If you look at the top 10 Forbes tech companies you can see several interesting things. Here’s the list below. See what you can spot:
The first obvious thing is that most of them are from the US. Second – in the US, most are relatively young companies, with the likes of Alphabet (Google) and Facebook being very young. The youngest companies also have something else in common: their business model is based on advertising. Simply put – they capture their users’ attention and profile and then show ads.
The other companies – not so much, outside of Tencent.
Advertising has been the go-to business model for tech companies for quite some time
Now – no one can say that advertising based models are bad – it seems that two companies managed to get most of the advertising budgets in less than two decades, displacing large media and advertising conglomerates.
The picture, however, is a whole lot different if you look at the top 10 companies, independent of whether they are a tech company or not.
There’s not one single advertising based company in the top 10.
The anomalies that stand out are Berkshire Hathaway (investment) and AT&T(telecom). The other companies are all retailers of something. Their own products, drugs, oil you name it. Even the two anomalies are related to commerce. If you look at Berkshire Hathaway’s portfolio you will notice that it resembles the list above quite a lot. AT&T is technically a retailer of telecom services with a quasi-monopoly on the US market.
Commerce based business models are the future of tech companies
I’ve noticed this idea in two key areas:
most of the new business models that are emerging in China are not advertising but commerce based. This is due to the fact that China’s VC scene is more grounded in a historic perspective of trade rather than advertising.
Shopify’s growth has been largely ignored by Sillicon Valley due to them not being related to the crowd consensus. Its stock trades at 40 times the list price 3 years ago
My guess is that the future of tech businesses is more commerce related than advertising, payment or any other niche model. Commerce is at the basis of our society and as long as we’ll have a functioning global society (not guaranteed, btw), commerce will make our world better.
What comes to mind when you think digital payments? That would probably be PayPal. We all know Ebay subsidiary PayPal leads the game in digital Payments but now the game is set to change.
Although it does have the first mover advantage and has been going strong into omnichannel retail, PayPal is threatened by the largest tech companies in the world:
First of all, company president David Marcus has resigned (or has been fired as rumor has it) to join Facebook. His mission – building a new type of … messaging tool. And by that I mean Facebook Payments.
Google is pushing hard on its Google Wallet, a mobile bridge between online and offline sales. It is a fully NFC compatible payment system, which now accepts all major credit and debit cards, loyalty cards and discount cards. It also allows customers to save offers and buy using touch-to-pay systems.
Everyone raved about the Amazon phone but the actual big news is … Amazon Payments. With over 200 million credit cards stored and the ability to pay with one click (for a very long time Amazon held the patent on that), Amazon is probably the biggest competitor to Ebay’s PayPal.
Apple also has a huge database of credit cards stored on its server. It also has a massive database of customer options, customer history and a fully featured Keychain app built into Safari, ready to help customers do a quick checkout. Its wide device adoption allows it to become one of the most important players in the omnichannel payments area.
Less than a couple of years ago Facebook Commerce seemed to be inevitable. It just seemed one of those things that are just waiting to happen. Yet it didn’t. After a promising start, e-Commerce’s wonder child just stopped being interesting.
How did that happen? After all – so many were jumping the wagon and everyone was just eager to tap into Facebook’s social market. Well … Facebook’s IPO happened. Its market cap dropped. It got dizzy and greedy. All of a sudden Facebook stopped being a revolutionary product. It stopped valuing its users, be them companies interacting with customers or users (sometimes) willing to have a virtual conversation with a company.
Facebook got greedy and careless
In may 2012 Facebook introduced “Promoted Posts”, marketed as another way for page owners to advertise their pages. It slowly, but surely, grew into a steady source of income and a few months later the company allowed page owners to promote pages not only to fans but also friends of fans.
It didn’t stop here. Sponsored stories were introduced in august 2012 and suddenly Facebook Walls stopped being ad-free.
Meanwhile, the Big Daddy of all social networks thought … “hey, there’s a lot of spam out there and people kind wanna spam each other on Facebook too. What if … “.
5 minutes and absolutely no second thoughts later, Facebook introduces … get ready … the option to send unsolicited messages to complete strangers. If paid. Wait a minute … isn’t this spam? Oh, yes it is.
While allowing advertisers to post ads on walls of people completely unconnected to their page, send messages to anyone on Facebook, whether they opted in or not, and generally ignoring the concept of privacy, the company still has the nerve to say … “The problem we face with the news feed is that people come to Facebook everyday, but people don’t have enough time to check out absolutely everything that’s going on” (Will Cathcart, Facebook’s News Feed Product Manager).
