Facebook has shown its costs thus:

• Costs of revenue: $860 million
• Marketing and sales: $427 million
• Research and development: $388 million
• General administrative:$280 million

This, of itself, is quite an intersting breakdown.  What other companies might there be where marketing, sales and R&D account for 41% of total cost?  A pharmaceuticals company perhaps?  However, what Facebook hasn’t done is split costs out in a way which allows us to see how much Facebook is spending on people, versus how much is spend on tangible operation costs, such as server space and data centres.  What Facebook labels “salaries, benefits and share-based compensation” is included within the figures for each of these categories, including the ‘Costs of Revenue’ line.  One would suspect that, in reality, people costs are a very sigificant element in all of these categories and it would be nice to know how this breaks down – not least because it will give us a glimpse of what it actually costs to deliver and maintain the infrastructure that is Facebook.

Knowing this is pretty important because it allows us to get a handle of what Facebook’s true marginal costs are and thus its true revenue potential.  What is already clear is that most of the costs associated with marketing, sales and R&D are not true costs, in that they are the costs Facebook has elected to incur in order to support the business model it has chosen to construct.  They are discretionary costs, in that any competitor coming into the market need not incur them in order to deliver a similar service to users.  In effect, Facebook has decided to incur these costs in order to service advertisers and chase sufficient revenue to justify a valuation in excess of $60 billion, rather than the revenue it needs to actually deliver the service to its users.

Look at it another way.  Facebook has 845 million active users.  Match this against costs of $1,955 million and this comes out at $2.30 per user.  Now I know this isn’t a truly accurate way of establishing marginal costs – but it probably isn’t way short of the mark.  So are we to believe that it costs Facebook around $2 to service every additional user.  Of course not, it will cost Facebook much less than this.

If I had to take a stab at it, I would reckon you could deliver A Facebook (if not The Facebook) to users for something in the region of $300 million.  Take that, plus a margin of say 25% and that gives you revenue of $375 million.  Put a multiple of say 15x on that and you get a valuation of $5.6 billion.  The fact that Facebook is already earning revenues of $1.7 billion, and carries a valuation in excess of $60 billion might give one pause for thought.  I don’t earn millions as an analysts at Goldman Sachs – so I wouldn’t necessarily set much store on my opinion.  But if I were an analyst at Goldman Sachs, I would certainly want a whole lot more information on Facebook’s costs.

What sort of insanity is this?  Surely, the key to successful corporate usage of Facebook is to develop an approach that reflects how people actually use Facebook, based on an understanding of what it is that Facebook is adapted to do.  Facebook is not a website, it is a tool that small groups of people whom already have some form of social connection, use to preserve and enhance that connection.  That is a very different function from that of a website, which is designed as a destination that you drive the maximum number of people to in order to give them information.  The Facebook format is not something to be ‘got around’ it is something to be embraced.

Jake’s logic seems to be thus:  once upon a time we had a thing which we understood called websites.  Then something new came along called Facebook.  Facebook was really different and we needed to find a way to understand it so we decided the best way to do this was to try and turn it into the thing we understood.

I know this article was written some 18 months ago, time for both the author and the companies concerned to learn the error of their ways – but having checked the Facebook pages concerned, nothing much has changed.  Why?  Well I guess there are some powerful forces at work here.

First is fear of the unknown.  Marketing directors want to be reassured that all the knowledge and experience they have accumulated in the world of mass media, can easily be exported into this new world of social media.  It can’t, because social media operates to a different set of rules – as much as anything else, social media is not something you buy, it is something you participate within.

Second is the fear of digital agencies that their business model is melting.  Digital agencies, the smart ones anyway, know they are in trouble.  To quote the boss of one such agency “how are we going to make money building websites in a world where anyone can now make a website”?  However, if they can persuade marketing directors to spend lots of money creating customised Facebook pages or building expensive brand communities – that can be a lifeline.

Third is Facebook itself, which receives virtually all of its revenue from marketing directors and needs to keep them and their agencies happy and reassured.

There is a fourth, which is the fact that a Facebook page is a much better data capture opportunity than a website – hence the current obsession with securing Facebook Likes.  In fact most Facebook strategies go something along the lines of: drive people to the Facebook page, incentivise them to click the Like button, then get them the hell out of there into a digital platform better adapted to doing what it is We want to do with them.  But is this behaviour really sustainable and is it not fundamentally missing whatever genuine opportunities Facebook might present?  Facebook is, in many ways, just a new form of social behaviour.  That is certainly how its users relate to it.  And these users are only going to be prepared to ‘engage’ with those brands that understand and respect this.  (Long term this is also a bit of a problem for Facebook, because you can’t own a form of behaviour).

