Sorry, Facebook: Real Friends Aren't Data


On top of buzz from an invitation to the media to "come and see what we're building," Facebook's stock was up over 10% last week. Then, when the media came to see what Facebook was building, the stock dropped 3%. Facebook's new Graph Search, which allows users to input natural language searches to help them sift through all the data friends and themselves have posted, didn't impress investors because it won't help immediate revenues.

But it should also cast doubt on long-term revenues. Not only could the new feature scare away users with its inhuman approach to friendships, but it also demonstrates the potential lack of depth in the company's product pipeline.

Privacy and the lack of user value
Facebook has changed how the world thinks about privacy. Originally only allowing friends to view your profile, the service has changed multiple times over the years, always testing the edge of what society accepted as OK for the public and friends to see:

  • In 2006, Facebook introduced the news feed that updated a user on their friend's activities, and forgot to put in place added privacy controls.

  • In 2007, the advertising platform named Beacon shared friends' purchases without asking for consent.

  • In 2009, Facebook changed the default privacy settings to publicly share a user's information.

  • In 2012, Facebook's use of the Like button to showcase products with friends' pictures and approvals ended up in a class action lawsuit.

  • In late 2012, Instagram, a newly acquired part of Facebook, caused an uproar with changes in its terms of service that made it seem like the service could sell users' photos and information, before they reverted back to its old user agreements.

Facebook obviously has a mass of user information and photos, and many users only skim the surface of what's available in Facebook's current form. With Graph Search, the depth of the information that users will be able to more easily access just might convince them that a for-profit company that doesn't charge anything up front may not be the best place to list where, when, and what you eat. Especially if anyone of your friends can search how often you end up at the local donut shop. And, according to unofficial numbers from analytics firm SocialBakers, U.S. users of Facebook fell by 1.4 million people in December.

It also shows the difference in how Facebook engineers utilize Facebook as opposed to the general public. While a dedicated Facebook employee might actually backdate photos they upload to when they were taken instead of added to the site, check in and review restaurants, list every one of their interests, and friend everyone they know, the average American probably shares much less. The value of networks is the information contained, and if your friends aren't as gung ho about sharing their lives, your search for donut-loving friends to invite to breakfast may end up with another trip alone to the donut shop.

Example Graph Search.

Additionally, the average Facebook user has 245 friend connections. This is slightly above what is estimated for Dunbar's number, which is a theoretical cognitive limit to the number of stable relationships humans can have. Put simply, there's a limit to the number of people our brain can care about. To take an example from the Graph Search examples given by Facebook, if you don't remember which one of your friends are interested in cycling who live in Seattle, chances are they are little more than a datapoint in your life, and looking them up has no real value for you.

A lack ofmonetization
Of course, the end goal of Graph Search is to make more money through advertising to users. Google has a superior average revenue per user of $43 compared to Facebook's $4.50. This is because when people are going to buy something, they research it with a Google search, and have a future intent of an action. Facebook, meanwhile, is full of past and current actions with pictures and status updates, but has yet to be able to market future intents to advertisers. To capture future intents, Facebook has come up with Graph Search.

It's the right strategy for Facebook, but what's troubling is that Facebook has only been working on Graph Search between one and two years. It's still in a rough beta version, and Zuckerberg said it could be a business opportunity over time, which implies an even longer wait for the growth at which Facebook's stock is currently priced. The amount of buzz Facebook attempted to create over this product makes it appear that they have little else to deliver to investors in the near term, which means the opportunity cost of holding the stock now may end up hurting investors. If it takes a year to release a beta version of a product that still doesn't improve the bottom line, investors should hope there's more going on behind the scenes.

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