Really, Will? Really? So basically I, a Facebook user, don’t have the time to check everything. Unless it’s paid for and then I have the time to check it, even if I never subscribed, liked, opted-in or even thought about that particular piece of content.
Facebook has very long term strategy and short term tactics. How about something in between?
Given this approach, where Facebook showed absolutely no consideration for either users or advertisers, it was of no surprise companies were going to pull back a little bit on their Facebook spending. Facebook Commerce, potentially one of the greatest streams of revenue the company could have tapped into, given the rise and rise of online commerce, was badly affected.
Payvement, a company providing retailers with access to F-Commerce features, just announced it will shutdown Payvement and its partner website Lish.com. The market reacted quickly to the news. Media’s backlash focused on Facebook Commerce but the bottom line is not just about commerce. It’s about Facebook’s vision. We know Mark Zuckerberg wants his company to usher in a connected world, with no communication restraints and no privacy. We also know that those who invested in the company early on are now pushing for financial results. What we do not know, and probably Facebook’s management doesn’t either is – what is Facebook all about? Now.
In order to address F-Commerce issues the company may need to take into account a different perspective on its product and market. It has to address some issues such as:
1. Pages should reach their full audience. Free.
Right now the usual Facebook page post reaches approximately 7% of all fan base. Let’s say a Social Media Manager has the audacity to wish for its message to reach all of its fans. Remember – these are people that willingly pressed the “Like” button, knowing that means they will receive updates.
In the mean time – Facebook decides reaching the audience is unethical if unpaid for. Yet if you are a brand and you are willing to pay you can reach your audience easily. And their connections. And their inboxes. And soon enough – their mobile phones.
What is wrong about this is that Facebook never mentioned anything about promoted posts or limiting reach when the companies were developing their Facebook pages through ads, Facebook contests, Facebook content and others that were directly beneficial to the social network.
If you were a large retailer you would think twice before moving your ecommerce operations to a company that neither cares for your business nor does it have any clear development strategy.
2. Facebook.com is just a tool.
The social network concept is out there. Facebook is not innovating anymore. At least nothing useful and visible. Soon enough it will be replicated by a company with a better vision and greater care for its users and advertisers. It is not the first social network and it certainly won’t be the last. Judging by current events Twitter and maybe MySpace (the new one is just amazing) might actually stand a chance at Facebook if they keep on this way.
3. How about thinking before rolling in the changes?
Facebook is an engineers company. Trial and error was fun back in the day and it probably worked when there weren’t 1 billion users actively using it. If you think about it, Apple is also an engineers company but it evolved a human approach. They listen to their customers, even when they are not speaking. Unlike Apple’s, Facebook’s customers, the advertisers, are not really glad about their purchase.
How about the company puts a little more effort into improving its user and customer experience and less into imposing new features that usually help no one?
Facebook needs to think a little bit more on its overall strategy. It really has to figure out what the “F” in F-Commerce stands for. Mark, you gathered 1 billion people, you got this far, don’t “F” it up!
After dropping more than 50% since the IPO, Facebook’s market cap restarted growth following Mark Zuckerberg’s on-stage interview at TechCrunch Disrupt. The company closed today with a 7.62% increase in its share price. Several factors could have lead to this fortunate turn of events but the keywords are: mobile, social search, photos and iOS integration.
Facebook has more than 488 million mobile users and the numbers are growing fast, due to increase in smartphone and mobile internet adoption. Recently the company introduced new ways for advertisers to target mobile users through sponsored stories. The advertisers were not so fast to switch to mobile ads, however: although mobile revenues are estimated at about $72 million this year, the figures are below Twitter’s estimates.
This situation is sure to change as Facebook’s focus seems to follow the mobile trend.
Probably the most important thing Zuckerberg mentioned was the fact that Facebook now serves 1 billion search results per day, “without even trying”. To put that in perspective – that is 10 times the number of Bing searches and approximately 30% of Google’s searches. Imagine that – 30% of the world’s largest search engine.
With social input Facebook search can potentially deliver better results than Google. After all, Google is not really good at answering questions but rather locating information. Facebook users usually ask their friends for help on different issues and this type of behavior creates a huge pool of data Facebook can use to answer questions in a very efficient way. Even “without trying”, Facebook has recently started monetizing its searches through contextual ads.
Facebook and Instagram Photos
Zuckerberg mentioned that there is no hidden agenda in Instagram’s acquisition. They want to help the app grow and so far they increased exposure by 1100%.
