Facebook can be its own worst enemy. The social network’s latest controversy over a requirement that account holders use their real names has angered transgendered individuals, artists and others who want to be known by aliases. The furor comes on the heels of a recent disclosure that Facebook secretly manipulated the emotions of nearly 700,000 users in a study. Now, the company has unveiled a new ad platform that more deeply tracks its members across the web, even if they use different devices.

In the midst of this privacy maelstrom, a new social network called Ello has thrived. The site bans all advertising and pledges never to sell user data to third parties. Ello is so rabidly fervent in its desire for privacy that it outlines its core beliefs in a manifesto. “Your social network is owned by advertisers. Every post you share, every friend you make and every link you follow is tracked, recorded and converted into data. Advertisers buy your data so they can show you more ads. You are the product that’s bought and sold,” it says. “We believe there is a better way.”

The press dubbed Ello the “anti-Facebook,” and its no-ads stance has resonated with many. Since launching in beta on August 7 with 90 members, the invitation-only social network has been getting nearly one million requests to join a day, according to a company spokesperson. The site is starkly simple, and users can choose to have their faces obscured by an eyeless smiley face in black. Founded by seven artists and programmers as a private social network, Ello said it received so many requests to join it decided to open to the public. “Ello is an interesting case, another indicator that everyone is uncomfortable with Facebook,” says Ethan Mollick, Wharton management professor.

Ello CEO Paul Budnitz, a Vermont businessman who sells high-end titanium bicycles, is a far cry from the stereotypical Silicon Valley whiz kid creating billion-dollar startups these days. Budnitz, who declined to be interviewed for this article, is proud of Ello’s domicile. “This company is Vermont-based. It’s the only state of the union that doesn’t allow billboards,” he said in an October 3 interview with The Atlantic CityLab. “We’re going to prove that the Internet doesn’t have to be one giant billboard.”

But Ello is finding out it is not so easy to stay untainted on the web. When one of its users discovered that the company took $435,000 from venture capital firm FreshTracks Capital, the social network was criticized for it after word got out. Entrepreneur Aral Balkan, who had dealings with Ello, said on his blog that “when you take venture capital, it’s not a matter of if you’re going to sell your users, you already have. It’s called an exit plan.” VCs want a return on their investment and could push Ello to take ads or sell user data to make money.

“Ello is an interesting case, another indicator that everyone is uncomfortable with Facebook.”— Ethan Mollick

Budnitz defended the decision to take VC funding. He said the principals of FreshTrack are his neighbors and insisted that there is no exit strategy, according to an October 2 story in Inc. magazine. Moreover, he pointed out that Ello’s founders still own the “vast majority” of the company. That means they call the shots and will not easily cave in to VC pressure to insert ads. “Quite frankly, were we to break this commitment, we would lose most of the Ello community. Including ourselves, because we dislike ads more than almost anyone else out there,” the Ello website says.

But then Budnitz also said Ello intends to be profitable, a departure from the no-profit business models of Craigslist and Wikipedia. “We will make money, and we are a business, and we have been really open about that since the beginning,” he told Inc. Instead of selling ads, Ello will use the “freemium” model in which basic functions will be free, but users pay to unlock special features such as universal log-in for multiple devices.

Paying a ‘Freemium’

The freemium model “could work as long as they’re offering features people want to pay for,” says Shawndra Hill, Wharton professor of operations and information management. But it will not be enough for Ello to thrive if its main attraction is the lack of ads, she adds. There has to be more to entice people to pay for the service. Hill points to LinkedIn as an example of a successful social network that uses a freemium model. The basic service is free, but paying for premium services allows recruiters to do sharper resume searches, provides salespeople access to an expanded list of contacts and gives job seekers tools to enhance their profiles and stand out from the crowd.

At least, Ello seems to be attracting users at a faster pace than other social networks — such as Diaspora, Appleseed, OneSocialWeb and others — with the exception of Google+. Diaspora got attention from the press as a Facebook alternative years ago following privacy controversies at the social network. Diaspora promised to be a private and secure network, but the system depended on users hosting and running servers. Using Diaspora was much harder than opening a Facebook account, and that was a hurdle that crimped its growth. Mollick notes that many such social networks have arisen, but “it is hard to imagine them getting the critical mass of Facebook.” Even Google+ has not offered a differentiated enough service to topple Facebook, despite its market power.

