The FaceFeed Ponzi Scheme

By , 14 August, 2009, 1 Comment

So I’ve been a bit swamped this week with several projects I want to blog about soon. As I result, I missed out on the chance to join the wave of insta-hype surrounding Facebook’s big move to buy FriendFeed. Late to the party as I am, I have a few thoughts.

The conventional wisdom that has formed around the deal is that Facebook is trying to get through FriendFeed some of the ‘live’ features it now lacks and at which insurgent Twitter excels. In particular, as Jason Kincaid points out, FriendFeed shows at the top of a page the most recent items commented on, not just the most recent items posted.

To be honest, I’m not sure this is something I’d want to see on Facebook. Effectively, this would mean turning each comment into its own status update in the News Feed. Given that well over half of the updates in my News Feed are uninteresting or irrelevant (no offense, friends, but the photos of your lunch food are just not ‘news.’), the likelihood that I care what others have to say about them (‘Hey, that’s tasty-looking? Where did you get it?’) are slim-to-none.

The reason it is valuable to Facebook is because it wants to keep enticing corporate and brand users of the site–people who set up a FB to get fans, not friends–and those people are interested in having their updates go viral. Keeping them at the top of fans’ feeds for multiple days, a FriendFeed-style system would certainly help. (In Twitter’s system, every ‘retweet’ or reply to a post is treated as a separate post.)

Even if Twitter is better at this kind of broadcasting than Facebook, neither site has a method in place to monetize the free marketing it’s giving to companies yet. Twitter has no ads; Facebook has tons of them–often really annoying ones promising me services I can’t type on a PG-13 blog– but no profits. There are more users who ignore the ads that ones that click through and advertisers aren’t going to pay much for real estate on a page that delivers poor click-through results.

The promise social networks keep making to the venture capitalist backers is that one day, the profits from advertisers will come, so they should keep investing in growing the user base. The promise social networks make to advertisers, meanwhile, is that one day, an infinitely large user base will make their ad dollars worth it. This deal takes my skepticism to a new level: the VCs have been convinced to let Facebook, a money-loser, spend money to buy FriendFeed, another money-loser, in order to get those future users and future ad dollars that will pay back everyone on the chain.

In other words, social networks promise each audience–VCs and advertisers–future returns based on investment collected from the other group, and pay out returns to neither. Instead, they sustain and rollover those promises over multiple years, increasing the amount of money invested and the number of layers of investment over time. Last I checked, that strategy was called a Ponzi scheme.

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