Photos seem to be a very important area in future Facebook development. Although it’s obvious that photos have a positive psychological effect on users and increase revenue through photo-page delivered ads there is probably something that we don’t know yet.
iOS is the most popular mobile operating system on the Internet, with an astonishing 65.27% of all mobile internet users. Today Apple announced several news, including the long awaited iPhone 5, the new iPod touch and some social features based on Facebook and Twitter social relationships.
Having been integrated in the world’s most popular OS means big exposure for Facebook. Even more – it means an increase in revenues.
In my last post I talked about the shift in consumer targeting that happened once the Internet went mainstream. Several highlights were the short history in consumer targeting, information regarding Amazon’s personalized recommendations and Apple’s usage of consumer data to increase music and app sales.
Now we’ll have a look at how two of the largest and fastest growing technology companies use consumer data and behavior to deliver ads. As Facebook and Google’s business model heavily relies on advertising they have to make sure ads are delivered efficiently to increase revenue.
However, trying to increase ads relevance and user experience can sometimes lead to unexpected (?) outcomes. Both companies had had their fair share of legal troubles regarding users privacy. For example last year Facebook user tracking practices lead to a request by US congressmen for the Federal Trade Commission to investigate the company. Apparently Facebook would track users web traffic even after they logged out. By linking browsing history, location and time of visit to account information (list of friends, preferences, browser) the company could potentially extend its user profiling to some very intimate data. Apparently the issue was corrected and now Facebook stopped linking browsing data to user profiles. Even so, the anonymized data can provide the company with some very good insights.
What are Google and Facebook’s revenues?
As stated above both companies rely heavily on advertising revenue. 96% of Google’s 2011 $37.9 billion revenue came from advertising. Industries that pumped most money in Google’s Adwords program were Finance and Insurance ($4 billion), Retail ($2.8 billion), Travel and Tourism ($2.4 billion) – source.
Meanwhile Facebook reported “only” $3.1 billion in advertising revenues last year. Even though the numbers are visibly lower than Google’s, Facebook advertising revenue increased 69% and topped Yahoo in 2011.
Having established that online targeting leads to generous revenues, let’s have a look at how Facebook and Google manage to efficiently target consumers using technology:
How does Facebook target users?
Facebook increase in popularity coined the term “social media”. This term describes web and mobile platforms where organizations or individuals communicate through different types of media (text, image, video etc.). As more and more users started using Facebook the available content increased, social links improved as users added more and more friends.
Facebook recognized the opportunity in consumer targeting using social preferences (Ex. “Your friend likes X Brand. You should too.”). Interestingly Facebook managed to give user profiles a real – life feeling by encouraging people to bring their friends along. Of course few people could recognize nicknames such as “MickeyMouse1982” so users started adding their real names, than their birthday, location etc.
Soon enough Facebook had a few hundred million demographic profiles at hand. These profiles were interconnected so influence groups could easily be determined. In a genius move Facebook introduced the “Like” button and later “Share”.
By using the “Like” button users would essentially hand over to Facebook their personal preferences.
As publishers saw that articles posted on Facebook were more likely to become viral and increase traffic they adopted the Like/Share widgets and later the Facebook Connect signup system. As these widgets could track user behavior by transferring traffic data back to Facebook the social network now knew what users were interested outside the platform.
Combining this data Facebook launched and improved in time their Facebook Ads platform. With more than 20% of all web traffic plus data on web traffic outside its social network, the company could potentially target ad delivery better than most other media companies. Let’s review what kind of data Facebook has at its disposal to target users:
consumer demographics: users enter their demographic information during signup or later as they use the social network
social networks: Facebook knows who is a friend of who, who is more likely to have his or her posts liked, shared or commented on. Basically it knows who is most likely to influence their peers actions with a granularity almost impossibly to achieve by others
consumer preferences: every time a user clicks a like or share button, comments, posts a status, photo or video it basically signals Facebook on some of his or her preferences regarding a wide array of things (music, products, news) that could later be used to show relevant ads.
web traffic: by tracking user behavior through like, share or social widgets Facebook registers data that even anonymized can show insights on a scale that no other company can
These are the most important factors in Facebook efficient ad targeting. Weather advertisers choose to use classic ads, sponsored stories or promote several posts the company takes into account this data to maximize exposure and engagement.
How do Google ads become “contextual”?
Probably the most disruptive technology company in the past two decades, Google relies on user data, behavior and semantics to deliver the contextually targeted ads.
To deliver ads, Google needs data. Where does it get it from?
