Facebook Is Evil

April 6, 2010 in Business, Essays

Anyone who knows me knows that I’m a fan of Google. This isn’t a post to describe my personal affection for a corporate entity, but it is an attempt to describe one element that I find particularly appealing.

Don’t Be Evil

This phrase is Google’s infamous, informal corporate motto. I love it. Not only does it help reinforce my romantic, naive teenage dreams that I could become the next Richard Branson or Bill Gates just by doing good in the world, but it also helps prove that in the new business world, evil is bad for business.

A small bit of history on the origins of the motto: At the start of the last decade, in the company’s early days, they had reached a pivotal point in their growth. Google was starting to expand beyond a small team of like-minded individuals and so the founders felt there was need to somehow define the company’s core values. Equipped with the new set of values any potential new-comer, when faced with a decision in their job, could instinctively know what “Google would do”.

John Battelle’s book on Google, The Search, tells the story like this:

On July 19, 2001, about a dozen early employees met to mull over the founders’ directive [to elucidate Google’s core values] … The meeting soon became cluttered with the kind of easy and safe corporate clichés that everyone can support, but that carry little impact: Treat Everyone with Respect, for example, or Be on Time for Meetings.

The engineers in the room were rolling their eyes. [Amit] Patel recalls: “Some of us were very anticorporate, and we didn’t like the idea of all these specific rules.”

That’s when Paul Buchheit, another engineer in the group, blurted out what would become the most important three words in Google’s corporate history. “Paul said, ‘All of these things can be covered by just saying, Don’t Be Evil,'” Patel recalls. “And it just kind of stuck.”

The message spread, and it was embraced, especially by Page and Brin… “I think it’s much better than Be Good or something,” Page jokes. “When you are making decisions, it causes you to think. I think that’s good.”

And that’s what “Don’t be evil” came to mean within the company. It was their way of reminding every member of staff that the user comes first. It informs their design, marketing, advertising and strategic decisions. Yahoo used to sell the top spot in it’s search results as paid placements, but Google decided confusing it’s users into clicking ads was “evil” and so it kept it’s search results separated from it’s sponsored links. Almost anything that taxed or exploited or inconvenienced a user was considered evil and avoided, even if it meant losing revenue in the short term. Even though this was borne out of a sense of moral obligation, it has since become an incredibly powerful driver of business success.

Facebook Is Unstoppable

I don’t know how many news articles and blog posts I’ve read that proclaim Facebook’s current position to be unbeatable, but I do know that I agreed with most of them. There were many reasons that Facebook overtook and usurped the user bases of MySpace, Bebo, Orkut, Hi5 and all the rest, but today these reasons are somewhat unimportant. Facebook has emerged as the victor from the early social networking free-for-all, and with it’s massive userbase (400 million and counting), open APIs and top class design, there really is no need for a competitor. When it comes to main-stream social networks, where the user’s utility and enjoyment comes from the fact all their friends are on the same network, the world only really needs one.

For this reason alone, I found it very difficult to imagine what features a new would-be contender to the throne might have, or how anybody could hope to gain a network effect stronger than Facebook’s own. But last week I read two separate articles that stopped me wondering how Facebook might eventually be toppled. “This is it for Facebook,” I thought. ” This is the beginning of the end.” (dun dun dun!)

The Love Of Money…

If I could alter this bible quote above, I would change it to “earning no money is the root of all evil.” Facebook has over 400 million users, but has only recently been cash flow positive. While they might be on track to earn $1 billion this year, the length of time it has taken for investors to start getting a return has got to be a huge weight on Mark Zuckerberg’s shoulders.

So let’s imagine we are Mark Zuckerberg, CEO of Facebook. (This scenario will probably be applicable to Twitter pretty soon too). Since founding Facebook in 2004, people have given you over $700m of their own money and are counting on you to earn them a large return on that investment. So how does your business make money? In 2009 you probably earned between $600m-$700m, and almost all of that came from advertising. Like the TV, Radio and Newspapers before you, you’re in the business of selling a captive audience to marketers. So what do you do to make more money in 2010?