Personally, I think the sign of an effective corporate use of a Facebook page is that it looks like, well, a Facebook page – an environment that looks and feels exactly like the environment Facebook users are creating for themselves.  It should be a space where people who want to come and talk to a brand, can come and talk if they want to.  Frequently, of course, these people are going to want to ask questions or raise complaints – but that’s fine, it’s called customer service.  Of course, you don’t want people asking questions or raising complaints all over your website – yet another reason why turning your Facebook page into a website is a stupid thing to do.

The fact is that we are now operating in a bi-polar world – the world of traditional media and the world of social media.  The traditional media world isn’t going to go away in a hurry, it is just going to shrink in importance as the social media space grows.  The defining challenge for any marketing or communications director (in fact any CEO) over the next 10 years is how to operate with a foot in both camps and the key to this is the recognition that both spaces are fundamentally different: what works in traditional doesn’t work in social and visa versa.

There are three reasons for this:

First – I was bored with the old look, it had been that way for years

Second – I wanted to become more practical, using this site to focus more on what I do as the day job, addressing the tangible issues organisations encounter when they look to make the transition into the world of social media.  The bigger picture issue about the social media revolution and how it’s going to change the world (which I find very interesting, but doesn’t really help a marketing or corporate communications director work out what to do tomorrow), I will now post at my lodgings over at the Huffington Post.

Third – I wanted a format where a larger selection of my posts could visible, rather than just the last one off the press.

For those of you who do take the trouble to follow me on a reasonably regular basis – I hope you like it.

The problem for Kodak was that information (a picture) became separated from its means of distribution (film and print) and Kodak’s business model was based around providing the means of distribution, hence the reason its business model became separated from its business.

As some have already pointed out, Kodak didn’t suffer from a lack of understanding of the digital environment or a lack of innovation.  It was a very innovative company and was a leader in many aspects of digital technology – but perhaps this ended up as being a distraction.  Kodak should have focused its innovation on changing its business model, not on developing new technology.

There are many lessons here, not least the misplaced belief that the social media revolution is all about technology and tools and that if you understand and use these tools you will be OK.  The technologies and tools of social media are crushingly simple to understand and use – that’s the whole point.  But the mass adoption of these tools is fundamentally changing the rules of communication and the relationship between citizens / consumers / customers and institutions such as brands, the media and government.  You don’t deal with the fundamental consequences of this change without making some fundamental changes to the way you do business.  Having  a Facebook page, being on Twitter and posting videos on YouTube is not a sufficient response.

Don’t be a Kodak.  Don’t get caught up in the technology and tools.  Only the organisations that understand how social media is going to affect their business model, and adapt accordingly, will avoid Chapter 11.  And this isn’t simply about media or digital businesses – it is about any business that still wants to have a relationship with a customer or consumer.

The relationship a brand, or the researcher representing it, establishes with the people in a focus group is quite a strange one.  Quite often, the brand may not even reveal itself, but the participants are frequently encouraged to disclose highly personal information about themselves, which they do both because they are paid a small sum but mostly because they feel flattered to believe that their opinion counts for something.   After the session ends, the relationship finishes.  It is very rare to return, or even report back, to the participants unless they have been recruited as part of a panel designed to see how thoughts and opinions shift rather than define what those opinions are.  Certainly the brands concerned don’t believe there is any advantage in preserving a relationship with attendees at focus groups or even encouraging the participants to buy their product or service: you don’t sell to the focus group, you get insights from the focus group in order to then sell to the much larger group of consumers or customers.

Facebook, as far as a brand manager is concerned, is basically a focus group and if you want to use it effectively the same rules apply, namely:

• use Facebook as a place to have a conversation with a small group of your target audience in order to work out how to change or improve your product or service,
• don’t waste time and effort trying to sell, or even necessarily ‘engage’ with the focus group because it is never, in and of itself, going to be big or influential enough to significantly move the needle on sales or brand reputation.

Very few brands have worked this out.  There seems to be a belief that because a group is ‘on’ Facebook, some sort of magic social media fairy dust will be sprinkled on it which will cause whatever positive engagement is created to spread throughout the network to all the target consumers.  This won’t happen in 99.999% of occasions.  OK, you may be able to have some level of interaction with more people on Facebook that you would in conventional focus groups – but not that many more, and certainly not enough to make an impact.  OK, those people that you do reach have a better ability and slightly more incentive to spread any positive experience amongst their friends, but again – not that much more ability and not that much more incentive.  And I know that much of the desire to harvest ‘likes’ is driven by data capture and CRM considerations – but this isn’t ‘social’ media it is anti-social marketing.