Where does Google get data from?
indexed and ranked web pages: even though the number is not really known as Google is secretive about its data centers, it’s estimated that indexed data is stored in more than 30 data-centers. These data centers hold 35 to 50 billion pages at any given time. They are ranked according to an algorithm initially designed by Larry Page and Sergey Brin and improved in time.
web page analytics: Google Analytics is used by more than 10 million web sites. As Google hosts data regarding traffic and user behavior on these sites it can predict user behavior and ads most relevant to potential consumers.
email information: even though information is anonymized Google makes good use of mails hosted on it Gmail platform. With more than 350 million users in Jan 2012 the data flow through Google’s emailing platform is astonishing.
searches: Google responds to almost 3 billion searches every day. By analyzing searches and user paths Google can determine what are the most popular search results and how can this information be used to optimize ad targeting and delivery.
Google+ is the company’s response to Facebook’s rise in popularity. It already has more than 170 million registered users (mostly active). Having answered the need for information in social networking targeting Google further improved its advertising targeting capabilities.
Android is Google’s mobile operating system. Though buggy at start, Android is now on its way to world domination in terms of mobile operating system.
Basically Google knows a lot about a lot of potential consumers and uses these data to increase efficiency in ad targeting.
Having a look at how the likes of Amazon, Apple, Facebook and Google use research and targeting , we can surely say that conventional (old ?) knowledge on the matter is becoming increasingly obsolete. As technology replaces human input research and targeting becomes real-time.
Unfortunately some privacy issues arise when people become “users” or “consumers”. On this matter – soon.
Conventional (TV, print, radio) advertising often relies on research and targeting methods such as focus groups or demographic targeting to increase brand awareness and sales. These methods seem to be more and more outdated as targeting technology is already delivering better results.
A (very) short history of advertising research and targeting
In the past, as media was unidirectional (broadcaster to consumer), there were few ways retailers could efficiently target potential consumers. Advertisers would use consumer profiles and split purchasing options through demographic indicators (age group, location, education, sex etc.). By using statistic results they could outline marketing opportunities for certain demographic groups (Ex. “Women between 25 to 35 years, urban, having higher education are more likely to buy Product X”).
Having (theoretically) discovered a potential consumer profile they would then buy media in newspapers, radios or TV stations that would best appeal to that certain demographic group.
Of course this is just a skeletal description of the whole targeting process but it explains the process pretty well. Many companies have benefited greatly from this targeting and advertising system. Most of the brands we now know and buy were built this way. Even now, decades after the likes of David Ogilvy were setting up the rules on research-based advertising, the system is virtually unchanged.
“I notice increasing reluctance on the part of marketing executives to use judgment; they are coming to rely too much on research, and they use it as a drunkard uses a lamp post for support, rather than for illumination.” – David Ogilvy
How did the Internet change research and targeting?
Few could have predicted the impact Internet was to have on commerce and economy. Even less would have guessed how this initially “exotic” media would impact research and targeting.
20 years ago there was no marketing concept that could explain AdWords targeting and not be considered science-fiction.
Internet targeting and advertising renders most of conventional knowledge on research obsolete as technology has achieved what was once impossible. 30% of all human population is now in reach of all advertisers and they can now target more than just demographics.
Behavioral marketing is a concept that could not be possibly be achieved with conventional media. Using consumer behavior rather than demographics advertisers can target real time preferences and individuals rather than demographic groups. Say a user is known to have previously visited a car dealership website. He then browses websites in search of reviews on different car models. The car dealership could potentially target this exact user and serve him the most informative ads. Advertising ROI is sure to increase this way.
Some companies have become increasingly good at Internet research and targeting. One of them is now the most valuable company in the world in terms of market capitalization. Let’s have a look at how Apple, Amazon, Facebook and Google use large data to target and monetize consumer traffic.
How did Amazon, Apple, Facebook and Google changed consumer targeting ?
Amazon personalized recommendations
Amazon is well known for its personalized products recommendations. How can it do this? Short answer: large data on consumer purchases and mathematics. Longer answer: Amazon holds a patent on its product recommendations which you can have a look at here (issued in sept. 2006). Although rather technical it focuses on certain key elements:
user profiling: Amazon holds valuable data on user demographics and previous purchases. Using this data it can map users in specific consumer groups. User profiling combines shopping cart contents, item ratings and recent purchases as purchase intents seem to change in time.
similar products information: say you bought three SF books. Similar products would be other books in that category. Some of these books would be more popular in terms of item ratings, reviews, views and purchases.
item affinity is the probability of some products to be purchased together. Say you are buying a Kindle on Amazon. You are very likely to buy a cover or case to protect your device. That means these products have a high affinity index
driver items are those products that are most likely to drive traffic to store. Again – the Kindle, Amazon’s best seller is not only a driver item but also a platform that insures further product purchases.
user path: the consumer will follow a certain path until it ads a product to the shopping cart or confirms a purchase. These paths are very important as they can be used to “guide” consumers to products they are most likely to purchase.
