision of “free for everyone” with the current vision of its shareholders for a centi-billion dollar market cap. Facebook web plugins, “sponsored stories”, and the new Timeline are attempts to leverage our activity within the Facebook ecosystem for sales and profits. Only then might they deliver on their shareholder vision as well as they’ve delivered on their founding vision.
Let’s put a few numbers behind this shareholder vision. Currently, Facebook is valued at $100 billion. Given this valuation, the expectation is that in two years, Facebook will be earning $5 billion a year. By the end of 2013, at Googlesque profit margins of 25%, Facebook will need revenues of $20 billion. Assuming they hit their 2011 $4 billion revenue target (a good bet), they’ll have to grow at 125% per year to hit $20 billion in two years. To put this level of growth in perspective, Google will have revenues of nearly $36 billion this year, so Facebook must create three-fifths of a Google in two years—a journey that took Google five years. Facebook’s got some heavy lifting to do, made heavier by their unwavering commitment to an ad-only revenue model.
As Ami points out in the video, ads perform better when they’re more relevant to us. The problem is that many of us bristle when intimate information about our family and friends is shared with Facebook and its advertisers. Sharing is the semipermeable membrane that separates public and private. Sharing is how we make personal information public or how we build intimate relationships by sharing secrets in confidence.
Since Facebook’s entire business is based on sharing, you’d think they’d seriously consider my Track or Charge option. Maybe if they had, they would’ve avoided this year’s privacy settlement with the FTC charging they “deceived consumers by failing to keep privacy promises.” The settlement requires Facebook to get consumers’ approval before it changes the way it shares their data, and requires that it obtain periodic assessments of its privacy practices by independent, third-party auditors for the next 20 years. Beyond federal regulators, Facebook is attracting some harsh critics around this revenue push. Without a Track or Charge option, expect the friction on frictionless sharing to continue.
Facebook is a great service and, and given the choice, the vast majority wouldn’t mind targeted ads. After all, we may hate being tracked but most of us hate paying even more. For those that want an ad-free, tracking-free experience, charge us $5 a month. It’s a win-win. Facebook would see billions in additional revenue from subscription users; they’d largely inoculate themselves from privacy issues; and privacy-conscious users would get a truly private experience. If Facebook gives users this choice, expect a frictionless 2012 IPO.