Facebook is due to IPO within the next two days and the analysts on the street are wondering how Facebook can keep its current multiple long term.
Is Facebook the next Groupon?
In my opinion, I think Facebook has some interesting plays which could boost revenue in the coming years. Groupon is an accounting mess you don’t want to touch with a 10ft pole.
What will Facebook do to grow revenue?
The key here is that Facebook will have major trouble growing its user base past the 1 billion mark. There are just not enough people online in the world to make that grow. Without a dominance in China, they might plateau around that 1 billion user mark.
Also once they become public you will see a marginal decline in users since they may be forced to disclose how many of the actual users are just advertising accounts or duplicate accounts.
Facebook drives most of its revenue via ads. No surprise here. I think this will remain the core for years to come. Here are the pros and cons of their potential revenue models.
A large portion of Facebook users primarily access the site via their mobile devices. Currently the issue is that the majority of interactions are notifications or action items. You tend to browse more on the desktop version of Facebook. The argument here is that the majority of their display ads are for a browsing type audience. Building new ad units for the mobile user and fitting everything within the 4 inch screen will be tough. The only real spot for an add within a native app is in the feed itself. Or perhaps Facebook allows advertisers to send messages/emails to the users with relevant ads? Either way, the model is subpar at best.
If Facebook were to release a click to call network, that might be something to watch. Perhaps they acquire a company like Marchex to get that technology.
People often forget that TV is still a monster of ad revenue. Facebook users are often on Facebook while watching TV. There is a play to be made here. And advertisers know the breadth of Facebook. Will TV shows start broadcasting on Facebook and will there be regular 15 to 30 second commercials on Facebook? Taking this route directly takes a stab at YouTube which we all know has a massive amount of ad inventory which monetizes fairly well.
AdNetwork outside of Facebook.com
One analyst mentioned that he thinks Facebook will start to attack the AdSense model and go after publishers outside of Facebook.com. This is one of the most valid ideas since it can be executed relatively quickly. Publishers have no loyalty to any ad network so there is little switching cost. Facebook already has a strong ad platform, but it doesn’t have much variability in terms of the ad unit sizes. This could be an issue for pubs. The other issue is that Facebook is largely CPC focused, but for publishers the CPM model might prove more effective. Google is clearly more advanced in this sector but they don’t have the social data to increase overall click through rates for pubs.
As the web moves towards being more mobile, this could also present another roadblock for Facebook. Will they be able to make display ads work on mobile partner sites? Does Facebook have a big enough sales team to go after the publishers that work with Google already?
Will having a transparent network be good for advertisers? Will having a transparent network be good for users?
My guess is that people will start to feel weird about Facebook following them outside of Facebook.com. I bet the privacy lawyers at Facebook will hold back revenue growth in some ways.
Facebook.com still has more inventory than ads, which means the ads show at a very high frequency compared to some other ad networks. This results in a lower conversion rate for advertisers and lower monetization for Facebook.com. They really need to get more advertisers in the mix so users are always seeing something fresh. The burnout rate for ads is just too fast for most advertisers to keep up with.
CPC rates have risen very quickly for the big advertisers but they are fighting for certain demographic groups which convert. Making the long tail of impressions and users will be important to long term monetization for Facebook.
Ah, Apps within Facebook. For the app world it makes sense to compare Apple’s app eco-system to Facebook. Apple makes a ton of money by being fairly agnostic of the user interface, they provide a solid hardware platform and simple monetization engine. They also provide fairly consistent growth in their devices which keeps the market growing.
Facebook on the other hand, provides various speed bumps or walls before you can get to your intended content. It also rapidly and frequently changes the user interface which is key to how app developers gather new users. The concept of “social sharing” is a moving target and can sometimes go away completely with larger changes like the Timeline implementation. Products like social readers blew up in terms of usage and died almost as quickly because of the UI changes Facebook implemented.
Consider how much time it takes to build an app, and the costs behind it. If you can’t deploy within weeks, you may actually miss the entire market opportunity. From an investment standpoint, I think investors will be hesitant to put money behind these ideas since they are unable to drive long term revenue or user growth. The other side of this is that developers will get sick of not being able to drive long term revenue with Facebook. They will focus on iOS where things are stable.
If a company like Zynga were to launch today, it wouldn’t work and it wouldn’t be driving 15% of Facebook’s revenue. Facebook is not allowing new products/companies like Zynga to sprout. This could be a serious issue when considering long term growth.
1 billion member affiliate network
Facebook could be on the brink of releasing the largest affiliate network ever. Imagine if it allows advertisers to pay each individual for getting their friends to buy a product or service? There would be millions of micro payments per day and massive fraud. This particular model could put a serious dent into Facebook’s cool image. But people want money and there will always be a group willing to sell their friends.
Google dominates search, and Bing runs a pretty solid site. Bing.com doesn’t need to exist anymore. It can live within Facebook.com and probably grow much faster. Searching for anything on Facebook is a horrible experience. I would bet that most people still leave Facebook.com to do a Google search, and then come back.
Facebook needs to stop people from leaving the site and truly incorporating Bing into the system will achieve that. It will also create a new ad product within Facebook.com which most advertisers are very familiar with. Search Ads.
There are no real costs associated with this strategy. Bing and Facebook already play nice together and are integrated loosely. But having the full power of Bing within Facebook is the better use case for users. Time for Microsoft to let go of this brand and focus on really attacking Google.
I think this proves to be the biggest threat to Google long term. If they lose their foothold in search, it could spell disaster for their entire product line.