Using these information (and probably more) Amazon can first map users in consumer groups (1), extract popular, affinity and driver products (2), compile most profitable user paths based on previous history and other users actions (3) and than recommend the items most likely to increase basket size.
Recently Amazon announced the launch of its Kindle Fire product. This product is built on a Android platform and uses a proprietary web browser called Silk. The browser optimizes web traffic by routing it through Amazon’s servers. As Amazon already holds information on user profiles (users will have to login to synchronize their book collection) and now data on web traffic it can further improve its recommendations.
Apple Genius recommendations
Although Apple does not explicitly state it monitors iOS user actions it doesn’t deny it either. If it does, however, it might access a huge pool on users data such as web traffic, mobile purchases, locations, call history, social networking information (through access to contacts information, call history, SMS and iMessage history etc.). Basically everything there is to know on its customers profile.
For now the most visible way Apple uses data to increase sales is iTunes Genius, the music and video recommendation system. iTunes Genius uses purchase history and iPod activity to recommend potentially interesting songs, albums or videos.
Although iTunes Genius probably uses a system similar to Amazon’s it is not yet known to be as accurate. The performance issues are probably connected to the number in customers and items on sale. Amazon has a wider products inventory and a larger pool of potential customers. This leads to a larger database and increased accuracy.
Technology based companies have changed the way we think of consumer targeting and advertising. Innovation lead to profits and behavioral targeting will probably develop in the future. Tomorrow we’ll have a look at how two of the largest advertising – revenue based companies, Facebook and Google, use large data to improve consumer targeting. Stay tuned.
“Your friend sent you a request” says my Facebook notification. That must mean one of my Facebook friends is playing one of Zynga’s or Konami’s social games. You know the type – manage a farm, a city or something close to that. You’ve finished building a windmill – what an achievement – share it with your friends. Need your crops faster – oh, no – share it with your friends.
These type of games, however annoying are highly addictive (at least for a moderately short period of time), highly viral and for a while they seemed to be the grim future of the gaming industry. After a fast growth period Zynga reported a loss of $400 million dollars in 2011. Not because of how bad its games were doing (Zynga owns 2011 top 5 most played games on Facebook and its revenues were $1.14 billion dollars). No, they payed “stock-based compensation expense for restricted stock units issued to employees”. $510 million dollars in stock-based compensation it did not had to pay until it went public.
However bleak Zynga’s future might look they still own some of the most popular social games and they started to adapt to the rising trend of mobile-based gaming (tablets and smartphones).
Its main competitor, Konami, is not doing too bad, either. Actually Konami’s social gaming division reported a 77% increase in revenue. Given the sharp rise in Zynga’s and Konami’s revenue we can see clearly that social gaming is a great investment . What makes it so?
Social gaming is highly addictive
Social gaming makes use of some incentive design based on social activity and achievements. Social gaming companies use human psychology to create levels of addiction close to gambling and these games usually have slow learning curve, use many motivators to commit users to revisit the game (plant a crop, come back after 10 hours to use it) and use instant gratification to convince users to purchase upgrades.
Behavior economics in social gaming
Interestingly, most of behavior economics principles can be found in these type of games: from peer pressure to “doing the right thing” (don’t let your crops die) and clearly seeing the outcome of one’s action – all add up to a picture where behavior economics seem to be the baseline for virtual economic architecture in games such as Farmville.
The virtual life in social games
Reality perception is altered when such games are played and playing the game seems to be more of a daily task then entertainment. To understand the high interest users have in this type of gaming we must remember that in our day to day life few things seem to add up like the virtual life in social games does. Click a button – start building a farm. Click another – plant crops. Come back after a day and you can cash in your hard earned coins that you can reinvest. It is a little harder to do that in real life. Sometimes – no matter how hard we try achievements don’t seem to pup-up.
We expect an end to our actions. If possible a fortunate one. We have been planting crops and harvesting them for thousands of years. Our bed time stories always have an end. The movies we watch program us to expect an introduction, action and the grand finally. Our lives don’t usually have that and this is one of the causes of modern stress and depression. Having a secondary life where everything is simpler and more colorful is a reward in itself.
