Will Facebook survive another five years, after 250 million members?

First, a confession from the sometimes-embarrassing world of Web 2.0: when I joined Facebook, it was just another site, one of the many social networks I thought would prepare me, then a high school senior, for college life. It was April 2004, just two months after geeky guys in a Harvard dorm had created the site. For me, joining up was little more than the next thing on my to do list before moving away from home: I used the same profile information I had already logged on Friendster; the picture, me with a white-boy afro, came cropped from my MySpace profile.

As we spent our first year at college, all of my classmates became Facebook guinea pigs; we were the first generation that would go through college (and the rest of our lives) with the site in our bookmarks. Social networking was as new to us as a frat party, a discussion section or a telephone call home. But we learned quickly. By the end of freshman year, I had stopped visiting each of the networks I had signed up for the year before because they were courting a demographic different than my own: Friendster was for old people (which, at the time, meant thirtysomethings); hi5 was for people in Europe, or Canada, or somewhere foreign; MySpace was for… well, we all know where Tila Tequila comes from.

Earlier this year, I finally got around to deleting all those other accounts. It was a Herculean affair, one that involved retrieving lost passwords to old e-mail accounts, calling numerous customer service lines, even sending MySpace a photograph of myself with a sign that included my full name, birth date, and some gibberish about why I was quitting the site. The reason is quite simple: my generation had decided, almost for me, that Facebook was the only social network that mattered, so why bother with anything else? By now, that’s a familiar logic, and it’s part of the reason the site has grown so quickly this year, from 150 million users in January to 250 million last week. It’s a number the site loves to tout with the following fact: were Facebook a country, it would now be the fourth most populous in the world.

It took just five years for the social network to reach this point, moving its way quickly from a college dorm site, to incorporating in Delaware as a company (five years ago this month), then moving to California and securing venture capital funding, adding access to every college in America, then every high school, then every person who wanted to join. Now, as the site is going international, 70 percent of current users are coming from abroad—many who first downloaded Facebook’s translation application, which users have used to morph the English site into 50 languages, all so that their friends who don’t speak English can join. “Our favorite story to tell is that 4,000 users translated the site into French in less than 24 hours,” says Naomi Gleit, Facebook’s project manager for growth. “It’s pretty insane, right?”

In terms of attracting users, Facebook has had an undeniably fantastic five-year run. Still, it’s had a notoriously hard time transforming its membership base into revenue and profit. This year, Facebook CEO Mark Zuckerberg said that he expected revenue to increase a massive 70 percent this year, with the site becoming “cash-positive” by 2010. As a private company, Facebook does not release earnings, but a recent stock buy-out option valued the site around $6.5 billion. That said, many attempts for the company to make money (mostly through user-targeted advertising) have been rebuked by the users themselves. “If you try to count the products Facebook is testing, it’s almost mind-boggling,” says Jeremiah Owyang, a senior analyst in Forrester Research’s social media department. “Facebook hasn’t yet figured out the formula that’s going to work for the needs of the users or the brands.” Even so, Marc Andreessen, who sits on the board of Facebook (along with Don Graham, the CEO of the Washington Post Company, NEWSWEEK’s parent) told Reuters that Facebook would do over $500 million this calendar year, with billions in revenue by 2012. Perhaps as it should be, growth remains a priority over making money—”they’re not staffed up to do [advertising] correctly, yet,” Owyang says.

But revenue projections are, well, just projections. Here is the current reality: Even as Facebook marks the anniversary of its incorporation this month, nearly every other social network has shrunk. MySpace recently cut almost 500 employees, close to 30 percent of its work force, after the site’s visits dropped by five percent in May from the year before. Friendster has all but disappeared. And while it’s clear that Facebook isn’t going anywhere for some time, the company certainly can’t rely on hundreds of millions of people contentedly poking and gifting each other into perpetuity.

“I think the main danger is that the social network is getting too big,” says Fred Stutzman, a teaching fellow at the University of North Carolina, who studies how people use social networks. His current research focuses on why people leave social networks, and he’s found that the choices people make tend to be pretty sudden, similar decisions to those you make when you stop visiting your favorite restaurant, or start shopping somewhere else. “It’s something that’s going to happen soon to Facebook—and so their business team has to worry about designing products and services that keep people interested.” Essentially, he’s talking about the cool factor behind Facebook, one of the few metrics that can’t be measured by the company’s incredibly smart (and data-driven) employees.

