Monday, May 3, 2010

The Social House of Cards

I believe that right now we are living in a bizarre era of the web that will be looked back on as a charming, fun, but mostly misguided period. Much like Altavista was a transitional technology that led to Google, Facebook (and it's newly acquainted sidekick, Zynga) is a product borne out of this unique era of the web's evolution, but will ultimately be seen as a transitional technology, not an everlasting empire. Unless of course the house of cards therein is rebuilt into something with a stronger foundation.

For the rest of this post, I ask the reader to remember Facebook's ultimate monetization path is assumed to be advertising. And of course, Zynga's monetization relies upon the mechanics of social gaming. The former, dubbed "Social Advertising" is discussed at length by Mark Maunder here.

Social advertising and social gaming are built upon several things which cannot be taken for granted, in the long term. Remove any one of these, and one or both of these revenue models evaporate.
  • People do not mind that their information be shared with third party sites to enhance their online experience.
  • People act as though virtual objects and virtual labor (mouse clicks) are real objects and real labor.
  • Social networking and gaming are the most appealing use of day-job free time.
I will go on to argue various scenarios which undermine these assumptions.

Scenario 1: Creepy Ads

In online advertising, there is a fine line between "relevant advertising" and "creepy advertising." Creepy advertising is like porn: hard to define, but you know it when you see it. If I were to try, creepy advertising can best be quantified by how much an ad makes you feel like someone is spying on you.

Remember: spying is often simply observing what people do in public. The creepiness stems not from the observing itself (we watch people doing things in public all the time), it's recording, aggregating, and acting upon those observations.

This type of aggregation and action lies at the heart of Facebook's monetization strategy. They want to aggregate and act on public, personal information in a way that is profitable but not creepy. They haven't succeeded yet, so this is why they are moving more and more towards creepy in their search for profitability.

The next step, as we all know, is to start sharing your information with third parties and letting them do the acting. This is opt-out, meaning it will start happening generally without people being aware of it. This will certainly result in more relevant advertising for some, but risks resulting in creepy advertising as well.

The hard problem for Facebook is it may only take one creepy impression in a pile of thousands to nudge a user towards turning off data sharing. And once turned off, that kills that user as a revenue source for Facebook. Not only that, but a user creeped out by Facebook-driven ads will probably loudly announce this to their friends, ironically, through Facebook. The network effects Facebook enables could very well turn into a self-destruct mechanism, a meme spread through the social graph in a few short days causing everyone to opt-out.

By this, Facebook is now trusting all third parties to act in a non-creepy manner. Viewed this way, Facebook's move to loosen data sharing rules seems at best naively reckless at worst a hail-mary pass to find a revenue stream.

Scenario 2: Privacy Disaster or Tragedy

The consolidation and availability of personal information and social connections opens up the possibility of it being used for much more devious things than creepy advertising. With services like Amazon Elastic Map Reduce and Elastic Compute Cloud, terabyte-scale data processing is accessible to your average consumer.

This algorithmic power, combined with the massive datasets available on the social graph, open up the possibility that seemingly impossible to answer questions about individuals can be answered, even if those folks are not even part of the graph itself.

So much information is within easy reach that it may enable some large-scale crime, disaster, or, god forbid, tragedy that goes beyond the typical identity thefts and security breaches we've grown used to reading about.

Such an event, reported by the media, that causes irreparable harm will pull the rug out. Afterwards, the public will be clamoring for, and the politicians eager to provide, regulation of the flow and analysis of aggregated social data. Such an event and the subsequently enacted laws will not only legally restrict the flow of information, but would cause users to think twice about what they share, similar to the scenario above.

Pending such an event, the information flow underpinning social advertising is one stroke of a pen away from disappearing.

Scenario 3: A Virtual Waste

Virtual objects & labor are valued by users in a way very similar to real objects and real labor. Farmville relies upon people valuing their "investment" in virtual labor to plant and harvest their crops. Virtual gifts on Facebook rely upon people valuing the experience of receiving those objects as if they were real.

It may always be possible to expect people to project real-world values onto virtual things, but there's a catch. No matter how real a virtual thing feels, a real thing is more real. For example, if I could buy you a virtual puppy or a real puppy, which one do you think you'd value more? If you spent an hour virtually harvesting your crops and an hour tending to your backyard garden, which do you think you'd feel more strongly invested in?

Ultimately, the valuation of virtual goods has a shelf life, until a real good can displace those virtual goods in whatever scenario they are being valued. Similarly, virtual labor towards virtual accomplishments is valuable only until actual labor towards actual accomplishments can be had with the same effort and time. (For more on this, check out Achievement Porn.) Time is the great equalizer in the case of labor, so virtual labor towards a virtual farm could be displaced by real labor towards something else altogether.

This observation doesn't tell you what these displacements are, only tells you that they exist. The day that an enterprising entrepreneur can provide a game that provides all the toil and benefit of the virtual labor on Farmville, but with tangible, physical results, is the day Farmville will seem quaint, silly, and a "waste of time."

Scenario 4: The Free Time Gap

Social gaming and social networking has apparently tapped into a vast reservoir of free time people have during their day jobs. What is so special about this time?
  • It is peppered with interruptions.
  • It is time in which people do not want to think too hard, since that energy is reserved for said interruptions. They'd rather spend the time being entertained.
  • It is time in which people have access to a computer with internet access.
  • It is time in which they likely need to be somewhat discreet about how they are using it.
As you can see, social gaming and social networking fits these constraints quite nicely. It can be context switched out of quickly, requires little thought, and lets them use the computer they already have Excel opened up in another window on.

You'll also notice that there's nothing that necessitates social networking & gaming as the best use of this time. Previously, this time was likely filled with mindless web surfing, shopping, or flash gaming. Social networking & gaming provide a more enjoyable use of this time (while not breaching the constraints), but there's nothing preventing another phenomenon to come and fill this gap.

Going back to the previous scenario, anything that supplants virtual goods and virtual accomplishments with real goods and accomplishments (while not sacrificing the above constraints) is a good candidate, since it will be valued higher by most users. Again, no solutions here, but the gap should be made clear: peoples' free time may be getting sunk into social networking & gaming, but this gap can be filled by something else, as it has been before.


I can't predict the future, but much of what I see around me on the social web screams "transitionary."

The social web devalues privacy and over-values virtual goods and accomplishments. On either of these counts (if not both), time will tell if they are sustainable.

Most major shifts in society are one of over-reaching due to new possibilities, followed by retraction as the consequences of that over-reaching are realized. (As noted by Auren Hoffman here.) I see this dynamic playing out with the personal information being posted to the web. I think web 3.0 will be less about new information flowing to new places and more about controlling (or stopping) the flow of the information that's already out there.

Beyond this, I see the rise of virtual goods & labor as a bizarre anomaly, similar to the CD player that played MP3s on CDR's or the projection TV, a solution that uncovers the problem, to which an appropriate solution will be applied. I think this solution is on the horizon.


Michael said...

But isn't Google just a better execution of the same idea as Altavista?

I do agree that the current trajectory of Facebook and Google (Buzz) with respect to privacy is making me a little uneasy. It's a little too creepy.

Jason said...

Great points, especially regarding privacy.

I think there's more to virtual gifts though. It's not about utility to me, it's about perception among others. A rolex provides little utility to me over a $20 casio, but conveys to others that I'm 'big pimpin'. Or the high score on the pacman leaderboard at my local arcade.

Matt said...

I like your virtual waste points. You've expressed quite nicely the vague feeling I have about pretty much all social gaming and quite a bit of the rest of social networking: "what a waste of time."