This is the key cross roads that all companies reach if they are in the business of selling an audience to advertisers. If they mistreat their audience to earn extra revenue in the short term, their business suffers in the long term. This is why newspapers separate their sales teams from the editorial teams and this is why Google doesn’t like to be evil.

Facebook, it would seem, has bowed to the pressure. Here are the two headlines from last week that I mentioned:

Facebook Is Evil

Both of these moves are very evil, in the Google sense of the word.

The first article describes Facebook’s potential plan to take the benefits of Facebook connect, but to remove the pesky “user’s permission” element – “Imagine visiting a website and finding that it already knows who you are, where you live, how old you are and who your Facebook friends are, without your ever having given it permission to access that information,” wrote Marshal Kirkpatrick. Facebook, on the other hand, described it as a nice user experience and a way of making Facebook connect “more seamless” – how thoughtful of them!

The second article describes a new change in the language used on Facebook advertisements. Users can currently “like” an update on Facebook, just to express the fact that they enjoyed it, or they can “become a fan” of a brand or company to connect with them and receive regular updates from them. Facebook has realised that users are far more likely to “like” something than “become a fan” (presumably because there is no commitment in the first one) and so they decided to change the language on their advertisements. Now a user will be presented with an option to “like” an advertisement, but it will have the functionality of “becoming a fan.” In essence, Facebook are tricking their users into opting into communications from advertisers. Or as they like to put it “This lighter-weight action for connection to a Page on Facebook means that users will be making more connections across the site, including your Facebook Page.”

Good Vs. Evil

These two stories, to me, represent the first clearly visible chink in Facebook’s armour. I can now see the unique feature that the next big social network will have – an overt respect for it’s users’ privacy, a desire not to be evil. Or maybe it’s more basic than that. Maybe the business that overtakes Facebook won’t just have a desire to be good, but they’ll have a business model that doesn’t force them to be evil. I can’t help but believe that had Mark Zuckerberg thought of a better business model than “just throw some ads on the site,” he never would have felt compelled to claim that a disregard for privacy is the new “social norm.”

This may not be the stuff that Hollywood scripts are made of, but for me the next 2-3 years will as good as any epic Good vs. Evil battle. Not only will it reignite my romantic beliefs in the power of good, but it will prove that building a business model around “doing good” will be the most successful strategy for the 21st century.

The Google way vs. The Facebook way, let the battle commence!

My Two Wallets

March 30, 2010 in Economics, Essays, Marketing

In my professional life I often spend time thinking about how much people value a product or service in an effort to estimate the prices they might be willing to pay. One of the biggest mistakes I always make in these evaluations is that I put too much emphasis on money.

Lately I’ve been seeing other people make this same mistake all the time (much easier to spot the mistakes of others!) so I thought I might share this little analogy I use to help myself think about the problem.

I picture myself, a consumer, as having two wallets. One in my right pocket and one in my left. These wallets represent how I think about payments, rewards, prices and cost.

My Right Wallet

My right wallet is the money wallet. This is the fairly standard stuff. I’ll agree to work a job because it pays €x per hour. I’ll buy product A over product B because it’s €2 cheaper. I’ll buy this item because I think it’s worth the price.

When we think about consumer behaviour this wallet is easy to understand and easy to address:

“How do we get more people to buy our product?” – “Let’s reduce the price”

“How can we get him to work more hours?” – “Let’s increase his bonus”

My Left Wallet

The left wallet deals with all the rewards, incentives and prices that are non-monetary. Although most people understand it, it is often overlooked. Even when it is considered, it’s importance is usually underestimated.

Payments-Out

Thinking about payments made from the left wallet can often help us understanding seemingly irrational behaviour.

Why have there been 10 billion song purchases on iTunes when they’re all available for free elsewhere online? Because ‘free’ is only the price for my right wallet, my left wallet is paying time to find them, guilt for not supporting the artist and fear of doing something illegal.

If I have money in my right wallet but no time in my left (i.e. I’m a working professional) I’ll get my music from iTunes. If I have no money in my right wallet but loads of spare time in my left (i.e. I’m a student) I’ll get it from Napster.

