There are good reasons for both of those declines, and neither is cause for panic. Facebook’s $1 billion Instagram deal and its $550 million purchase of patents from Microsoft show that it’s still focused on long-term dominance, not short-term profits. And for all the gloomy pronouncements of a social-media bubble, Facebook remains a wildly profitable company. But if it’s going to justify its astronomical valuation, the social network will have to get creative.
As of now, most of the company’s money comes from advertisements displayed on Facebook.com. Ads on Facebook are valuable because the company’s access to your data—your likes, interests, friends, and demographic information—allows advertisers to tailor their pitches to you. Facebook can sell more ads, make them more obtrusive, and target them better, but there’s a limit to how much more money it can make this way. Too much clutter, and Facebook risks going the way of MySpace. If Facebook’s latest financial filing is any indication, those limits aren’t so far away: Ad revenue is still growing, but not as fast as it once was. (Another chunk of revenue comes from the cut Facebook takes from purchases of virtual goods sold by Zynga and other app makers, but those numbers may also be flattening.)
Facebook’s growth, then, will have to come from new realms. One can imagine some of the possibilities: selling users’ data to third-party advertisers; taking advantage of the smartphone boom by serving up location-based ads. And there are surely other ways for Facebook to make money from our data that haven’t yet been dreamt of.
For those who dislike the idea of more ads, better targeting, and more data mining, there’s a paradox here: The more valuable you become to Facebook, the less valuable Facebook becomes to you. Right now, it’s a screaming good deal. You can use the site as much as you want—the average user spends 11 minutes a day there—without paying a thing, and Facebook makes only a penny or two a day from your patronage. The more value Facebook extracts from your data, however, the more the bargain starts to look Faustian to those concerned with privacy. In essence, you’re selling your identity for the chance to stalk high-school crushes and see what your friends are listening to on Spotify.
All of which raises a question that few have dared to ask: Could Facebook start charging for its service? It will likely never put up a full pay wall: That would scare away loads of people, and if your friends aren’t on Facebook, then the site instantly becomes less appetizing. But as Facebook matures, it may find that a subset of its users would prefer to pay for its service in dollars rather than in information. It’s not how Facebook would prefer to make money, but it could be a safety valve in case of a privacy scare or regulatory crackdown. A premium service—one that costs, say, $15 a year—that offers up all of the site’s functionality without the data mining might be enough of a lure to generate some serious income. If you’re going to be worth $100 to Facebook one way or another, wouldn’t at least some people prefer to pay in cash?