The architecture of social gaming
Most social games have a pretty simple story that gets you hooked. The first form of profitable social games were the MMORPGs (Massive Multiplayer Online Role Playing Games) where you played a character and took possession of his actions. Other players would join in and you would search for coins, artifacts and battle different monsters or other players.
What are the lowest common denominators of most successful social games?
1. The story – as we are used to stories from infancy we best deal with adopting a new concept if we receive it in a story. Weather you are living in a future where aliens are threatening to take over the universe, a village where your survival depends on how well you manage your farm or a fantasy world where elves and trolls are trying to get you – you need a story. Without a story no game-addiction can develop, there is no understanding of one’s actions and the game flops.
2. The setting – the environment is really important as that is the context for the players actions. If you are in a farm you don’t usually battle star ships. There is no need for extra mana to cast a spell and there are, usually, no monsters you have to slay.
3. The character – people play games to foster their imagination and to escape the usual reality. That’s the same reason we watch movies – we need alternate realities where we can embody some other character.
4. The economy – whether players are searching for extra stamina bottles, artifacts, coins or other incentives they do that because they understand the need for an alternate economy. Economics are so well embedded in us that social games that have no economic notion can never become mainstream.
5. The limitations – social games have to have limitations. Without limitations there are no achievements. Without achievements there is no psychological gratification. No limits – no endorphin.
6. The incentives – what makes users tick? Incentives. Search for an artifact and you can defend your castle. Develop more farms and you can buy more land. Upgrade your ship and you can win the battle you previously lost. Incentives makes people act. Just as the real world economics incentives are the carrot that works better than the stick.
7. The social features – imagine playing tag by yourself. It isn’t too fun, is it? We are deeply social animals and everything we do is based on how other people react to our actions. Social gaming evolved so fast that it makes it so easy for users to attract peers and develop common interests.
What social gaming lacks right now?
Most of what we now call social games have developed strong social ties, a great system of incentives, some kind of limitations, some kind of game economics but they lack the story and characters. It’s not all about the graphics. The user has to understand the back story and understand who is he in the game. Just like our real lives the most important things about how we relate to the world are the things that shaped us, who we are and who will we become.
Zynga’s social games lack the story and the characters which is not much of a problem right now but people will get bored with the shiny incentives and peer pressure. For a long term user retention social games need to develop personas and epic stories.
Thomas Metzinger, a German philosopher, stated in “The Ego Tunnel” that we understand reality through a scaled down replica of the reality surrounding us. He based his research on neurological research, human psychology studies and artificial intelligence tests. Why is that important for social gaming? If users are not fully immersed in the gaming reality – they can easily abandon games. The game world is not really a personal perception of reality. Social games are shifting the perception of what is real and what is not but only for a limited time.
In the future I expect social games to develop the social gaming worlds to an alternate reality and developing characters. It’s happening right now with World of Warcraft. There are 10.2 million paying subscribers, fully immersed in the story and characters Blizzard created.
In 2010 we wrote a study on Facebook Gaming. Most of the assumptions and predictions turned out to be right. Here is Gaming on Facebook .
Part two of this article will come soon and will focus on the economics of social gaming.
Many things have been said about Facebook. With more than 900 million users Facebook is changing the way we communicate. People share their thoughts, photos and stay connected to friends through the largest social network. 1 out of every 5 webpage views on the internet is on Facebook. That means Facebook is big and popular but is it moral?
Why question the Facebook’s morality?
Facebook is not just an website. It is a communication platform where almost 1 billion people gather daily. Facebook shapes these people’s reality through the information it filters. You must be aware by now that not all your friends’ posts appear on your all but just those that Facebook deemed interesting to you (“top stories”). Having such an input on users outlook on reality means that Facebook controls at some incipient level the things we see and therefore the way we perceive reality.
Think about the way we usually perceive the world through our senses: sight, smell, taste, touch, and hearing. Imagine one of your senses would be altered. Let’s say sight. If we weren’t able to perceive the colors we would believe the world is black and white and by consensus the world would be defined as black and white.
Social media in particular and media in general are filters that define our perceived reality. They help us build a mental replica of the world in our brain. Any alteration of these inputs alters our reality.
Think about what that means in terms of human control: you have one trusted source of information that is able to filter some details out of your reality. How does Facebook does that, how does Facebook filter information out of my news feed?
Is Facebook moral?
Facebook, Twitter and other social networks revolutionized social relationships. With a larger pool of potential mates users can find themselves a little to attracted to the idea of polygamy. A recent UK study even pointed out that a third of all recent divorces point towards Facebook as a contributing factor.