Payments-In

A similar divide exists when you’re paying people to perform an activity.

I saw Matt Mullenweg, founder of WordPress, speak at the recent Dublin Web Summit and describe how his open source project is built and maintained by a legion of unpaid developers. He was asked how he manages to “pull this off” by an audience member, with the implication that this was exploitation.

On on the surface it seemed like a valid point. Who are these idiot developers and why are they working for nothing? But after one look at the platform they’ve managed to build, it’s clear that these unpaid developers are no idiots. The answer becomes obvious when we apply the two-walleted analogy – they are getting paid, just not into the most obvious wallet.

I’ve never been a developer on a project like this, so I can’t claim to know exactly what reward they feel, but the internet is full of Open Source projects created and maintained by tribes of workers – none of whom get paid money, but all of whom get some form of reward. The “payment” to the left wallet comes in many guises: happiness, accomplishment, social status, achievement, inclusion, belonging, recognition, reputation, pride.

There are many things we do in life just for the sake of our left wallets – friendship, community building, sport – so it shouldn’t be a big surprise that people will work for these rewards too.

Left vs. Right

The interesting part of the analogy comes when we stop thinking about each wallet in isolation and start to look at how they work together. Specifically, when we look at the exchange rate between the two. I’ll explain what I mean by this with two real-world, offline examples:

The Day Care Dilemma

The first example comes from a study done at day care centres in Israel, recording the time of day at which parents collected their children. At the beginning of the experiment most children were collected on time, but naturally some parents were late on occasion. For the most part, parents made their best effort to be on time each day and few were ever more than 30 minutes late. There was a social cost associated with being late: feeling guilty, imagining that their children might get punished or just feeling embarrassed for being considered a bad parent. These costs were paid for from the left wallet.

A few weeks into the study, some centres began to fine the parents for being late – roughly €5 for every 10 minutes. Thinking about the effect this fine would have on the parents’ behaviour, most people would expect them to try avoid the fine. Therefore, one would expect the number of late collections might decrease. The complete opposite happened. Late collections rose, but not just by a small amount – parents facing the fine were almost twice as likely to arrive late as those who faced no punishment.

This is because parents don’t combine the payments from each wallet, they substitute them. Once they started paying in cash they no longer felt that they were paying in guilt or embarrassment. And the exchange rate was fantastic! When they make the mental conversion, €5 is a much lower price to pay than feeling like a bad parent.

The “punishment” implemented by the day care centres turned out to be nothing more than a discount.

Thanks at Blood Banks

A similar effect can be found with payments into the left wallet, as opposed to costs out. A great example of this come from studies on the economics of blood donations. The data shows that when blood banks switch from asking for voluntary donations and start paying donors, the total level of donations fall.

This again is because of the mental substitution of the left wallet for the right. In a voluntary system, the blood donor’s reward is a sense of civic duty, of moral good and of helping someone in need. In the cash-for-blood system, the cash payment replaces the social payment, and the exchange rate kills the service – no reasonable amount of money can equate to the feeling that you might save another person’s life.

Applications to Business

The applications to business, especially online business, can be hugely important – the blood donation principle in particular. When people suggest paying Wikipedia contributors for writing good articles we can now immediately see why that wouldn’t work – the monetary reward necessary to substitute for the social reward would just be too big for Wikipedia to afford. The same goes for the question posed to Matt Mullenweg about paying his WordPress developers. The answer is now obvious: they are being paid…. into their left wallet, and the exchange rate to switch to the right wallet is just too big.

This is why sites like Mahalo – that pay users low amounts of dollars for contributions – probably won’t work. This is why sites like foursquare and Digg– which pay users with social rewards like status, reputation and gaming achievements – will.

While we’re on the topic, the Irish blood Transfusion Service seem to understand these principles quite well – they offer different “rewards” for different levels of commitment, all of which are paid to the donor’s left wallet. For example, after 10 blood donations you get a pin and after 50 they take you out to dinner! Looking at their ads (below), they tackle both sides of the coin. One set attempt to increase the social reward (gratitude) and the other to reduce the left-wallet cost (fear, time).

