Facebook: The Failure to Capitalize on Localization

What makes a Facebook user more valuable than a Myspace user? More time spent using the service? Loyalty? These things may be true, but what it boils down to is the geographic density of the user-base.

Facebook users are clumped into geographic heaps – each college campus representing a local community. This is an advertiser’s dream, because they can effectively influence the physical lives of its members, as opposed to solely their online behavior. Here’s why it matters:

The majority of our waking lives are still spent living life rather than sitting at our PCs. Purchasing behavior is no different. More than 98% of all retail purchases still take place at brick-and-mortar retailers. At a projected annual e-commerce growth rate of 14%, it doesn’t look this will be changing too drastically anytime soon.

The problem is that almost all of the money poured into online advertising is geared toward reaching that meager 2%. The brick-and-mortar institutions in your locale – where 98% of consumer spending takes place – have no way of using the internet to effectively reach their local audiences. Sure, Wal-Mart and Best Buy can advertise nationally. But your local Wal-Mart and Best Buy, in addition to all of the sole proprietorships in your area (that comprise half of total spending), have no easy way of reaching you.

Facebook could have solved this problem through localization – that is, connecting the people, events, and businesses in each geographic locale together. Due to the clumpy nature of its user-base, it could have connected its users with their local retailers, restaurants, and happenings in their respective communities. This scheme would have the potential to change the face of advertising forever, and result in Facebook becoming a dominant part of the United States economy. Additionally, this type of physical value would be nearly indestructable, guaranteeing Facebook’s long-term sustainability.

No other web application before it, and none since, have had the opportunity to do so. And yet, Facebook blew it. You might say that Facebook is 'doing just fine,’ but in reality, there is no clear revenue model in sight that effectively monetizes the community Facebook has built. It has become just another social network. Localization could still be utilized, but the direction the company has taken in recent years makes it more difficult.

Rebuilding the Revenue Model

The following is what Facebook’s revenue model could have been. We’ll stay within the confines of Facebook’s (formerly) core audience, college communities, for simplicity.

Local businesses should have the opportunity to reach their target customers – the college students. Pizza parlors and Chinese restaurants should be able to advertise themselves, and even offer discount specials, to their communities. Supermarkets and retailers should have the opportunity to do the same. Facebook doesn’t need to lift a finger, short of setting up the framework, to do it. Local businesses should have the ability to join Facebook, under their own categorization. They can have their own page, in the same way that groups presently have their own pages. These businesses should then have the ability to insert some credit card information, fill out a few simple form fields, and thus, serve up ads. This sounds like an improved version of the Facebook flyer system, but it’s only the beginning of the usefulness of the model.

Once these local businesses are all online, they can be searched for by users. In the mood for pizza? Need laundry done? The businesses are just one search query away. It would effectively create a community yellow pages. Facebook could even go one step further and provide tools for setting up take-out orders and reservations for restaurants, pickup for laundry, online purchases (for pickup) for small retailers, etc. Of course, Facebook takes its cut. The possibilities are endless, especially when you consider expansion outside of college communities.

Why Facebook hasn’t yet leveraged the geographic density of its communities by involving local businesses is beyond me. However, there’s a definite opportunity here for those gutsy enough to pursue it. If you can create a Facebook application that effectively does this, you’ll be king of the hill – at least until Facebook creates its own competing application. Or, you can keep creating apps that pass virtual drinks between friends...

There’s another strategy involving the last component of localization that would provide yet another revenue channel for Facebook. I won’t give any more of this away, since it infringes on a startup I’m presently working on.

My advice to all of the other young entrepreneurs out there, if I’m at all qualified to give advice, would to be keep localization in mind when planning their startups. Facebook won’t be around forever (for reasons I’ll be discussing in later posts), and if you’re in the position to leverage localization, you can succeed where Facebook has failed – and reap the monetary rewards that come with it.