Users, especially young ones, point toward a certain depression caused by the social network. The reason seems to be the fact that they don’t always feel adequate among their social media friends. With others posting interesting status updates and photos regarding an unrealistic lifestyle (ever had the feeling that all your Facebook friends seem to be either travelling, partying or just enjoying a perfect life?) teens feel that they can’t measure up to that kind of lifestyle.
These things paint a pretty dark picture of the social network we thought to be spotless in terms of helping human relationships. That picture is not actually accurate, though.
Facebook is as moral as guns
Facebook is just a bunch of code patched together. It does not cause infidelity, depression or jealousy by itself. It just helps these things, sometimes.
I will focus on the fact that one third of all marriages in the UK point towards Facebook as a contributing factor. Data shows that there is a slight increase in divorce rates in UK, but it can’t be caused by Facebook.
A 2011 study showed that there was a slight increase in divorces in England and Wales, in 2010. However the number of divorces per thousand married population have actually gone down in the last ten years.
More so, if you would look at the image on the right you would see that the year Facebook opened to users 13 and older is the same year the number in divorces started going down.
If Facebook was actually causing adultery and divorces the numbers would have gone up by 30% but they didn’t. If you are looking for a correlation the data points to an actual decrease in divorce rate.
Facebook can’t be blamed for choices people make
Adultery, lies, jealousy, depression are all part of what makes us human. We make wrong decisions and we are willing to blame anyone or anything for our mistakes. Sometimes the lack of privacy that Facebook is known for exposes those mistakes. Of course people blame Facebook for their divorce. They blame it because they got caught.
As you might have heard George Soros, the Hungarian – American investor known for his 1 billion $ profit in the 1992 “Black Wednesday UK Crisis”, is reported to have sold his stakes in financial companies such as Citigroup, JP Morgan, Goldman Sachs and Wells Fargo, and bought 341 000 Facebook Shares.
Why would Soros buy Facebook stocks?
The decision to buy Facebook stocks that have been steadily falling since the IPO is at least intriguing as the share price dropped 45% since the 18th of May 2012, the day when Facebook went public. Even more intriguing is Soros’ decision to sell his financial companies shares over Facebook.
Let’s look at the chart and then a quick set of facts:
LATER UPDATE: Facebook unlocked its inside investors shares and the share price dropped 6% and than bounced back to ~$20 per share.
What does George Soros know that we don’t?
George Soros is known as a very informed investor. He knows when to sell and when to buy. He also sold his minor stakes in Intel and Dell.
I can only assume that George Soros bets on one of the following:
A large partnership Facebook is about to join. Last week I’ve noticed some Apple-Facebook motion and discussed the possible implications. Such a move will have positive implications on Facebook’s stocks.
Facebook stocks will begin to rise as the company will provide the market with evidence of its increase in revenues, in the future.
George Soros’ is attempting to trick the market into increasing demand for Facebook stocks. His actions can be enough to increase the Facebook stock price.
I believe that by the end of the year Facebook stocks will see a positive trend and pass a 25$ /share price. After all Facebook is a very valuable company and will continue to be so in the future.
Humans are not usually rational. The neoclassical economists were wrong. We don’t make the best economic choices given more information. We do not plan for the future. We care about what others think of us. We act on impulse. All these things are the basis for Behavioral Economics Theory.
This (rather) new economics theory has caught momentum and is now one of the hottest topics in theoretical economics. Well… as hot as an economics theory can be. It blends psychology and neoclassical economics (the thing we generally call economics) to help explain why we act the way we act and to help policy makers increase the likelihood of better economic decisions.
There are many variables and a lot of information on the subject but for a better understanding we can look at some principles outlined by The New Economics Foundation:
Other people’s opinion matters: we take great interest in what others think or do. We don’t usually get informed on economic topics. We usually copy behavior and decisions. Why? First of all we are a social species. We want to be socially acceptable and we can do that easiest by mimicking. It’s also easier.
We are creatures of habit: even if what we do is economically wrong we will continue doing it out of convenience or because we have a habit that forces us to do what we do.
We want to do the right thing: we have an innate sense of justice that leads our behavior. Most of us pay our fines not because we might go to jail but because “it’s the right thing to do”. We help others because it makes us feel good, not because there is any financial incentive in it. Actually such incentives may actually be counter-productive as they take out the primarily motivation – doing the right thing.
We act according to our self image: we care about our commitments and we like to stand up for what we believe in. We see ourselves in a certain way – that leads us to certain kind of behavior in order to avoid cognitive dissonance.