The basic rule that determines the effective use of Facebook as a marketing tool is this:  If you are looking to use Facebook, in and of itself, as a mechanism to create ‘engagement’ with your consumers, forget it.  The numbers will never stack up sufficient to move the needle on overall brand reputation or engagement.  The only effective way to use Facebook is to use it like you use a focus group – i.e. a tool to work out how to change and improve your product or service (or, if you really must, your advertising).  Thus, if you want to move the needle on overall brand reputation this occurs because you have improved product or service delivery (or your ads) using insights gathered from Facebook rather than because of any magic that happens within Facebook itself.

In other words – you don’t sell to the focus group, whether or not it happens to be on Facebook.

None of this explains the current desperate obsession that brands have with Facebook and the desire to drag their website into the Facebook space, garnering ‘likes’ as they go.  Is there, for example, a single ad, these days, that doesn’t end with the strapline “find us on Facebook”?

I followed  this advice for a car manufacturer whose ad I saw on TV last night and when I ‘found’ their page (something it was easier to do via Google than via Facebook itself incidentally), what I found was basically a sub-standard version of their website.  This was not sub-standard on account of any design failure on the part of the car company, but because a Facebook page will always be sub-standard if you are trying to create mass information / destination site, because a Facebook page was never originally designed to be this.  The page prominently featured the obligatory exhortation to ‘like’ the company and alongside this was a celebration of the fact that the company had now exceeded 10,000 ‘likes’.  Here is a company whose target audience in the UK would be measured in tens of millions, getting all excited because 10,000 people had pressed a little like button.  Whoopee do!  Was there an opportunity to engage with the company in any discussion (i.e. like mini focus groups)?  No – the discussion facility was not activated.  And what was the company actually saying about itself?  Well most of the posts encouraged people to go to its website!  Was anyone, other than the company itself, actually posting anything on the page’s wall?  No, although there were some comments on posts, many of which were negative.  Was the company responding to these comments and/or was there any meaningful conversation or interaction going on at all?  No.  Was this page a waste of time and effort?  Yes.  This company is not alone out there, if one were to form a focus group drawn from the pool of large consumer brands I would suspect that we would find this usage of Facebook pretty representative of the whole.

As I have said many times before, social media is not a channel that you can use to ‘engage’ with your target audience.  It is sensationally bad at doing this.   However, it is sensationally good at speaking to very small groups of people, even individuals, at exactly the right time and about exactly the right things.  Therefore the way you use social media and the metrics and measurement criteria you set all have to be aligned against this fact.

Strategy is no exception to this.  A social media strategy is different to a marketing communications strategy for the following, simple reason.  A marcoms strategy has as its output a piece of communication (expressed as an ad, a press, release, a brochure, a campaign – essentially one single ‘thing’ that is presented to the whole target audience).  However, a (successful) social media strategy has as its output a form of behaviour or a process.

The best way to understand this is to imagine that you are in a room with 100 people who represent your target consumers, customers or stakeholders.  If the only way you have to engage with this group is a 2 minute (or 30 second) slot on a podium, what you will need is a speech – a very carefully crafted piece of communication that conveys exactly what it is you want to say about yourself.  This situation is analogous to the communications and marketing environment we have been operating in to date.  We have very limited (by time, expense or relevance) opportunities to state our case and the only way to do this effectively is through the projection of single, short messages designed to be seen or encountered by all of our audience, often repeatedly.  As a result, our entire approach to strategy has been harnessed around the need (now seen as an unquestioned assumption) that this is the output.

Social media is different in the respect that you are in the room with that same group of 100 people, but this time you are in a social situation.  There is no podium, people are talking to each other.  If you want to engage productively with these people, simply bringing along a speech or a predetermined set of responses to anticipated conversations, is not going to work.   Preparing any fixed pieces of communication, in advance, will be a waste of time.  Success in this situation will depend on your behaviour – your ability to understand the dynamics of the room, join the right type of conversations and, critically, say the right thing at the right time.

