The other weekend I was dragged to Ikea by my girlfriend. Her parents happened to be in town so, naturally, she wanted a new bedroom. What’s brilliant about Ikea is how they can get customers like my girlfriend’s parents — the kind of people who would never dream of assembling their own computer or growing their own food — to lug a 40-pound bed frame through what is basically a warehouse, carry it to their Toyota and then spend two hours building the rickety thing.
Last year alone, half a billion other customers went through the same ordeal, helping Ikea rake in roughly $20 billion in revenue and $2 billion in profits (which also happens to be one of the highest profit-margins in the industry).
The economist Tim Hartford recently posed an interesting question on Slate about Ikea’s runaway popularity. “Surely we have less time than we did 20 years ago, while having more money to spend on our homes … [so] why are cheap sofas to put in it still such a tempting offer?”
Surprisingly, the answer, as Hartford goes on to write, has a lot to do with the rise of Facebook.
Years before the phenomenon of user-generated content known as Web 2.0 (think the skateboarding pug on YouTube), there was the Swedish furniture-maker Ikea. In economic terms, their business model depended on one idea and one idea alone: “value co-production,” which simply means getting the customer to create your product for you.
“Ikea keeps its costs and prices low by enlisting its customers — their time, their cars, their ambitions as interior designers and their inflated ideas of their carpentry skills,” says Hartford.
So what does all this have to do with Facebook? Well, in August 2006, the social-networking site opened shop to “developers” who create applications that can go on your profile (think that ubiquitous vampire widget). By piggybacking on Ikea’s do-it-yourself business model, Facebook has found similar success — a $15-billion valuation, thanks to their buddies at Microsoft and 50 million members, thanks to college students’ endless love affair with procrastination. Facebook is Ikea 2.0.
Through its pool of 10,000 developers who happily provide the free content, Facebook has become another Web 2.0 platform like its predecessors: MySpace, Craigslist, Wikipedia. “Customers can do the majority of the value creation,” say Don Tapscott and Anthony Williams about these Web sites in their book Wikinomics.
Of course, while all the talk about empowering users is nice, it still comes down to the bottom line for most of these businesses. Ikea has that annoying little feature where they force you to walk through the entire store before you can find those replacement light bulbs, but that’s nothing compared to how far Facebook has gone to capitalize on the goodwill of open source.
A couple of months ago, Facebook creator Mark Zuckerburg announced the ominously named “Beacon” feature, in which you can become a “fan” of any number of advertisers, who in turn can upload their own developer gadgets. What this means is that the next time you order “Love Actually” from Netflix, your order will show up on your friends’ newsfeeds. Naturally, you can see how this whole thing may cause a kerfuffle. Even after Facebook relented and offered an opt-out choice, some security analysts claim that advertisers who signed up for the Beacon service can still track your surfing activities — even when you’re logged out of Facebook.
Perhaps more disturbing is their new “Social Ads” feature, which allows companies to use your name and profile picture as part of advertising campaigns. Unlike the dubious Beacon tracking system, these social ads may actually violate privacy laws, according to University of Minnesota law professor William McGeveran, who cites a 1902 lawsuit in which a flour-maker used a teenage girl’s picture without her permission.
Facebook was forced to pull these money-making stunts — and face the PR nightmare that followed — because traditional banner ads simply weren’t doing the trick. But higher returns shouldn’t require sketchy privacy-invasion tactics.
Back at Ikea, as I was busy avoiding the bed frame quest, I noticed a curious sign for good-quality, wooden-handled umbrellas:
“Sunny Day – $10”
“Rainy Day – $3”
Obviously this pricing scheme goes against the basic theory of supply and demand. Then it hit me: Ikea was willing to lose $7 to keep driving customers back — customers who will be staying dry on a rainy day and thinking how friendly the neighborhood Ikea was. Facebook, in contrast, has been driving customers away in their abuse of open-sourcing to make a quick buck. Perhaps the difference between the two is more than just the futons.
Jerry Guo is a junior in Timothy Dwight College. His column runs on alternate Fridays.