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Martin Hoffmann
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Former private equity professional, turned founder: I have worked with cross-border private equity funds as well as in private equity focused consulting for close to ten years. Having carried out many due diligences with teams of experienced industry experts, my approach is to dig deep to... More
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  • What Does Facebook's Recent Experiment On Users Tell Us About The Company’s Market Position & Challenges? 0 comments
    Jul 6, 2014 6:52 PM | about stocks: FB

    Imagine you go to see your trusted physician for a regular check-up. Now this doctor tells you that you are ill. You go home and you are in a bad mood because of the news from the doc. After one week your doctor calls you to tell you that you have been part of an experiment. You are not ill, but part of a study which examines how you react to bad news. There is little doubt that you would never see this doctor again, right?

    Facebook has been playing with users emotions in order to conduct an experiment, studying human behavior. Close to 700.000 users were manipulated in a way that they would be exposed to either positive or negative content. Facebook and some researches wanted to investigate user's reactions.

    Clearly, we are aware that Facebook uses our personal data. We use Facebook's services for free. In return, Facebook attracts advertiser dollars by using this data. Here is no reason to complain. However, this study went a step further. Without our knowledge Facebook used us for a study, manipulating our emotions. While the experiment was carried out as a scientific study, we should be clear about one thing. Users are Facebook's most valuable assets, which they turn into advertising revenue. I don't see why Facebook should run the risk of scaring users away, when there is no benefit for them. Knowing about our emotions can be very valuable to advertisers who want to address us on Facebook.

    The above-mentioned doctor would know that he would loose patients if he did such an experiment. So why does Facebook run this risk? Let's examine one possible explanation. They might have done it because they have such as strong market position that they won't face any economic consequences.

    There were some complaints here and there, however, I have not heard about users leaving Facebook. As a platform, Facebook benefits from a strong network effect. We are on Facebook, because all our friends are there. If we choose to leave, we are isolated. Another platform first needs to develop the critical mass of our connections before we will switch.

    However, on the other side, new platforms like Instagram, Whatsapp or Snapchat emerge continually. In addition Facebook just acquired Whatsapp for an incredible amount of money in, what I consider a defensive move. Facebook's user numbers amongst younger people are declining. Facebook basically 'bought' those younger customers who are active on Whatsapp. At the point where a company is acquiring customers instead of growing organically, it's safe to assume that they do not have an unbeatable market position.

    If we think of Facebook only as a platform, there is another question arising. What is the value that Facebook provides to users? It enables us to stay connected with friends. But to stay connected we don't need to go online on a regular basis. Facebook offers us the experience of seeing what our friends are doing on a daily basis. In this way Facebook is not solely a platform, but a publishing business. Both LinkedIn and Medium have shown that platforms are developing from pure platforms to publishers. Users visit LinkedIn, Medium and Facebook, not only for the connection, but to consume content. If we look at Facebook from this perspective, then it is playing a dangerous game, playing with the trust of its users and reducing the quality of its content.

    If it does not have this strong market position, and if content quality is important for Facebook's users, then why is Facebook running this risk? Because, like every publisher, it serves two masters. It needs to balance providing valuable content to users and extracting value from them in order to increase advertising revenues per user. The experiment might be an indication that it is currently under pressure to become more attractive for advertisers.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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