On Oct 10, 2008, at 1:43 PM, Andrei Herasimchuk wrote:
So... I have to wonder out loud: Why not just charge $9/month for a Facebook account? I know that's so 1992 with an that oh-so-dated America Online model, but hey... At some point, we'll all finally get past the silly notion that stuff should always be free. Advertising can only support so many businesses in this space.
I think it's because they haven't built anything that gives them protection against someone else just duplicating it and putting it back up for less.
In business, there's only two long-term ways to generate higher profits than your competitors:
1) either you keep your internal costs lower than all your competitors, so that your margins are always naturally higher, or
2) you keep your quality high enough that you can charge premium prices to keep your margins higher than your competitor.
Most of Facebook's costs to date have been in R&D. However, they are almost 100% transparent in how they work. So, that means that a competitor can produce an equivalent product without the same R&D effort, but just copying what FB has done.
Facebook has "locked up" the market now because social networks require that you're connected to everyone you want to be connected to. Moving to a new social network has a high cost.
However, that high cost may be worth it if staying has a higher cost, like having to make a monthly payment to keep the connections available. Then, the motivation to move to a free network becomes substantially higher. What can FB offer for the monthly fee that would prevent that?
That's how I see FB is locked into free service and has to now invest in originating a business model that (a) produces the 10x returns on the $500m investments they've received and (b) isn't easily copied by competitors who can build it out at 1/100th the cost FB has invested.
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