Facebook Doesn't Own You

 | Nov 13, 2013 | 12:00 PM EST
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The general public, and probably investors as well, fundamentally misunderstand the value of the "social network" that Facebook (FB) has built, and how it ultimately will best monetize it. Investors are fixated on the "audience" and how Facebook will serve ads to its users.

Facebook has room to be creative in the format, obviously, with sponsored posts and the like, and it can offer a greater ability to target, given the knowledge it has of its users. The company will eventually use that targeting capability to command higher CPMs than similar advertising platforms such as Google (GOOG), which have some knowledge of immediate activity but less depth in the persistent characteristics of the viewer.

A wide ranging discussion with some of the smartest people I know in online consumer marketing services (including the executive team at StartSampling.com) clued me in to the arms race going on in consumer data acquisition at the moment, and highlighted the opportunity for Facebook. Every consumer products company is collecting huge databases of information about their customers. The goal is to develop a close relationship with those consumers, thus enabling them to tailor products, special offers, and other interactions directly to the person at the point of contact.

The challenge becomes apparent when you consider the hundreds of companies building duplicative databases tracking millions of customers, then trying to integrate dozens of data sources: scanner data, frequent shopper data, responses to marketing programs such as sampling, etc. This is "big data" in its purest form.

At some point, marketers are going to realize much of the personal data they seek is already being collected and cleaned by a site on which users freely offer personal information: Facebook. More importantly, rather than advertise on FB, they will seek to buy specific target information from Facebook to use in their own campaigns, which would likely take place away from Facebook.

Targeting is what FB can do best, but it can unbundle it from the advertising, increasing its ability to profit from you. I envision that in five to 10 years, the majority of Facebook's revenue and profit will come not from advertising but from data services.

I liken it to a phenomenon we see in the movie industry. Everyone focuses on the opening weekend box office, but all the money is actually made on the back end, i.e., international showings, DVD sales, etc. People will still focus on FB advertising metrics, but the real money will be made in the invisible B2B business of selling our data.

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