6 Facebook Problems Need Fixing

After the IPO hoopla, there's work to do. Facebook might have 845 million users, but that does not mean building a business out of user attention will be easy.
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When Facebook goes public in the next few days, the company could end up being valued at over $100 billion.

Facebook expects investor interest will be high: Two days ago, the company increased the total number of shares it will offer and increased the share price range from $28 to $35 per share to $34 to $38 per share. According to its most recent SEC filing, Facebook will offer over 421 million shares.

The company certainly has a lot going for it: 845 million users, high user engagement compared to competitors, rapidly growing revenue, and a strong developer community.

But it faces a number of problems, some of its own making.

1. Trust. Users don't trust Facebook. According to an AP-CNBC poll conducted earlier this month, 59% of respondents "say they have little or no faith in the company to protect their privacy." Only 13% of Facebook users say they trust Facebook completely or a lot to protect their data.

[ What are Facebook's most valuable technologies? Read Facebook's 11 Biggest Technology Bets. ]

When Facebook settled Federal Trade Commission charges that it deceived consumers with its privacy claims last November, CEO Mark Zuckerberg accepted blame. "I'm the first to admit that we've made a bunch of mistakes," he wrote in a blog post. "In particular, I think that a small number of high profile mistakes, like Beacon four years ago and poor execution as we transitioned our privacy model two years ago, have often overshadowed much of the good work we've done."

Facebook will have to keep working to convince users that it can be trusted.

2. Regulation. Having managed to convince users that sharing could somehow co-exist with privacy, Facebook still has to worry about government regulators. The European Union is presently considering revised data rules that would affect Facebook and other companies. The rules include a "right to be forgotten. To comply, companies would have to respond to requests to delete customer data and would probably incur additional costs. In the U.S., Facebook faces 20 years of privacy audits and an abundance of legislators and other legal officials ready to hold hearings or open investigations when controversies arise. And in China, a highly desirable market for many tech companies, Facebook is banned.

3. Ads. Facebook is an advertising company. Forget the social jargon for a moment. Facebook might use terms such as "Sponsored Stories," but it's really talking about ads. And ad companies succeed when their ads produce results.

Unfortunately, Facebook's ads don't work for everyone. GM just told the Wall Street Journal that it plans to stop advertising on Facebook. Apparently, the $10 million GM spent on Facebook ads didn't help sell cars. On a smaller scale, a pizzeria in New Orleans recounted a similar experience in a recent NPR blog post. The pizza restaurant saw a $10 return on its $240 ad purchase.

Facebook has counterexamples. It notes, for instance, that CM Photographics generated almost $40,000 in revenue directly from a $600 investment in Facebook ads. However, "works sometimes" isn't the sort of slogan that entices ad buyers. If the odds of generating a return are significantly less than 50%, you might be better off gambling your marketing money at a casino.

4. Skepticism. Among those who responded to the AP-CNBC poll, 46% believe Facebook is a fad. That's three percentage points more than the number of respondents who believe Facebook has staying power. The skeptical majority might be easier to dismiss if Facebook hadn't agreed to pay $1 billion for Instagram, a startup with no revenue but 30 million enthusiastic users. That's not the move of a secure company. It looks more like a defensive effort to co-opt a potential competitor and reinvigorate a user base that doesn't tune in as often as it used to.

5. Value. Three out of 10 Americans surveyed by AP-CNBC say they visit Facebook daily. But for what? Entertainment? Self-promotion? Socialization? That's nice, but there are plenty of places to get that.

It's different for Apple, Google, and Microsoft. For the average computer user, hardware running an operating system from Apple or Microsoft is essential, as is a search service from either Google or Microsoft.

Apple, Google, and Microsoft all offer software and services for productive tasks and for personal convenience, such as online storage. They offer services people will pay for, even if they subsidize some of them with ads in order to offer them for free.

Facebook gives away plenty of value, just not the kind of value that people want to pay for. And that needs to change. Facebook needs to offer Dropbox-style file storage or other services that create lock-in and meet business needs. Facebook's control of users' contact data isn't enough to keep users interested if the novelty of sharing wears thin.

6. Mobile. Apple has iOS and Safari. Google has Android and Chrome. Microsoft has Windows Phone and Internet Explorer. Facebook has no operating system or browser to guarantee its presence on mobile phones. The company depends on apps and the mobile Web. And that could be dangerous, particularly because Facebook's mobile apps aren't very well regarded.

Google already has greatly increased the number of Google+ users through Android. Apple is bound to try to improve its social competency. And Microsoft could get less friendly toward Facebook if it can convince enough people to buy a Windows Phone.

Facebook CEO Mark Zuckerberg is aware of the problem at least. During the company's IPO roadshow, he emphasized that his number-one priority is improving Facebook's mobile apps.

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