Guest contribution by Joshua Gans, Digitopoly
Yesterday, Facebook announced “Graph Search.” It’s an engineering name that is accurate and communicates nothing to the general public. Nonetheless, the engineering face stops with the name as the feature itself is designed with humans in mind.
Facebook’s own introduction describes graph search nicely. It is basically a search engine for social networks — in this case, just Facebook. But you don’t just try and find friends. But you find friends you know with particular attributes — such as “friends near me” or “friends near me who like Star Wars.” And how does it know how likes Star Wars. Well, that is from those ‘like’ buttons that began as more of a social acknowledgement but now are data. The variants on what might be done are mind-boggling.
This sounds like something that will be useful and it will be more useful the larger the network you have. But here I want to focus on the business model — something that no one appears to be discussing today. The business model is not to be a Yelp-killer although that may be a by-product. And it is not necessarily to provide a Google-search killer although you never know. Instead, it brings Facebook squarely into the search advertising space.
Facebook have currently relied on a model where social activity reveals something about people and then advertisers can serve up activity based on those profiles. This is useful but there is always a nagging feeling that the activity does not reveal the right thing. Having consumers ‘like’ ads may help here and I think there is information that can be aggregated from clicks and such but ultimately it is ads served up when consumers are doing something else. It is like ‘old media’ that way.
Search gives this a new dimension. When people are searching they are looking for information. Advertising, at least as intended, is supposed to provide information. In other words, advertising based on search matches the consumer activity to the advertiser activity — it is not a by-product, the links are tight. This is what made Google successful and now Facebook has provided a completely knew search activity based on information only it has access too.
Herein lies the clarity of Facebook’s vision. They are going to move from targeted advertising to search-based advertising. Well, not so much a move as having it all. And it is hardly a stretch to consider that such advertising will attract and compete for exactly the same set of advertising dollars that comprises Google’s revenue. Google did see this coming and that is why they directed so much energy to Google+. But it is safe to say that Google+ offers a very different social data set than does Facebook. More critically if Facebook search becomes important, those on Facebook may actually want to be found which will increase incentives to provide likes and such. And for those who think that privacy is a concern, all of the academic studies show that people will sacrifice that for very small rewards or benefits indeed.
Facebook can also tap on things beyond the private search space (hmm, “private search” is a better word than “graph search”). For instance, with people providing likes and activity that indicate preferences the data can provide important information to firms when aggregated and stripped of individual characteristics (respecting privacy). This is information Facebook can sell. It can also sell access to its tools so that firms can find that information themselves — not to mention political campaigns. And when firms want to actually connect with individuals, Facebook have already hinted that they are experimented with LinkedIn style pay for connection messages. You have got to believe that LinkedIn is something that both can rival Facebook but also benefit from the underlying search technology Facebook are developing. Not to mention that Pinterest is providing a whole set of data that will be of use to both Facebook and Google now.
So to those that see Facebook as failing as its share price fell on IPO, there is much to think about here. This market is not done yet.
About Joshua Gans
Joshua Gans holds the Skoll Chair in Innovation and Entrepreneurship at the Rotman School of Management, University of Toronto where he is a Professor of Strategic Management. In 2010, he was a visiting scholar at Harvard University and in 2011, he was a visiting research at Microsoft Research. Joshua is also Managing Director of, economics consultancy, CoRE Research. While Joshua’s research interests are varied he has developed specialities in the nature of technological competition and innovation, economic growth, publishing economics, industrial organisation and regulatory economics. He has also co-authored (with Stephen King and Robin Stonecash) the Australasian edition of Greg Mankiw’s Principles of Economics (published by Cengage), Core Economics for Managers (Cengage), Finishing the Job (MUP) and Parentonomics (New South/MIT Press). In 2007, Joshua was awarded the Economic Society of Australia’s Young Economist Award. In 2008, Joshua was elected as a Fellow of the Academy of Social Sciences, Australia.
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