It makes more than $40 billion a year, swings presidential elections, is used by more than one-fifth of the planet, and captures more attention than any other place on the Internet.
Yet we still underestimate Facebook.
It’s not our fault. Our minds are still in the age of supply. Unlike monopolies and large corporations of the past, Facebook does not (only) control supply; it also controls demand.
Facebook is a super-aggregator in the age of aggregation. That’s why it is perfectly positioned to shift its gaze to new industries and destroy its incumbents. This is already happening with everything from TV and movies to online marketplaces.
It’s time we properly estimate the full potential of Facebook.
The Age of Aggregation
It’s easy to compare Facebook to monopolists of the past, but there is one big difference: Facebook is controlling demand as well as supply.
We now live in the age of aggregation, a concept best articulated by Ben Thompson in his multiple pieces on Aggregation Theory.
In short, business has changed. More specifically, the problem that many businesses solve has changed.
In the past, the problem was distribution.
A newspaper distributed stories and ideas; a hardware store distributed hammers and nails; a tax consultant distributed tax advice to nearby businesses. It took a lot of investment for someone to build a business that distributed better than these incumbents.
The Internet has changed business by reducing the cost of distribution to zero.
It costs basically nothing to share ideas online. It is nearly free to find the perfect hammer and nail and have it sent to your house within days. It is quick to find tax help from people or software — from anywhere in the country or world — whenever your heart desires.
When distribution costs go to zero, the problem that businesses need to solve becomes how to match the supply with the demand of potential customers.
When there is an endless supply, we literally don’t have the ability to look at all the options. How, then, does a company aggregate all of the potential products/services/information to ensure the right product/service/information is shown to the right person?
Facebook: The Ultimate “Super Aggregator”
Enter Facebook.
Facebook is a super-aggregator that enjoys free supply and controls demand.
On the supply side, Facebook receives its content for free.
All photos, messages, business listings, products in Marketplace, and more are uploaded to Facebook for free by all of its users. Facebook then chooses which of these pieces of content to show to a specific user.
In short: Facebook enjoys endless supply and limitless demand, so it acts as the matchmaker in the middle.
When a monopolist enjoys this power, it can quickly decide what else to include in its supply. Facebook is now doing just that, moving from photos and messages to TV, personal communication, and product listings.
How Facebook Retargets Our Attention
Facebook has a monopoly on our attention, with the average American spending almost an hour a day on Facebook and Instagram. Facebook, of course, wants more attention.
The longer we spend on Facebook, the more it can show us ads and grow its business.
Plus, the more time we spend in Facebook’s universe, the more data it collects on our interests, and the better it does as curating the content we most want to see.
Facebook Watch
To increase the amount of time we spend on Facebook, the aggregator has to widen its menu of content offerings. Not surprisingly, TV is next on the list.
Facebook recently launched Facebook Watch, a new platform for watching shows. These shows ranges from user-generated content (free supply!) to more professional content, such as sports and movies.
The goal is simple: instead of just going to Facebook to see what your friends are doing, you can now go to Facebook to watch a football game, a movie, or your favorite Internet series.
Facebook already bid $600 million for the rights to stream Indian cricket games, and it’s expected to enter the fray for rights to NFL games. The English Premiere League (soccer) is also gearing up for a bidding war — not between ESPN and FOX, but between Facebook and Amazon.
Facebook is also allocating nearly $1 billion in the next year to create original programming, similar to Netflix and Amazon Prime Video.
If you are in the U.S. and open your Facebook mobile app, you will already see the Facebook Watch icon. Click it, and you will see how the super aggregator is now pushing all of this demand towards its own entertainment channel.
Complete Communication
Facebook has long controlled our social media updates, but its acquisition and development of WhatsApp and Messenger, respectively, has extended its reach. Now, we also use Facebook for one-to-one communication, similar to texting.
We already know that Facebook and Instagram are massively popular apps. What we often forget, though, is the number of users on Facebook’s other communication platforms.
The image below shows the most popular apps based on monthly users. The ones in red are owned by Facebook.
As you can see, WhatsApp and Facebook Messenger combined actually have more monthly users than Facebook!
By controlling the main platforms of communication, Facebook builds its pinwheel.
More people join WhatsApp and Facebook Messenger because that’s where their friends are. As more people join, there is more incentive for others to join. The pinwheel continues to spin.
What’s different from the AOL Instant Messenger days, when everyone joined so they could talk with their friends, is that Facebook can use the social graph of our communication to determine what to aggregate. The more people use its communication tools, the better Facebook gets at aggregation, and the more people want to use it. The pinwheel continues to spin.
Facebook learns what we like, it enjoys an endless supply from which to choose, and it perfectly matches its supply with our demand.
Facebook Marketplace
Shopping is yet another arena Facebook is looking to enter. While it is unlikely to catch up to Amazon on the B2C side, it does have an advantage in the “C2C” market of consumer-to-consumer.
