Facebook’s business model
cdixon.org
cdixon.org
> Display ads generally hurt the user experience, and are also not very efficient at producing revenues.
Agreed. I would differentiate FB ads from your normal banners however, due to the against-the-wall approach of most banner buys (from larger advertisers) and the much more target - and interactive - approach of FB ads.
> Google makes the vast majority of their revenues when people search for something to buy or hire. They don’t have to stoke demand – they simply harvest it.
Very true, but this also brings a problem. There is much more money in creating demand vs. harvesting demand. In addition, by capturing users earlier in their decision process, an advertiser often cuts out later stages that may sap overall profit margin.
I think that we really should not be comparing Paid Search at all with Facebook Ads - the two really are completely different. What we should compare is businesses like Yahoo! Display and AOL's Advertising.com - those are the ones running scared from this.
I think the short term metric is whether they're worth a 100B valuation. Q1 profits were $205M give them leeway (they did spend $300M cash on Instagram) say they have 1B in profits this year and their P/E when they go public will be ~100. That's indicates an extremely high growth company.
Considering their profits are down this quarter and their growth rates are slowing I think Chris's point may be more of is Facebook worth as much as they say they are. I, personally, prefer to see them at a P/E of 40. I think this is a pretty mature company and their primary revenue growth is behind them. The real short term question for Facebook won't be whether they can continue to grow their user base (they're likely tapped out) but how well they can increase the revenues on the users they have.
I have bought about $5k of facebook ads, and they were not great. If I could remarket on facebook, I'd likely spend several thousand a month, and GM would spend a ton more than the $10M they recently cancelled.
I honestly think I could re-work their ad platform, and double revenues over time without changing the product.
Right now, on facebook I am seeing ads for generic stuff like cell phones, and clothing. On other sites on the internet, I am seeing ads with a special offer for a local gym that I was considering.
I don't have a really good explanation why, except that maybe the ads I see on my Facebook pages seem to have a 'scammy' feel to them (the most common ad I see is for Canadian Pardons - Facebook must think I'm a criminal).
If Facebook knows that you recently got married, and that you just surfed over to a baby website (equipped with the "Like" button), you might be intending to have a child, even if you're not yet pregnant. They can start selling you a daily-deal on diapers before a kid exists to soil them.
http://www.forbes.com/sites/kashmirhill/2012/02/16/how-targe...
More seriously, what you say may be true, but that's a stretched definition of "purchasing intent". Google wins here not because they happen to get eyeballs of surfers interested in diapers, but because people actually use Google to find places to buy diapers. That's a tough nut to crack, and the point of the linked article. More generally: facebook has "eyeballs" and page views, but search providers have the people with their wallets already out.
Facebook has way more information about me than LivingSocial, so I assume they could do a better job of that.
Interesting post on Target.
Honestly my intuition says that there isn't that much money in that kind of "buy this, you don't even know you need it" advertising. Consumers generally know what they want already.
BTW, Amazon's revenue dwarfs Facebook's but Facebook made more profit last year than Amazon ($1 billion vs. $900 million).
And yet there are plenty of ads there. Why? How do they work?
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> A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect –to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.
So long Facebook is a "nice-to-have" business models around paying for access or privacy are dead on arrival, users will just leave or go elsewhere. However if Facebook becomes a "must-have" in order to participate in society, then people will do whatever it takes. If Facebook is becoming an infrastructure provider then they have every incentive to encourage a rich ecosystem and businesses will pay for access, even consumers perhaps might. The comparison that comes back to me is the early phone system from 100 years ago. It was a "nice-to-have" to have a phone number. But phone companies invested in infrastructure and interoperability and lots of third party applications emerged that got deeply embedded into societal life. Thereby the telephone became a "must-have". Facebook today seems to have a similar opportunity in front of it. If they realize and leverage it, it could be huge.
They somehow have to monetise this.
However, offering these features is likely to cause damage to the naive belief that Facebook is actually private.
(I have never had one, never plan to have one either)
Previously I taught her how to watch everything she wanted online.
As someone who has been on a computer daily since 3rd grade (I am 37 years old) - websites are simply the new channels we debate over liking (no pun intended).