This is why social media strategies have to be based around the creation of forms of behaviour and thus harnessed to defining the management processes that lie behind this.  This sort of strategy will look very different from a strategy that is designed to deliver a thing.  It also has to recognise that when you are in a social situation you can’t talk to everyone, all at once.  Social media is actually very bad at doing what traditional mass communication does well.  The benefit from social media (as with conversations) comes from ability to talk to exactly the right people at exactly the right time.  Social media is not about large numbers (Facebook likes, YouTube hits, Twitter followers etc), but the ability to target very specific groups with very specific information.

This means that the elements of a social media strategy should revolve around two things: training and focus.  Training, so that people understand and are motivated, to behave in the right way; focus, so that activity is linked to very specific situations.  Having broad objectives, such as increasing ‘engagement’ or improving brand reputation scores, are useless for social media.  Social media activity is rarely going to move the needle on these in a timeframe, or with an impact, that is likely to be acceptable.  Interestingly though, social media can be used to measure how the needle moves on these objectives – if people like your brand, your Facebook ‘likes’ will go up, but this is not necessarily because of anything you are doing ‘in’ Facebook.  The tool you use to measure something is rarely the tool you use to generate something – but many fail to appreciate this as they chase Facebook ‘likes’ believing that by inflating this score they are having a significant impact on improving the reputation of their brand – when all they are doing is skewing the numbers.

An effective social media strategy requires objectives that are focused on very specific business issues (increase business with X customer, sign Y deal, recruit xx individuals, improve Z product or service).  This is where social media can really work and it is why I now base my social media strategies on five elements: Business Objectives, Priorities (people / topics), Human Resources, Tool Selection, Operation and Management Process (perhaps more of these in separate post).

Funnily enough, it is only relatively recently that I have had this insight.  I have long realised that social media strategies are different from conventional marketing strategies, but I haven’t been able to nail this difference as one that stems from a fundamental difference in output – from pieces of communication to forms of behaviour – until now.  I think the reason for this is that I have recently done a workshop with a former colleague, Paul Burns, ex Saatchi & Saatchi.  Paul does a very good module on how to produce a creative brief and we spent a lot of time discussing how to apply this process to social media.  We realised that the process could be adapted to social media, but only when we fundamentally changed our assumption of what output we were seeking – away from creative things to creative behaviours.  It also resonates with a conundrum I encountered a few months ago, when attending a gathering of creative academics – that is people involved in the teaching of creativity rather than academics who think creatively.  The biggest ‘criticism’ these people had of social media was that they couldn’t see ‘the creative idea’ in social media campaigns.  And the conundrum stemmed from the fact that there is never, in social media, a creative idea that relates to what the people we have come to call ‘creatives’ actually do and thus the uncomfortable conclusion that there is no point in teaching a traditional creative director how to operate in social media, because traditional creativity (expressed as tangible outputs) has no role within it.

It is a shame your blog does not allow comments, because that might be an easier place to have this conversation!  I cannot disagree with anything you say in your reply – it is plausible support for how you might create a keiretsu cooperative.  My issue, however, is not how one might do this, rather why one would do it – or rather why one would do it to create a “publishing and discussion site designed to attract the indie writers we call bloggers”.

One of  the consequences of the separation of information from distribution is that the information then tends to live in digital spaces rather than digital places.  For example, you didn’t come to my blog (digital place) to find my piece on Gutenberg and the social media revolution – you found it “out there” in digital space.  My article lives in a Google search (which is a space) much more than it lives in my blog and its visibility in this space is determined by how people have shared or distributed this article within their own digital spaces not by how many have come to my blog to find it.

In reality, the concept of information living in, or being published by a “site” is dissolving as, indeed, is the idea that there is any collective interest (monetary or otherwise) in the act of publication.  However, there is an emerging collective interest in the act of information sharing and thus there may well be relevance in the concept of  a community (or site) to share information.

Thus, my advice to you would be to take your work on creating a kieretsu coopoerative, which remains relevant, and apply it instead to the act of information sharing, rather than the act of information publication.  There is no longer money to be made in publication, because publication costs nothing.

(Also note: by ‘walled garden’ I did not mean pay-walled garden.  The walls are there to stop the information getting out, not to prevent people getting in.)

Happy to continue the discussion.

I am glad that Google serendipity brought you to my piece.  (By the way – read Eli Pariser’s “Filter Bubble” for an investigation of the way in which Google is stifling serendipity).