Since Facebook has a platform for communication and knows what we like, it can perfectly match sellers with buyers and allow them to communicate. Taking its model of free supply, Facebook enables commerce on Facebook Marketplace.
Facebook Marketplace is basically a gigantic flea sale (with similar quality much of the time).
Facebook, however, is learning. It’s learning what people like to sell and buy, and it’s using its power as a super-aggregator to quickly improve.
Recently, Facebook announced that car dealers could post their used inventory on Facebook Marketplace. (Here are our thoughts on it.) Other industries are sure to follow.
Since Facebook can track our activity across the web, it gets better at showing products and alerting us when something we want is for sale. Sites like Craigslist are at a severe disadvantage, because not only does the super aggregator get the supply, it also gets to show the supply to the users, thus demonstrating a demand.
Facebook is a monopoly that actually people like.
Facebook Pixel
While it’s not a platform that gets much attention, the missing link many people forget about is the Facebook pixel.
The pixel is a tiny bit of code that can be added to nearly every website. It tracks what users look at on your site, so you can target relevant ads to them on Facebook.
For Facebook, having a pixel on millions of websites means it not only aggregates based on data from Facebook pages and its apps but also from millions of websites that are not on Facebook.
If I visit a shopping site to look at a pair of shoes, Facebook now knows to show me similar products on Marketplace. If I visit IMDB to read about an actor, it knows to show me TV shows featuring that actor. If I read an article about a specific athlete, you know similar content will show up in my news feed.
The Facebook pixel is a huge leap forward, enabling Facebook to aggregate both on and off its core platforms.
How Regulation Builds the “Moat” for Facebook
Following Facebook’s outsized role in the recent U.S. election, it seems increasingly likely that regulation may come to Facebook, especially for its ads division. What many are not considering, however, is that regulation will further build a “moat” for Facebook, making it harder for others to compete.
Sure, Facebook doesn’t want legislation. Sure, legislation might be good for our privacy. In terms of competition, however, it will be damaging.
If regulation is set up to limit the ability of Facebook to aggregate, it will be even more difficult for other start-ups to follow the same rules.
Legislation may limit some of Facebook’s data-gathering tactics — but with a monopoly on our attention and an eye on websites around the world, it will still do a good job of showing the best results to users. Other sites and apps won’t have access to the variety of data sources that Facebook has, so they will provide a poorer experience for users, thus encouraging people to stay on Facebook.
In Europe, regulation is already in place to limit the ability of Facebook (or any social network) to port a list of users. In other words, you can’t export a list of your Facebook friends to another social network and connect with them automatically in that new network.
This legislation makes sense from a privacy perspective. Why should my data be added to a new social network without my consent?
The result on competition, however, is dramatic. If I can’t share or move my social graph from Facebook, why would I ever go anywhere else? The pain of building a network of friends on a new site is so high that few, if any, sites or apps will take a chance at competing with Facebook.
The proof can be seen in one of Facebook’s savviest (and priciest) acquisitions: Instagram. Instagram became a massive network because it ported data from Twitter.
Users could connect Twitter with Instagram and immediately find all their Twitter followers. With just a few clicks, an Instagram user had a complete network of friends with whom to share photos.
By the time Twitter realized what was happening, it was too late. It had aided and abetted in the creation of a major competitor. The fact that Facebook bought Instagram means that Twitter actually helped to build its largest competitor.
There is a need for regulation, especially in regards to transparency of ads on Facebook.
What seems painfully obvious, however, is that whatever legislation comes next, it will only strengthen Facebook’s position as the premier source of data, advertising, entertainment, information, shopping, and more.
Do you feel like you’re underestimating Facebook now?
Facebook’s Power in the Age of Aggregation
If you buy that we are in the age of aggregation and agree that the trend of legislation will only strengthen Facebook’s position, you have to also agree that it will continue to maintain and grow its attention. With this attention, Facebook can methodically retarget attention to capture new markets.
I’d be worried if I were in a business that focused on distribution. The cost of distribution is trending toward zero. Even durable goods and physical items like cars could be aggregated and shown to potential buyers regardless of location.
I’d also be worried if I were in a business that focused on demand. From Ticketmaster to Craigslist to AutoTrader, it wouldn’t take much effort for Facebook to replicate these business models and soon become a faster way to connect a buyer with the product.
For most of us, Facebook’s underestimated power means it’s crucial to learn to use Facebook now in order to build our own database down the road. Facebook can drive subscribers, leads, and buyers to your store. If you connect with these people on Facebook, you can maintain a relationship with them off Facebook as well.
The price of advertising on Facebook will inevitably increase as more people use Facebook ads. Yet the necessity of advertising on Facebook will inevitably increase as well, as Facebook continues to extend its powers as a super-aggregator.
We continually underestimate Facebook. It’s time we realize its full power in this new age of aggregation.
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