No, you don't.
Privacy is available, right now, for free. The cost, if there is one, is getting all your friends to stop using a single website started run by a sociopath who does not believe in the idea of privacy and start using an open source peer to peer solution that is not controlled by any single person or entity.
30% ain't gonna cut it, though. They'll have to chop that down by an order of magnitude.
I personally think it's unlikely that Facebook will not launch an Adsense competitor at some point.
Then there's Facebook credits with at least 200 million users [2], potential there to expand into off-site micro-payments, POS systems, etc.
Or "Premium Features": advanced analytics, promoted posts, photo storage, etc
The $100B valuation is reflective of the market's confidence in their potential, obviously. It's wise to be cautious, but I wouldn't write them off just yet.
[1] http://investor.google.com/earnings/2012/Q1_google_earnings.... [2] http://www.businessinsider.com/facebook-credits-2011-6
So in the advertisers mind, search ads are literally orders of magnitude more effective than FB ads.
W/r/t FB as a business however, it's all well and good becuase, even at $.35 RPM, with billions of page views /day or month, the numbers start adding up pretty quickly. As long as they continue to crank billions of page views, justoptimizing the site to move from $.35 to, say, $.40 RPM will have a massive effect on the growth...provided they keep cranking the page views.
The whole point of Facebook is to get users to spend all their time online there. At that point Facebook's business model can approximate any and all other web companies business models. Facebook's Search will be keyword based and charge Google-like rates per pageview. Facebook's app and content delivery platforms will take Apple/Netflix/Spotify sized cuts.
Surely they can create purchasing intent simply by working out what users want to buy next based on yet profiles. What about growing existing elements like events (meetup.com) and chat (Skype, hangouts).
Feels by economies of size and scale Facebook has to create value.
I somehow don't believe that Facebook shows ads on 2x as much pages than google. If it's really only about pageviews then it's highly irrelevant as Google serves majority of its ads outside of their pages.
Facebook still does not have a business model that works.
Facebook is surviving on investment, not income.
Mark Zuckerberg is billionaire because of Microsoft's and others' investments, not because Facebook is making billions in income.
Better check your facts. Facebook made a $1 billion profit last year.
Zuckerberg's thesis is that eventually all software is going to be social by default. Does social just mean "it has my friend graph?" No. It means it has access to all of the things your friends are doing right now and ever. And it also means it has access to all physical and virtual entities connected to you. The music you've played, the photos you've viewed, the videos you've watched, tracking all these things are possible today. In the future it will mean every little thing you do is getting logged by a big server in the sky. The places you go, the conversations you have, the things you look at, touch, smell, and taste. Facebook's goal is to be that server that all that data streams into. This is the reason that Google is shitting their pants trying to "iPhone" them by creating stuff like Google Glass, since unless they leapfrog them Facebook will be a large part of the "world's information" they cannot organize. It has nothing to do with search not being "social" (another red herring), it has to do with Google being left behind as Zuck spends 10 years rewriting the rules of the game, much like how Microsoft is suffering due to Steve Jobs doing the same. It's one thing for Facebook to make Google search obsolete somehow, its quite another for Facebook to make all software Google writes, now and in the future obsolete, which they are poised to do.
As for Microsoft, their investment into Facebook might be looked back upon as the smartest business transaction of the 21st century, if it gives them special privileges in building systems that are enabled by the data Facebook can give them. 2000-2010 might just end up being a "lost decade" for Microsoft, and they may yet come out ahead in the future of software in a way Google will be unable to. (And Amazon, as an aside, will be selling AWS pickaxes to everyone the whole time.)
All apps of the future are going to either be connected to the pulse of this feed of information or they are not. The ones that are not will slowly but surely be replaced by those that are, since they will be not just inferior but essentially braindead.
We are still in the playground stages of all of this since Zuckerberg is still plugging together the pieces. The stuff being built now is just scratching the surface since we don't know what we're doing and there are still gaps in the availability of this data. There is also a generational gap. Most people on HN cringe when they have to accept a Facebook dialog. Our younger siblings and kids will have opt-ed in to the big server in the sky in full, no holds barred, when they turn 13. By 18 it will be a distant memory that these choices were even made, and that they were choices in the first place. And by then they will be fully profiled by data mining algorithms, using software that knows them as well as their parents do (if not better.) And, for most software, opting out will mean the software basically doesn't work.
