Facebook’s Conundrum

on November 1, 2013

I used to be very bearish on Facebook. I’d say I’m more skeptically neutral now. Each quarter Facebook has posted significant growth in terms of monthly active users. Yet when we talk to consumers, particularly younger ones primarily in the US, we kept hearing of declining usage. Patrick wrote a great article earlier this year called Facebook is for old people based off things he was hearing from his kids and their friends.

For some time we had been hearing the same with the younger demographic. We did find some interesting related data that even many consumers of all ages who had been on Facebook more than three years noted a decline in their daily usage. So Facebook’s own admission that teen usage on their service is declining came of no surprise.

Before I dive into what I think the conundrum is let’s take a look at their growth as a user base at large then also the growth of mobile users on Facebook.

Screen Shot 2013-10-31 at 3.30.13 PM

The key to this chart is the growth of mobile active users which is now nearly every active user on Facebook. My hypothesis all along for the steady growth of Facebook’s quarterly increase of monthly active users was that emerging markets were coming online and joining the Facebook revolution. We know that many emerging regions have helped spike the adoption of smartphones very sharply over the past 12-18 months. In these regions many of these consumers do not own PCs so their smartphone was their sole portal to the Internet. In fact it is possible that Facebook itself was one of the primary driving factors for many consumers in these regions to get smartphones in the first place, buy a data plan, and connect with the broader world.

Benedict Evans eloquently stated this in a recent tweet:

iPhone is a tool to sell data plans in the USA. Facebook and Whatsapp are tools to sell data plans in emerging markets

This statement hits the nail on the head as to the growth and sustained active users for Facebook. Interestingly the same is true of Whatsapp which is adding about 50m new registered users per quarter. Another is LINE which has added 100 million active users since January of 2013 and is now currently at 280m users. As the world comes online via their mobile devices they are looking to discover and connect. But what happens three years from now when they are mature users. My suspicion is that these types services which acquire users quickly can also lose them just as quickly.

All of these companies are mobile first companies. Facebook used to be a PC social network and now they are a mobile company first and foremost. This is evidenced by their continual growth of mobile ad revenue. It is truly a mobile world.

Facebook’s Conundrum

Plain and simple, Facebook’s challenge is engagement. Early Facebook users find the joy of discovery and connecting with friends, family, those they lost touch with, etc., as a very sticky experience. Facebook’s on-boarding(initial sign-up and discovery of the service) experience is quite quick and clean because fairly quickly you can start connecting with schools, alumni, friends, family, etc. Within a few hours there is a wealth of active social data available to you.

But overtime, that discovery fades and Facebook becomes more about maintaining than connecting. Checking in and the occasional sharing rather than discovery. The challenge for Facebook is to continue to evolve the service to encourage and maintain engagement even after it moves from the discovery phase. [pullquote]Facebook would be a great service if you un-friended 90% of your friends[/pullquote]

One theory I have is that so many of us grew our friends list so big that the amount of noise vs. genuinely interesting things becomes so overwhelming that stop engaging heavily due to that noise. Someone once told me that Facebook would be a great service if you un-friended 90% of your friends. This is a fantastic point but also one that would come with a cost. The value of having a large network is that the timeline is fresh. The problem with that, to my earlier point, is that most of that is noise..but it is fresh noise! If we were to unfriend most our friends except the ones we are truly close to, the content would most likely be more relevant but it would also not be as frequent. So by nature Facebook would be better, but it may not make it that much more engaging.

Contrast this with Twitter. Twitter is my favorite and easily my most time consumer app of my day. I may actually be on Twitter more than any app including email. Twitter has the opposite problem of Facebook in that the on-boarding is an issue. You sign up for Twitter and it takes a significantly longer amount of time to find relevant folks to follow. And Twitter, unlike Facebook, gets better the more content sources you follow. Once you have curated your own network of hand selected interesting content sources, you find your timeline stays fresh and stays relevant. This is why I spend so much time on Twitter. I have hand selected content sources that I find relevant and interesting. I follow 793 sources and the quality of my timeline is so relevant that I do what I can to not miss any tweets by playing catchup throughout the day. With Twitter taking the time to invest in volume sources makes it better. With Facebook taking the time with volume sources arguably makes it worse.

Twitter may or may not reach mass market status. For me and what I do it is an invaluable resource, network, and communication tool. Facebook is clearly a mass market product but they have a challenge. They may or may not figure this engagement problem out. Perhaps they don’t need to. So long as they continue to find relevant ways to deliver engaging advertising on mobile devices and continue to run a healthy business they should be fine. But they are now a public company and investors are relentless about growth. Engagement is one of the keys to Facebooks growth metrics that investors care about. That is why I remain skeptical.