In the next few weeks, Facebook will report its Q2 earnings and the company will likely have booked yet another record quarter of multi-billion-dollar sales, most of which now comes from mobile advertising.
None of that seems surprising today. Facebook is one of the web’s basic utilities, like Google’s search, or text messaging. Everyone uses it, and the fact that it’s a fantastically profitable business is a surprise to no one.
Or rather, almost no one.
Two years ago, the media commentator Michael Wolff wrote that Facebook was doomed. In two separate stories, one for the MIT Technology Review and the other for USA Today, Wolff claimed specifically that Facebook would “go bust.” “It will collapse,” he said, because Facebook’s ad business was on an “unsustainable basis.”
Due to “ever-lowering prices” in the online advertising market, “the maths is sickeningly inevitable,” Wolff told his audience. “Given its vast cash reserves and the glacial pace of business reckonings, this assertion will sound exaggerated. But that doesn’t mean it isn’t true.” He offered this solemn judgment: “Facebook is … MySpace.”
Newsflash: That didn’t happen. Facebook has $US3 billion in the bank at the last count and $US9 billion in stocks and bonds on its balance sheet.
It’s interesting to look back on Wolff’s predictions for a couple of reasons. First, Wolff is one of the most famous media columnists in the business. He has written regularly for USA Today, The Guardian and Vanity Fair. He is the author of an approved biography of News Corp. chief Rupert Murdoch.
People take Wolff seriously, in other words. He is a public figure, and the public listens to what he says. So we should scrutinize what he is saying.
But when it comes to Facebook, Wolff turns out to be wrong. Not just a little bit wrong. Rather, completely, utterly, totally, 180-degrees wrong.
We contacted Wolff and we’ll add a comment from him if he gets back to us.
I became interested in Wolff’s wrongness recently when he wrote about Business Insider. The story contained several mistakes. BI founder Henry Blodget does not attend trendy Manhattan cocktail parties, and Wolff’s estimation of our average ad prices was comically outside the ballpark. You can read that as a conflict of interest disclosure if you like. What catches my eye is Wolff’s theory that online, media has only an “ever-decreasing appeal to advertisers,” and that web ad prices only fall.
It’s a fundamental misunderstanding that many people make. Yes, there is a seemingly endless supply of digital media offerings for advertisers to buy. It seems intuitive that ad prices ought to fall, generally. The reason they don’t is that the number of reachable consumers stays fairly stable. The supply of eyeballs is always the same. Digital demand, meanwhile, is increasing as money pours out of TV, radio and print and into the web and mobile devices. Increased demand for a stable supply will, generally, create rising prices for any media provider that can build an audience of any reasonable quality.
I’d encourage you to read Wolff’s two lengthy analyses of Facebook, as a primer on some of the basic things people get wrong about adtech and how digital advertising now works.
Here are some of the highlights. For MIT he wrote:
1. “Without an earth-changing idea, it will collapse and take down the Web. Facebook not only is on course to go bust but will take the rest of the ad-supported Web with it.”
In fact the reverse happened. Facebook is now the primary distributor of web traffic after Google. It handles about 21% of all web referral traffic, according to Shareaholic. You can quibble with the individual stats, but everyone who studies web traffic agrees: Facebook is supplying more traffic to web sites than any other single company, bar Google. Facebook is actually building and supporting the web, in other words.
2. “The value of digital ads decreases every quarter, a consequence of their simultaneous ineffectiveness and efficiency. … Facebook’s business grows only on the unsustainable basis that it can add new customers at a faster rate than the price of advertising declines. It is peddling as fast as it can.”
When Wolff wrote that in 2012, Facebook’s average revenue per user was $US1.28. Today it is $US2.00, an increase of 48% from the same period year before. The average price of advertising on Facebook is therefore rising. Facebook has more than doubled its ad revenues since Wolff predicted its imminent bankruptcy.
3. “And the present scenario gets much worse as people increasingly interact with the social service on mobile devices, because on a small screen it is vastly harder to sell ads and monetise users.”
There was indeed a brief period when sensible people thought Facebook was doomed on mobile phones. That idea was encouraged by Facebook’s disclosure in its IPO filings in 2012 that it did not make money on its mobile app. But by the time Wolff wrote his second column, for USA Today, 14% of Facebook’s ad revenues were from its mobile app. Now, 59% of its ad revenue — more than $US4 billion per year — comes from mobile.
4. “The growth of its user base and its ever-swelling page views mean an almost infinite inventory to sell. But the expanding supply, together with equivocal demand, results in ever-lowering prices. The maths is sickeningly inevitable. Absent that earthshaking idea, Facebook will look forward to slowing or declining growth in a tapped-out market, and ever-falling ad rates, both on the Web and (especially) in mobile applications.”
Here’s how that sickeningly inevitable maths turned out in real life, according to Facebook’s SEC disclosures: “During the first quarter of 2014, as compared to the same period in 2013, the average price per ad increased by 118% and the number of ads delivered decreased by 17%.”
5. “The crash will come. And Facebook — that putative transformer of worlds, which is, in reality, only an ad-driven site — will fall with everybody else.”
Um, OK. If WhatsApp and Oculus VR and Messenger and Parse don’t work out, and Facebook itself falters, then Wolff will be right.
Wolff went further in his story for USA Today, titled “Facebook is … MySpace?” In it, he compared Facebook unfavorably to Path, the exclusive social network for people who only want to be linked to 150 people at a time.
6. “Facebook has built a platform that allows other people to start more intimate, personalised, targeted networks. But that facilitation isn’t Facebook’s business, at least, it’s not the one they envisioned. And they have no way, and seem to have contemplated none, for making money off it.”
Facebook is on course to book about $US10 billion in revenue this year. Path laid off 20% of its staff last year.
7. “Perhaps never has there been a lamer misunderstanding of social interaction.”