Once we are there, Facebook is essentially going to be able to implement a tax, much like Microsoft did for many years. Its hard to imagine how they will be usurped if they manage to get to this point, as they will be more integrated into the fabric of our lives than any other business I can imagine. More than banking, more than the utility companies, more than any retailers wet dream. Even more than Google. They have a strong technical team and a young, visionary founder who has absolute control of the company.
What could go wrong? Eventually we might see an anti-trust suit (think 2016-2017 time frame) but Google is doing its best to create the illusion of competition on that front. And, of course, Facebook still has (and will always have) a bus factor of 1, which can't be very reassuring to investors. If you step back and look on a 5, 10, 15 year window, though, you'll realize they are essentially unstoppable.
[1] MIT Media Lab: http://media.mit.edu/research/groups/1448/openpds-privacy-pr...
[2] Personal: http://www.personal.com
"It means it has access to all of the things your friends are doing right now and ever. And it also means it has access to all physical and virtual entities connected to you. The music you've played, the photos you've viewed, the videos you've watched, tracking all these things are possible today."
In terms of friends' activities, Facebook only has access to what people voluntarily post to it. And in my experience, only a small percentage of my "Facebook friends" actually post regularly about their activities. Moreover, that number seems to be going down, as though my friends have been using Facebook less as the years go by. Whether that's just because these people are getting older, or whether Facebook usage really is decreasing across all users, I don't know.
Sure, Facebook can see and analyze which Facebook photos you've looked at, but why is this particularly interesting? It's just a bunch of people dancing at bars, or maybe a few family vacation shots, at least in my experience. For videos, most videos people watch are on Youtube, not Facebook. So +1 for Google in that case (although I also don't see how this fits into the master plan you are describing). And for music, well, Facebook doesn't see what music I listen to. I don't list it in my profile, nor do I use Spotify or another Facebook-connected music program. I suspect most others are the same, as I don't see much music related stuff in my news feed. I don't see this changing in the future (and I even suspect that Spotify has come to view mandatory Facebook authentication as a mistake).
"...they will be more integrated into the fabric of our lives than any other business I can imagine. More than banking, more than the utility companies, more than any retailers wet dream."
This is ridiculous. Even if a majority of businesses were to use Facebook to authenticate and track users, they are under no obligation to send this data back to Facebook (and, through Facebook, to other companies--possibly competitors--also connected to Facebook). The best Facebook could hope to do is impose a fee for using their authentication, and since they aren't doing this now I doubt they would ever.
Businesses just won't accede to sharing their information back to Facebook to the extent you think they will. They have no reason to, and plenty of reasons not to. The only things they will share are items users have specifically authorized them to post into their feeds[1], and based on my Facebook experience, those things are relatively few and far between (almost all of my feed is just status updates expressing an opinion or thought, or picture uploads).
[1] with the possible exception of spammy "social" games, which seem to find ways to post things even if players didn't really want them to -- but such spammy updates will only further drive people away from Facebook in the long run
Right now things are incredibly primitive. Pictures at bars on the surface seem useless, but we're living in an era where machine learning and machine vision can extract tons of information out of those photos and that behavior. All it takes are a few nuggets of facts about a person that cannot be ascertained otherwise and Facebook has an unfair advantage as soon as people learn how to apply those facts in a way that puts them at an advantage.
I would not look to the status quo as an indicator of how this is all going to tie together. You and I are not going to be part of this, most likey, we are too old. Facebook hasn't even created a phone yet. Once they have hardware out in the field that is Facebook-enabled things are going to change rapidly since those devices are going to make non-Facebook devices look braindead, even today.
if there is none already, somebody could build a skype-type iPhone app to talk/videochat only with your FB connections. If that gets traction, it may be bought by FB, given they wont shut down the API connection.
Wish I would know Cocoa...
also, don't forget that 90% of the ads budget is spent on creating intent not satisfying it.