Facebook's business problems are symptomatic of many large digital firms

Facebook is wrestling with a business challenge more traditionally found in legacy media: how do you translate consumers that don’t think they have a commercial relationship with you into relationships that that other firms will pay for?

Despite 955 million active users and increasing revenues, the company has lost a third of its share value since its IPO in the spring.  The exuberance that surrounded its IPO and overpriced its shares has worn off and investors are realizing that being big isn’t enough to ensure business success. Its latest earnings reports show the firm lost money, $157 million, in the second quarter on income of $1.18 billion.

Facebook’s challenges are symptomatic of a long line of “successful” digital firms that are experiencing monetization problems, including Yahoo, You Tube, AOL, and Twitter. Despite large numbers of users globally, they still lack effective business models to generate revenue levels congruous with their size. They may provide great communication functions for users, but they are not transforming very well from innovative users of technologies to highly profitable commercial enterprises.

Part of their challenge is that they have to focus so much effort on non-paying customers and those customers think of the services as personal communications—making them resistant to many efforts to monetize them. This problem has long plagued traditional media, but they are conceived as mass rather than personal media and have been around so long that many people are now used to a certain level of commercial exploitation. They also have a proven track record of return on advertisers’ investments that digital media have not yet been able to deliver for many types of advertisers.

Large digital players will continue to evolve and can be expected to improve their financial performance over time, but it will take a good deal of innovative thinking about the business rather than about the technologies and social value of their services.

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Letting go: Making sense of social magazines and news readers

Applications that aggregate articles based on what others in one’s social network are reading and reformat them into an attractive magazine and presentation formats are growing in popularity, but they are raising concern among some publishers.

The processes build upon the referral and curating functions of colleagues and friends in social networks and reduce the need for users to go to multiple sites for content on their own. Some of the best known social magazines are Flipboard, Newsmix, Currents, and Pulse. Some publishers are starting their own social reading apps, such as New York Times that has a Facebook app pulling together stories that friends have read in NYT.

Many publishers are fearful of these developments, however, because they represent another step away from publishers controlling when, where, and how readers use their content, reduce the impact of the publishers’ brand strategies, and diminish control over the presentation and marketing of their content.

But publishers really don’t have a choice whether or not social magazines and readers grow in importance. That ship has sailed. The real choices is whether publishers use them for best effect and whether they are willing to accept the benefits of having more readers driven to their content and reaching persons who haven’t used their content before.

In coping with this and other disaggregation of content, however, many publishers need to adjust their own ways of presenting digital content. Because readers from social magazines, other aggregators, and search engine are directed to individual articles, it becomes more important to think about how that material appears to these new readers and what can be done in its layout to attract the new readers to stay on the site and sample more content. They are not entering through the home page so greater thought needs to be given to what appears on article pages.

Social magazines provide another mechanism by which deliver content to new readers and to existing readers in new ways.  They are not the ‘silver bullet’ for solving publishers’ digital challenges, but they are another means by which benefits can be obtained and pursued. 

Focusing on what control social magazines transfer to users and their branding downsides is a distraction for publishers who are beginning to learn the value of letting go of the control in the digital environment. Digital media are now bringing 15-20 percent of the traffic to many publishers’ digital content and they are feeling the benefits of letting readers decide the means and uses of that content.

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