Reducing The Social Cost Of Blood Donations

Nothing New

Of course, none of this theory is anything new. Behavioural Economics has been around for quite some time (Dan Ariely and James Heyman, for example, illustrated the difference between “Monetary and Social” payments in their 1992 paper “Effort for payment: A Tale of Two Markets”). The study has become quite popular in the last few years, with much of this post inspired by recent books like Predictably Irrational and Behavioural Investing.

The “new” bit that I hope to bring to the table is the Two Wallets metaphor. I’ve understood behavioural economics for quite some time, but I consistently neglected it when planning business decisions and thinking about consumer behaviour. So now I always imagine people as having two wallets from which they pay me, and two wallets into which I can pay them. This helps keep the behavioural science at the top of my mind, without having to remember all the science!

The Tragedy Of Haiti and Crippling Debt

February 9, 2010 in Economics, Essays

To quote Dan Bordeaux in a letter to the Washington Times:

The ultimate tragedy in Haiti isn’t the earthquake; it’s that country’s lack of economic freedom.  The earthquake simply but catastrophically revealed the inhuman consequences of this fact.

Since the disaster many people have been urging world governments to “drop the debt” that Haiti owes. Indeed many governments already have.

The real tragedy is that if half the effort we’re devoting to the rescue and salvation operations were applied to preventative measures, many more lives could have been saved.

Haiti has, for a long time, been enslaved by debt. As was noted by many before the quake, “Debt costs lives,” and few places in the world was this more evident than Haiti.

At it’s peak Haiti owed $1.8 billion, almost all of which was borrowed and squandered by past dictators. In the first half of this decade they spent more money each year repaying the debt than they did on healthcare, education or agriculture.

Last May an article from The Times – “Haiti: the land where children eat mud” – has one particularly disturbing insight into the effects of crippling debt and poverty on a society:

“Parents in Carrefour Feuilles are happy when their son joins a gang,” one Haitian woman, who runs an anti-violence project, tells me. “They are also happy when their daughters become child prostitutes. It means the family can afford to eat.”

And yet some will argue that Haiti needed better government, stricter planning rules or more access to information so that it could have prevented the huge loss of life in January, but as anti-dismal points out:

You may argue that stricter building codes are a major reason why the 1989 Bay Area quake killed far fewer people than did this week’s Haiti quake. But stricter building codes increase the cost of building and if you are poor and cannot afford expensive buildings you build cheap, less safe, ones. So you can have all the building codes you like, but people have to be wealthy enough to be able to afford to obey them, for them to work. Also buildings will get safer, even without building codes, as people get wealthier. The more wealth you have the more you have to protect and thus the more you are willing and able to spend on protecting it.

That Haiti gave almost $1oom to rich countries last year instead of investing it in infrastructure is a tragedy, but worse again still is that many other developing countries around the world are being forced to pay off such odious debts. This will ultimately leave them in the same state as Haiti was when the earthquake hit – when each day is a battle to survive there is no room for the luxury of planning for tomorrow.

This rule doesn’t just apply to natural disasters like the Haitian earthquake. Increased GDP per capita (through free-er markets and more capitalism) can lift developing nations from all sorts of poverty-related problems, including famine, war, slavery and crime (albeit indirectly.)

In fact, emotions and humanity aside, there could be a very strong business case for dropping the international debt. The cost of dropping the debt to Haiti entirely was roughly equivalent to the amount that has been donated since January 12th, not to mention the amount that will be spent in years to come.

(There are some obvious flaws in the numbers here, dropping the debt doesn’t automatically lead to a developed nation with top quality infrastructure, but it’s certainly a start. The other obvious issue is that the people donating are not those who were owed the debt.)

But in the long run, even if world leaders take a cold-hearted approach to the issue, dropping the third world debt (paying it on their behalf) could be their most cost effective strategy.

When talking to global leaders Bono, Geldof and company could try appeal to the strings of their purses, rather than hearts.