Your model of collaborative ownership of media is interesting – but I can’t say that I can give a clear steer on its chances of success.  I wish I knew the answer to the question “what is the future of media”; all I have at this stage are some clues as to what the basic principles that shape this future may be.  The only thing that I am pretty sure about is that whatever this future is, it will look completely different from what we have at the moment (see Clay Shirky’s excellent “Thinking the Unthinkable” piece).  And my sense is that co-ownership of media may not be sufficiently unthinkable because media may be becoming something that can’t actually be owned in a way which allows any form of monetary benefit.

So what are the clues?

The big one for me is the shift from institutions to processes.  Trust is shifting from institutions to processes, as I mentioned in my piece, and this shift is creating a separation between institutions and processes – journalists (representatives of institutions) are now being separated from journalism (process).  This has many implications – not least your idea that there is a benefit from drawing ‘bloggers’ into the essentially institutionalised sphere of journalists and journalism – i.e. the answer is to make these new people part of the old establishment (albeit an establishment that has adjusted itself to make it more amenable to collective or collaborative processes).  Alan Rusbridger at The Guardian has talked about involving “Our Readers” in producing “Our Product”.  The problem is that news is no longer Alan’s product – it belongs to the people (he likes to call) readers and it doesn’t really live in fixed places (websites, newspapers) anymore, it lives in digital spaces (Google search terms).  The only valid role that Alan has is to help these people manage a process whereby they can create and control their news.  News is shifting from being a finished product to being a raw material – and I think the only models that stand a chance of success in the long-term have to be rooted in this insight.

So I am not entirely sure that the bloggers you talk about actually exist – in the way that citizen journalists don’t exist, although citizen journalism does (citizen journalist = institutionalised way of looking at something, citizen journalism = process way of looking at something).  I have a blog, but I am not a blogger.  People-publishers  are defined by their behaviours not by their usage of particular tools (blogs, Twitter etc.) it is only traditional media that defined itself by its usage of a particular publishing tool (print, TV, radio) because it had no alternative.  Undoubtedly conventional publishers will be able to gather about themselves a group of interested individuals who may be prepared to participate in the process of publication – but the issue here is the definition of publication.  Within the Gutenberg world publication was essentially defined as being means of distribution because the means of distribution (and its cost) was the problem publication solved.  Post-Gutenberg, this problem has gone away because distribution now costs nothing and everyone has the tools to do it.  Information is now separated from the means of distribution – my sound bite of what the social revolution is all about!  You don’t necessarily manage the transition into a more collaborative world by adding a gloss of collaboration to a redundant concept – the redundant concept being in large part the idea publication requires and generates money and therefore a stake in that is something of value.  The very nature of publication has changed, a point you recognise in your Kieretsu-Cooperative paper.  This is the shift publishers have to adapt to, and it has a shift from being something that is vested in institutions and places to one that is vested in process and spaces.  Wikipedia is a good example and it is worth noting that the first attempt to get the concept off the ground (Nupedia) that was based on opening up the process to a community of incentivsed collaborators failed.  The idea only took-off when the process was opened up to the community of everyone.

I do a lot of work with consumer brand organisations.  Their equivalent of creating a cooperative community around them is to set up Facebook pages and try and get lots of people to ‘Like’ them and be their ‘friend’.  The problem is that there is only a tiny proportion of their target consumers who are actually prepared to have this sort of relationship with them – and chasing this group creates no sustainable business advantage so long as the relationship you are looking to create is limited to this idea of high engagement and involvement amongst a fixed group of supporter / collaborators.  Most people don’t want to be a brand’s ‘friend’ however much that brand may wish it.  They only want to talk to that brand when something goes wrong or they want to change what it is that brand does.  If a brand can facilitate that sort of interaction (process) – it gains a benefit – provided it is able to respond to the wishes of its consumers.  And that is why I think that focusing on a small group of bloggers / collaborators may be the equivalent of a brand trying to create ‘friends’ in Facebook.  Ultimately an unproductive exercise (as brands are slowly starting to realise) because it is an idea that is rooted in a relationshiread business model) a brand wants to have, rather than the one that responds to the relationship that 99.99 per cent of the brand’s consumers actually want to have with it.

It goes back to the point about community I mentioned in the article you quote in your piece “people will not want to be managed within communities controlled by institutions, they will form communities to manage their relationships with institutions”.

So for me – the future is all about shifting the focus from the creation of new institutions to managing processes, recognising news and information as a raw material not a finished product and understanding the dynamics of the Community of Everyone.  And finally, here are some thoughts I have just published which examine the idea of collective moderation based not on restricting information (old institutionalised publishing model) but by positioning information.

Hope this is food for thought!