Photo: Robert Scoble
Facebook’s ad business isn’t very good, and it’s making the company’s upcoming $100 billion IPO look hairier by the minute.But the truth is, the IPO will be fine.
The problem with Facebook ads is that unlike Google ads – which are perfectly matched with a user’s intent – Facebook ads are targeted the same way TV ads are: through guesswork.
Advertisers buy space that will been seen by certain types of people, in hopes that those are the types of people that will someday want to buy the product being advertised.
The problem is: advertisers don’t feel like they are getting enough feedback from the people who see those ads on Facebook. The advertisers say they can’t tell if their ads are working.
As a result of these issues, Facebook’s ad revenues shrank from Q4 to Q1 and are actually decelerating overall.
But even though Facebook’s ad business isn’t very good, the company is still going to IPO on May 18, and it’s still going to IPO at a very high valuation – probably somewhere around $100 billion, maybe higher.
The big institutional investors who will propel Facebook to that valuation are going to do it for a lot of reasons.
Scarcity is one factor, but a bigger one is potential.
Facebook has almost a billion users. 500 million people come to the site everyday. More than 400 million use Facebook on their mobile device every month.
Investors the world over are looking at those user numbers and they have decided that they are so big, that Facebook’s upside is worth the risk.
So, what are some things Facebook could do that would make its business really explode?
Before we get to some ideas, there are two things to remember:
- Mark Zuckerberg will always prioritise making Facebook useful for users over making money. So any business ideas have to also improve Facebook for users.
- Unlike Google, Facebook seems comfortable with the idea of making money from lots of different businesses. So there might not be just one solution.
Ok, the ideas:Your Facebook ID becomes the way you pay for everything online and offline. Long-term, one of Facebook CEO Mark Zuckerberg’s goals seems to be for your Facebook ID to be your ID everywhere. Given smartphone adoption, you can imagine this happening online and off. If that were to happen, the easiest way for Facebook to make money would be to facilitate offline and online transactions. Potential: PayPal, part of eBay, has an enterprise value close to $20 billion or so. Visa has a market cap of $100 billion.
Facebook tells every publisher in the world who is coming to their site in exchange for a percentage of ad revenues. Another way of putting this is that Facebook could create a third-party ad network. Potential: Google has an ad network and eMarketer estimates it will have more revenues than all of Facebook by 2013.
Facebook becomes the place to buy anything that might be bought with friends: movie tickets, concert tickets, aeroplane tickets, hotel rooms, etc. Ticketmaster has this cool Facebook integration where shoppers can share the news of their ticket purchases with friends. Every time those friends see that news and click on the link on Facebook.com, that click is worth $6 in revenue for Ticketmaster. It just goes to show how inherently social purchases belong on Facebook. It’s helpful for everyone: more sales for the seller and more fun and useful for the buyer. Potential: The movie industry sold maybe $15 billion worth of tickets last year. Facebook could maybe take 10% of that? Ticketmaster is a $1.6 billion company. Priceline is a $36 billion company.
Venture capitalists fund startups that leverage Facebook data to disrupt their incumbents. Former Facebook executive Chamath Palihapitiya left the company to start a venture capital firm with a single mission: fund companies that will use Facebook’s open APIs to take over large, calcified industries like banking, education, and healthcare. Palihapitiya is funding a banking startup, for example, that will give potential customers a credit score based on their Facebook activity. Potential: Unknown. The idea is that Facebook will profit from companies using its data to disrupt incumbents the way it figured out how to profit from Facebook gamesmaker Zynga’s disruption of the video game industry.
Facebook figures out advertising. Right now, Facebook is pretty bad at brand advertising. But it has a lot of people figuring out how to get better, including some of the top people from Google. Potential: Google is a $200 billion company, and Internet advertising spending is only half as big as TV advertising spending.