To date, no one has come up with a reliable algorithm for “coolness,” (which might explain why Facebook fought the buzz behind Twitter by, um, copying it). But for academics like Stutzman and others increasingly turning their attention to social networks, there’s a name for what happens when everyone joins the same site at the same time, perhaps rendering it uncool: “context collapse.” That’s the term used to describe a series of awkward events like when your boss or parents friend you, or someone posts a picture of you that you don’t want your colleagues seeing, or when an elementary school bully from your past starts commenting on your status updates. As these activities cascade, social media research has shown that people begin to shy away from their online persona and begin aggressively limiting the information that appears about themselves. Not surprisingly, users begin to stress out about their tangled social scenes and abandon the network all together. “What needs to happen—and what’s going to happen—is that there needs to be more granular privacy settings,” says Nicole Ellison, who researches and teaches on social media at Michigan State University. “So I can share a status update, but one I only want to go to my high school friends.”

Facebook has been augmenting its privacy settings to allay these fears, and earlier this month, the company announced a new tool that will better control who can see what. Still, Facebook’s view is that the more information people consume on the site, the more useful the site will be, so the company is focused on brainstorming ways to go far beyond 250 million users. But the next growth hurdle will be harder to jump than those they’ve faced in the past five years, because after opening the site to college students, then anyone in the United States, and now, anyone in the world, what’s next? “Our team asks that question a lot,” says Facebook’s Gleit. “My job isn’t done until literally everyone in the world is on the site.”

Right now, her team is working on the smaller things to help the site reach everyone, which include making the site easier to join by eliminating instant e-mail verification. Facebook is also constantly testing new strategies, like suggesting people you should be friends with to make your network more useful. “One of the reasons we’ve grown so much is because of how much emphasis we put on user-trust and privacy, and that’s definitely distinguished us from the competition,” Gleit adds.

The paradox of the social network is that trust—the very lifeblood of the site’s growth—may be the same thing hindering its financial success. Recently, the company faced a series of heavily-publicized battles when users were turned off by Beacon, an initiative by the site that targeted advertisements at individual users without their consent. After many Facebookers protested, discussions arose over what information Facebook owns about each of their users, and a new privacy code was established on the site. As the network rolls out more features, it’s likely similar issues will come up. An upcoming one will allow users to search friends’ pages for their ideas—whether places to eat or auto repair shops—of how you should be spending your life. “If they can figure out a way to monetize our interactions without violating our trust,” Stutzman says, “then maybe they’ve got a chance of being the next Microsoft or Google.”

It’s an exciting prospect. Facebook has the largest cache of user-created personal data on the Internet, and the idea this could be used to create a new kind of social network, one where your friends’ provide you with information you need (as opposed to information you want) is an interesting idea. In its best form, you could turn to the network if you were planning a trip to, say, Mozambique, and wanted to figure the nicest hotel to stay at, the best restaurants to visit and the right attractions to see. The next five years, for Facebook, will likely be about testing this idea—moving the site from a social space to a service space; this search function is currently in testing. And the company insists that despite the added expense of servers and other infrastructure needed to expand its user base, it should be profitable by the next decade.

To get there, Facebook will need to connect its members with its advertisers. Its long term ad strategy includes signing on major advertisers like Coca Cola or The Gap, but those deals are a long way off , say insiders familiar with the site’s ad strategy. For now, Facebook is reliant on local advertising, which is often cheaper and lower quality. (Teeth whitening discounts, anyone?)

Still, Facebook’s ad plans could be a gamble with a huge payoff. It’s a bet currently being taken by the site’s employees and investors. Last week, longtime employees were given a chance to unload their stock options to Digital Sky Technologies, a Russian company that has invested more than $200 million in Facebook. Those eligible have about a month from now to decide whether or not they want to cash in. Whether or not that internal drama tells us anything about Facebook’s prospects for the next five years is unclear.

Regardless of whether the site ever turns a profit, it has changed the rules of friendship and the meaning of networking. But five years from now, whether we talk about Facebook in the present or past tense will ultimately be up to one group of people: our friends.

Credit: Kurt Soller

Source: Newsweek