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How Do You Compete With Free?

Updated on June 5, 2012

Can Free Services and Information Be Profitable? (The Future of Facebook)

Apparently, Facebook, with its approximately 900 million users, may not be as valuable as some people previously believed; although you could make the case that its falling stock price after its recent IPO has been caused more by the decision to offer too many shares at a price that was initially too high. But even at its current lower than expected stock price, the company is still valued at tens of billions of dollars, and Mark Zuckerberg is one of the richest men in the world. The pressure is now on, however, for Facebook to produce profits that justify this valuation.

The Facebook model pretty much follows the standard internet paradigm: if a webiste offering a free service can attract enough traffic, then this traffic can eventually be monetized. Generally, this is done by selling space on a site to advertisers who want to be exposed to all of those eyeballs. But in the case of Facebook, its most valued asset would be the data that it compiles about its users, data that businesses would love to have in order to better isolate and predict the shopping behavior of potential customers. For this sale of data to be profitable, however, you need to have a hell of a lot of users.

There are two costs, therefore, to using the "free" Facebook service. First, users have to tolerate the bombardment of advertisements appearing constantly on the right side of the screen. But this, of course, is nothing unusual, and most internet users have learned to tune out the advertisements that are flashing across the screen on virtually every webiste. So Facebook's real future is in data mining, meaning that the main cost for users on the site will increasingly be the surrender of privacy. And as the pressure mounts for Facebook to generate increasing profits, we may be pushed to surrender more and more, with every detail of our lives being sold off to various interested parties.

Of course, Facebook could try the novel idea of charging members to use its service. This is, after all, the way that things have typically done throughout human history. This is unlikely to happen any time soon, however, because most people have come to expect internet services to be free. So if Facebook starts charging a monthly fee, people will flock to other social networking sites that are happy to charge them nothing. One of the keys to Facebook's success, the "free" service that it provides, may ultimately doom its attempt to be a massively profitable media company. And the same may be true for its many competitors.

So if Facebook can't turn its 900 million users into massive profits, then what hope is there for a little guy like me who is trying to make a few extra bucks writing internet articles? I determined some time ago that blog articles, in themselves, would never generate for me anything resembling real money. People rarely click on advertisements or links to Amazon products, and even if they did, articles on history, religion, education, and politics are not going to generate a huge amount of traffic anyway. So I decided to turn to the more traditional route of publishing a book consisting of articles that are mostly unavailable online. But until I tried it, I had no way of knowing if people would be willing to pay for anything that I would write. Since there is so much information out there for free, and the only cost for reading it is exposure to advertisements and the potential of having your online behavior tracked, have we reached a point that paying money for content is going the way of the dinosaurs?

For now, there seem to be plenty of individuals and services out there who are willing to produce content for free, either because they simply enjoy doing it or because they think that traffic can eventually be monetized. But if cultural phenomena like Facebook and Twitter cannot figure out a way to turn obscene amounts of traffic into real money, then how sustainable over the long haul is this internet paradigm that information and services should be free? If companies are OK with relatively small profits, then business as usual may continue indefinitely. But if companies want to join the ranks of Apple, Amazon, Microsoft, and Exxon/Mobil, then they might have to go back to the old-fashioned practice of directly charging their users for the services they provide. And if users continue demanding that services are provided for free, then they should not be surprised when they get what they pay for.


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