Facebook Should Pay Attention to This New Competitor

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It appears new social-media site, Ello, is exploding in popularity. As reported by Vox Media, at one point last Thursday, the site boasted signing up more than 30,000 users an hour. And while bragging about a mere 30,000 signups per hour appears to be rather inane when compared to Facebook's massive installed base that now totals over 1.3 billion monthly active users, Facebook investors should understand the risk Ello signifies.

What Ello is ... and why it is (potentially) better
Ello, still in its beta testing mode, is an independent network where users can post and update profile pictures, add friends and contacts, follow people, and post statuses. On the surface, this seems exactly like Facebook without the competitive network effect and competitive advantage that Facebook currently possesses. For perspective, the social-media site most like Facebook in terms of user functionality is Google+; Facebook has roughly three times the monthly active users Google+ has.

With that being said, Ello seeks to change the business model of social-media sites. While Facebook and Google+ are ad-based revenue models. Ello seeks to attain something more akin to a freemium model. By aligning its revenue directly to users, it can potentially lead to a better experience.

Freemium vs. ad-based
Ello operates a freemium model; one that's free in which you have to pay money for added features. This model is most prevalent in mobile gaming -- companies like King Digital and Zynga have utilized the model to better monetize their gaming products.

Ello's manifesto is a direct attack an ad-based models [emphasis added]:

Your social media is owned by advertisers. Every post you share, every friend you make and every link you follow is tracked, recorded, and converted into data. Advertisers buy your data so they can share more ads. You are the product that's bought and sold...We believe a social network can be a tool for empowerment. Not a tool to deceive, coerce, and manipulate - but a place to connect, create and celebrate life. You are not a product.

While the manifesto is rather blunt, it is correct: In Facebook's current model you are not the customer -- you are the product. The customers are marketers clamoring for your personal data. And so far, Facebook's been rather good at providing them with it. The company grew ad-based revenue an outstanding 67% in its recent reported second quarter on a year-over-year basis.

Atlas helps investors, but has the potential to anger users
On Monday, Facebook is debuting its new ad platform, dubbed Atlas, that will allow Facebook to share its huge repository of data with advertisers to better target Facebook users and assess each ad's effectiveness. The end result is highly targeted ads that advertisers will pay more for.

Facebook continues to straddle a fine line between investors and users. Investors want to continue to grow ad-based revenue. Users want a clutter-free experience and to connect to friends and loved ones. What ruined Facebook's top-spot predecessor, Myspace, was too many ads and an ugly, clunky interface.

The trade off between investors and users has been particularly acute in Facebook's Instagram property where users revolted when Facebook initially tried to bring ads to the site. Facebook is moving slowly on Instagram monetization to address user concerns.

With that being said, Ello isn't a threat but does introduce a new wrinkle
Although many have concerns with each keystroke being analyzed, on the whole it hasn't stopped the proliferation of Facebook or other social-media sites. In the end, our desire to connect seems to outweigh any apprehension related to data collection. So while the freemium model seeks to solve the irritation of ads and addresses privacy concerns, it doesn't appear as if it is a widespread issue.

Not only that, it appears data concerns aren't even the reason that Ello is growing. Ello's rather impressive growth appears to be centered in Facebook's policy of having users use their real, legal names. This policy particularly angers those in the LGBTQ community. Many new Ello users appear to be from the LGBTQ community as a result of what they feel are favorable policies -- a muscular no-harassment policy and the ability to use whatever name you feel.

Final thoughts
Will Ello succeed in knocking Facebook off its perch? Probably not, but the company's short-term growth is impressive. As Facebook continues to grow both on a monthly active user basis and a revenue basis, look for continued challenges to the company. Ello may have unwittingly found a way for other social-media sites to compete against Facebook: targeted and focused user outreach. If social-media sites focus on a subset of the population, rather than the whole, it will be hard for Facebook to compete against a new crop of sites.

With that being said, we're rather far from that happening -- if it happens at all. Look for Facebook to continue to build upon Mark Zuckerberg's goal to connect the world.

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The article Facebook Should Pay Attention to This New Competitor originally appeared on Fool.com.

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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