Photo: World Economic Forum
Facebook updated its IPO prospectus yesterday with the company’s financial results from the first quarter of this year.Here’s what the new information makes clear: Facebook hasn’t yet figured out how it’s going to make money when it grows up.
Two data points in support of this conclusion:
- Oddly for a company that has not yet reached the public markets, Facebook’s advertising revenues are already decelerating.
- The Facebook Credits business – how Facebook makes money from games like Farmville – actually shrank during Q1.
The company that everyone on Wall Street wants to compare Facebook to is Google, but prior to Google’s IPO, its advertising revenues were still accelerating.
Facebook is no Google, and there is one plain reason why: Google has the perfect online advertising product and Facebook doesn’t know what its online advertising product will be yet.
Google’s perfect online ad product is the search ad. Search ads are perfect because the people paying for the ads know that the people looking at the ads want to see them. Consumers go on to Google and search for products or information about products, and Google shows them ads from the company that makes that product (and ads from its competitors).
There is no guesswork in the targeting of Google ads. The same cannot be said for Facebook ads. Facebook ads are targeted the old-fashioned way.
When an advertiser buys air time for a commercial during a particular TV show, it’s because that advertiser has been told by the TV channel what kind of people watch that TV show, and the advertiser has decided that those kinds of people are the kinds of people it wants to reach.
Facebook does the same inexact thing: It sells ads targeted based on the kinds of people who will see them.
The only advantage Facebook has over TV advertising, right now, is that because Facebook users say a lot about themselves on the site, Facebook can tell its advertisers a little more about the kinds of people who will see their ads.
The major disadvantage Facebook has versus TV is that its ads are very easy to ignore because they are tiny and shoved into a corner on Facebook.com, and they are usually not very good at telling appealing stories about the companies paying for them.
If you were an advertiser, which ad would you buy first: the search ad, which will definitely be shown to a consumer who is looking for information about your product or a rival’s product; or the other kind, which will will be shown to a group of people that you think might be interested in your product?
You buy the search ad first.
Now, let’s figure you have some money left over.
Let’s say you want to buy an ad that will reach a certain group of people because you think there are some people in that group who haven’t yet realised that they want to search for information about your product, and you’d like to convince them to do so.
Do you even buy a tiny, easily ignored Facebook ad then?
Or do you buy a pretty TV commercial, which is harder to ignore, and does a much better job of telling a story about tampons or toothpaste?
Probably, you buy the TV ad first.
And that’s why Facebook’s advertising business isn’t accelerating like it should – or even accelerating at all. It hasn’t invented an advertising product that is much better than the alternatives that already exist.
Is there hope?
Facebook has 900 million registered users. More than 500 million come to the site every day.
Obviously, the answer is yes. That kind of scale makes it very likely Facebook will be able to develop an ad unit that makes a boatload of money.We actually kind of already know what it will look like, thanks to Ticketmaster.
The people over there have put together this cool product where, when a customer buys a ticket to a concert online, that customer is given the option to share the news with their friends on Facebook.
What the customer actually shares is a link to a seating map of the venue, labelled with where he or she will be sitting.
The customer also has the option to label the places on the map with the names of other people they just bought tickets for. This is just like “tagging” a photo on Facebook, and it makes it so the news is also shared with the friends of the people who are tagged.
You can see how this feature is useful for everyone.
Customers only share the information if they want to, and if they want to it’s probably because they want other people to come to the concert with them.
If you’re friends with one of these people and you see that they are going to a concert, it’s at the very least an interesting bit of social news and at best a good way to learn about a concert you might also want to go to.
Here’s why this is all hopeful for Facebook: It turns out that every time a Facebook user sees one of these links shared by their friends and clicks on it, that click is worth $6 to $8 in sales for Ticketmaster — $6 if the customer only shared information about themselves, $8 if they labelled the seat map with their friends’ names.
Clicks from Google search results and ads are worth the same amount — $6 to $8 in sales.
That’s remarkable because traffic from Google is solely made up of people who already knew they wanted to go to a concert and were already looking for information about it.
People coming to Ticketmaster through the Facebook links are more likely to be people who didn’t know they wanted to go to a concert before they saw the shared link on Facebook.
Advertising that connects people with something they already know they want to buy is valuable. That’s what Google sells. Advertising that finds people who didn’t know they wanted to buy something, and converts at the same high rate as advertising meant for people who already know they want the product is much more valuable. Instead of satisfying demand, it actually creates it.
The funny thing is, right now Facebook isn’t making a dime off of Ticketmaster for providing any of that traffic. Ticketmaster is basically a Facebook app, and it’s free to be a Facebook app.
You can imagine how Facebook would someday make money off of that kind of transaction, though: by taking its users’ activity – voluntarily and eagerly shared! – and highlighting it in such a way that more of that valuable traffic finds its way to Ticketmaster.
That ad unit is starting to take shape. Facebook has something called sponsored stories, which do something similar.
The problem is that customers of most companies aren’t going to be as eager to share their purchases as customers of Ticketmaster. Events are inherently social; toothpaste and tampons are not.
Still, if more industries can figure out a way for customers to find use in sharing information about their purchases through Facebook, that industry will benefit and so will Facebook.
Facebook just hasn’t figured out how to make that happen, yet.
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