How Has Facebook Managed to Stay Afloat?

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By Jacob Maslow

User holding an IPad with Facebook home page on screenIf you’re a Facebook shareholder, it’s very easy to feel like you should be congratulating yourself. After all, you resisted the temptation of unloading the stock when it hit rock bottom at around $17. Moreover, you might be congratulating yourself because you scooped up Facebook around its bottom, and now it’s past $70 per share.

Well, don’t get too excited. The reality with Facebook (NASDAQ:FB) is that it’s under a lot of pressure to remain relevant. Facebook knows that it’s dealing with a very fickle market. Facebook didn’t become number one for no reason. In fact, another social networking platform, MySpace, was the king of the hill when Facebook entered the scene. Facebook knows that it had to displace MySpace and Friendster to get to where it is. The last thing that it wants to see happen is for history to repeat itself.

Facebook is also very resource-heavy. To process the information that it shows its users, it has to spend a certain amount of software development, hardware resources, and bandwidth. This seems pretty straightforward if you’re talking about American traffic. However, the bulk of Facebook’s traffic is in the third world. Advertisers pay less money for Pakistani and Filipino Facebook traffic. Not surprisingly, it’s the high value paid by advertisers for American traffic that ends up subsidizing emerging-market traffic.

What happens when Facebook shrinks in its developed markets and explodes in emerging markets? You end up with a ridiculous situation where Facebook will be almost unable to pay its bills because the amount of advertising paid for emerging-market traffic doesn’t come close to covering its structural and systematic costs. This is a fundamental structural weakness that threatens Facebook’s existence. It definitely makes you ask how Facebook has managed to stay afloat. Here are just some of the answers.

Heavy monetization push

Facebook is serious about monetizing every visitor. That’s why if you’re seeing a lot of Facebook ads, expect more in the future. Moreover, Facebook is trying to milk as much traffic opportunities from its network as possible. This is why it threw Facebook fan page publishers under the bus by penalizing their commercial messaging. It takes much more likes for commercial messages to appear on Facebook page fans’ timelines.

Another way Facebook has managed to stay afloat is to use heavy cost broadcast technology. This is a fancy term for using Facebook as a sign in mechanism for a wide range of websites. This cross access system effectively recruits other websites in Facebook’s drive to get more members and to stay relevant.

It’s only a matter of time until Facebook has to face a moment of truth. Only time will tell whether these efforts are enough to keep Facebook afloat. It’s definitely up against very formidable forces.

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