“Online social networks are like parties: They’re only fun if we know someone else.”–Jonah Berger

That means Ello has to provide users with something that is “amazing and compelling and makes you feel good all over” if it wants to become more than a niche service, says Peter Fader, Wharton marketing professor. That is what Apple did to incumbent market leaders with the iPod and iPhone. Just providing an ad-free platform is not going to make most Facebook users jump ship. Without giving people other good reasons to switch, Ello risks being just a countercultural platform mostly for people who are obsessed with privacy or hate Facebook, he notes.

What’s more, as a social network that charges fees, Ello will find it a “challenge to survive with so many free services online,” according to Kevin Werbach, Wharton professor of legal studies and business ethics. Wharton marketing professor Pinar Yildirim agrees. By its very nature, a fee-only social network would attract a smaller pool of people, she says. “We are talking about a smaller network, including people who may care about sharing their opinions, ideas, likes and tastes without worrying about being tracked.” Social networks gain popularity based on the number of users and their friends who join. “If fewer people begin to use an online social network [such as Ello], the demise may be quicker compared to other online businesses, which rely less on such network effects,” Yildirim adds.

The linking of relationships on Facebook also makes it hard to supplant. “Online social networks are like parties: They’re only fun if we know someone else,” says Jonah Berger, Wharton professor of marketing. “It’s tough to unseat Facebook because of the network effects. All our friends and family are on it, so it’s hard to get any one person to switch. Unless the site really appeals to a certain demographic or social group, or a part of the network moved simultaneously, unseating Facebook will be tough.”

Facebook Forever?

That does not mean Facebook is impenetrable. Fader says he is not yet counting out Google+, which could gain traction with groups like company employees who want to connect socially online but find the easy familiarity of Facebook inappropriate for their needs. Also, there are new technologies and companies entering the market all the time that could threaten Facebook. Fader cites the case of Netscape, whose Navigator was once the most popular web browser in the 1990s, until Microsoft came along with Internet Explorer and took the lead.

That means Facebook should vigilantly watch over its business or risk being overtaken, notes Wharton marketing professor David Reibstein. Consider Yahoo, which used to dominate the Internet search business before Google came along. Now Yahoo is in the doldrums, in part because it didn’t keep up with its users’ needs. Yahoo’s decline “should have never happened,” he says. The same thing occurred at Kodak, which invented the digital camera, but lost market share because it did not want to upend its old business by pushing the new technology. For Facebook to avoid the same mistake, it must continue to run tests on its site to stay current on trends, even if that upsets users, Reibstein suggests.

“None of these services are things you have to use.”–Shawndra Hill

Facebook may anger users from time to time, but Hill notes that consumers should remember they are getting the social network’s services for free. “It is the price you pay for having free solutions. It is unfair to be upset about it, because you have the option to use the service” or not. Until social networks become a necessity, users who do not like their advertising and tracking policies should go somewhere else. “None of these services are things you have to use,” Hill says.

Fader adds that Facebook has the right to conduct tests and to insist that people sign up with their real names. “I’m not a big fan of Facebook, but on both those issues I kind of stand by them,” he says. The use of real names will help Facebook become more entrenched as websites ask people to authenticate through social network accounts. “It’s an arbiter of who is real and who is a troll,” Fader points out. Facebook has since backed down somewhat on the issue; it is now asking individuals to use monikers they go by every day, not necessarily their legal names.

Fader also believes that Facebook’s latest advertising endeavor, Atlas, is “brilliant” and could be a true challenger to Google’s dominance in online ads. Atlas lets Facebook track its members as they visit other websites, even if they utilize multiple platforms and devices. That means Facebook could come up with user data that is richer than what Google could get because of the link to demographic and other personal information found on the social network. “Life is good for Facebook,” he says.

If Facebook transgresses on users’ privacy again, at least the company has the power to dial it down. “They’re going to figure out how far they can push it. They’re in a position to throttle it back,” Fader notes. “They’re controlling their own destiny, unlike some other media companies that are dying without these ads.” While some users are uneasy about how Facebook uses their data, “so far, it hasn’t risen to the level that causes a significant exodus,” Werbach states. Fader predicts that even Ello users will keep their Facebook accounts. With such odds, Ello can always choose to stay a niche social network that appeals to a select few. “Not everyone wants the same thing,” Reibstein says.