We are more loss averse than gain interested: we hang on to what we believe is ours. We treasure our possessions more than we value what we could potentially gain.
We are not very good with data: we don’t really understand numbers, we’re bad at calculating probabilities and we take decisions based on how information is presented to us.
We need to feel empowered to take action: too much information can lead to the inability to act. Too many options make us feel helpless. People need to have a clear understanding on how their actions affect the world around them to fully commit to any activity.
Behavioral economics in social media
Feelings, sharing, likes, friends, fans are not words we usually hear in business economics. We do hear them pretty often these days in social media. Business are starting to understand the importance of customers behaving socially. Social behavior is what drives companies to success or into the ground. There are no formulas in financial economics that can describe the feelings people have toward one company or another.
Classic economic behavior can be described in numbers on a spreadsheet but is not the way real people act. It is a flawed economic model in an economy that results in debt and frustration. The first result can be seen in the financial models we’re currently looking at. The second one cannot.
There is a growing media that helps express and amplify the principles of behavioral economics. That is the Social Media. With the growth of such social networking companies such as Facebook or Twitter, people started acting more and more connected. We now have an way of observing behavior with the help of social media. As it turns out all the principles of behavioral economics can be seen in social media. Let’s have a look at them:
Behavioral economics principles at work in Social Media
Other people’s opinion matters: we care what our (Facebook) friends think of us. That’s why we share interesting quotes, we “like” only certain brands and we are very careful before posting something online.
We are creatures of habit: first of all have a look at your behavior today. You have probably checked your Facebook timeline or Twitter profile at least once today. Why? Because you are accustomed to Facebook. You can’t give up checking the news, the photos your friends posted or the new products your favorite brand advertised on Facebook. Increase in mobile internet popularity is only enhancing this behavior.
We want to do the right thing: people are sharing more and more social causes through social media. With over almost 1 bn users, Facebook acts as a catalyst for social causes. Social causes spread fast and users are very likely to share social messages. But that’s not all. Individuals as well as organizations now know that anything wrong-doing can have a long term negative impact on their life. Here is a video of a police officer pepper spraying demonstrators that quickly lead to a large negative social media response. If you were to search Google for the phrase “Sgt. Pepper Spray” you will find no less than 213 000 pages that frown upon his behavior. Eventually his email address and home address leaked to the internet. You can imagine the outcome.
We act according to our self image: People have a certain self image that translates into social media behavior. For example: Barack Obama’s “Hope” presidential campaign was not really about the soon to be president. It was about the people that he represented. People found in the campaign a positive message for change. They’ve seen that the presidential candidate expressed a need for better people to run the country. People such as themselves. A lot of Obama’s success story happened on the internet where people expressed their views on “Change”. The messages they’ve spread were positive expressions of self image. People were not “like”-ing Barack Obama. They were “like”-ing themselves and the way they wanted their friends to see them.
We are more loss averse than gain interested: Think about how often you see messages like “don’t lose the opportunity”. Why? Because they work. Groupon cashed in on the feeling people have regarding limited time discounts. So did Woot. Using loss-aversion works really well in online retail.
We are not very good with data: If neoclassic economics theory would be true and if we really were rational beings, Groupon would never had caught on. Buying a discounted sky dive or a night lamp when we have ten already does not make sense economically. However, people did buy those things. Why? Because social media goes hand in hand with presentation bias. Suppose we see a 70% discounted offer on blue handkerchiefs that were already bought by 300 people. We think – “oh my, I must buy that handkerchief now or they will go out of stock. Look – 300 people already bought it”. The information has been framed (70%) and enhanced by other people’s behavior. We do not think whether we need the handkerchief or not, whether it is an economically safe behavior. We see the deep discounted price, we see that other have already bought this (see point number 1.) and we “need” to buy the handkerchief. Now.
We need to feel empowered to take action: there are millions of products on Amazon. Billions of web pages indexed by Google. If we were to browse rather than search we would probably get frustrated and quit. However – we still use Amazon and we still use Google. Why? Because of targeting. Both companies dig through millions of terabytes regarding other people’s behavior to serve us the products and results we are most likely to buy or open. That makes our choices easier and we feel empowered to act.
I believe behavioral economics are here to stay. The kind of human behavior they explain has always been here. Social media is just acting as a catalyst to this kind of behavior. If we are to look deeper into behavior economics we need to use social media data to better understand the way we act and how can we get to economic results. The internet economy is growing at a faster rate than any other sector because successful online entrepreneurs already know the seven principles outlined here even if they’ve never heard of behavioral economics.