For many of people, Facebook is the first stop in any web surfing session. It has developed into a highly engaging combination of online bulletin board, personal scrapbook, and group communication network. But did you ever wonder why, being all those things, Facebook is free?

Well, it really isn't. Facebook offers its service in exchange for the right to capture and collect mountains of demographic and preference data from its users (you mean they didn't tell you that when you signed up?). That data can be extremely valuable to marketers and advertisers because it is highly detailed and personal.

Many Facebook observers believe that the company hopes eventually to licence parts of its "social graph," or profile information database, to external marketers and advertisers who might use it to target ads or other content to potential customers. But to be useful to marketers, the user data must be set to "public," and Facebook has come under intense scrutiny over its handling of the privacy of its users' data of late. In light of the current backlash, any quick moves by Facebook to monetize its user data could prove disastrous.

What will Facebook do?

Low-Hanging Fruit: Facebook's Business Today

Today, Facebook is mainly an advertising platform. It sells ad space on its site, and it helps its advertisers aim their ads at specific groups of Facebook users, based on "public" elements of its members' profile data. Facebook also takes in a small amount of money through revenue-sharing agreements with developers who offer apps on Facebook: Facebook hands over a certain amount of "public" profile data to the app makers, enabling them to personalise the experience of the app's end users.

And that's it.

Some observers, such as Tom Phillips, CEO of social marketing company Media6Degrees, believe that Facebook's userbase is so massive, and its database of user data is so rich, that it can do good business simply by selling ad space and by hosting apps on its own platform. "With the amount of volume they have, they only have to do simple things," Phillips says. "They can make enough money selling big marketers volume impressions online, by running ads at their own site based not on keywords but on the actual tastes and preferences of Facebook users."

To be sure, Facebook has focused on increasing its membership, and it has been wildly successful on that score: the number of Facebook accounts is now nearing 500 million. So the sheer size of the Facebook audience is attractive to advertisers and app makers; and as a bonus, Facebook provides data tools to advertisers that help them make meaningful impressions on members of that audience.

But the company is deeply indebted to its venture capital backers, who, while already seeing dividends from Facebook's current business, are looking forward to a big payday (investment plus return) at some visible point in the future. For now, Facebook's investors are giving Zuckerberg and company plenty of time. People familiar with the situation say that you won't see a Facebook IPO this year or next year, but you probably will see one in 2012.

Still, Facebook has already taken some bold steps in that direction, periodically marching out new features to capture more user data for its massive "social graph", and trying to make as much of that data "public" as possible. That public data is what marketers use to ensure that they are knocking on the right doors (websites) with the right marketing messages (ads, usually) to sell products. But those same bold moves have earned it the ire of many critics concerned about the privacy of user data.

So the interesting question isn't "How does Facebook make money right now?" but "How does Facebook intend to leverage its massive store of data to achieve full profit-making potential over the next two years?"

Stay the Course?

For the most part, Facebook has restricted its business partners to using the data it provides to approach users within Facebook. For example, Facebook gives onsite advertisers and app developers the advantage of its user data to help them target ads and customise the content in apps. Facebook does not directly charge those partners for the privilege, however. That could change.

According to Harvard Business School professor Ben Edelman, Facebook could stick with its current money-making model, but start charging for things that it does for free now. "Facebook may be using the old crack dealer model, the first puff is free," Edelman says. After app developers and partner websites get 'hooked,' Facebook could start charging for access to its user data, he says.

Edelman believes that many of Facebook's current business partners would be happy to pay. "If American Airlines can afford to spend $100,000 to somebody to design their page, I imagine that they could afford to pay $10,000 a year to Facebook itself," Edelman says.

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