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Facebook vs Adsense

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.

Mobile

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.

TV

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

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.

Apps 

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.

Search

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.

 

Facebook Stats – IPO bound

Facebook filed its S1 papers for an IPO with the SEC today, February 1, 2012. 

Here are some interesting facts about the SEC document:

  1. Facebook has 845 million registered users. About 57% of them are considered “active”
  2. They made $3.7 Billion in revenue in 2011
  3. They have a 27% net margin for 2011.
  4. Their gross margin is 47%
  5. Zynga paid them $444 million in 2011 through their payments platform. This accounted for 12% of their revenue.
  6. In 2009 to 2010 they had a 154% growth rate in terms of revenue. In 2010 to 2011 they grew by 88%.
  7. Marketing costs in 2011 went up by 2.3x
  8. R&D costs went up in 2011 by 2.6x
  9. In Europe 62% of Facebook users access the site daily. In the US 70% access daily.
  10. Asia shows the highest growth in terms of new accounts. However, the daily usage rates are in the ~50% range. This could indicate spam accounts, marketing accounts, etc. Or just a lot of competition in the social space in each country.
  11. Penetration in China is close to 0%.
  12. Ad revenue in Q42011 was $943 Million.
  13. Credit card fees hurt overall profitability.
  14. If their growth rate continues they may hit 1 billion users in 2012.
  15. More and more people are moving to mobile to access Facebook which doesn’t have ads. This is hurting them. They need to monetize mobile and fast.
  16. Internally shares are valued at $29.73 as of Dec 30, 2011.
  17. Open lawsuits against Facebook are not highlighted all that much.
  18. Mark Zuckerberg has a salary of $500k – but had a total compensation package of $1.4 mil
  19. Mark has 120 million shares.

Many analysts have said that the Facebook stock is overpriced.

Here are some possible ways that Facebook can explode and refine itself in the coming years.

1) Lower Data Center costs – This might come through more “green energy.”

2) Create a true online currency and get rid of the credit card companies. This could be huge. Right now, people don’t accept facebook credits at brick and morter stores. This could be next.

3) Ad advertising to mobile devices.

Highlights from the letter below –

  1. Site was founded on sharing
  2. Site can change Government
  3. Hacking is a good thing
  4. They want to make money but it seems secondary.

Personal letter from Mark Zuckerberg –

 

LETTER FROM MARK ZUCKERBERG

 

Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected. 

We think it’s important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do. I will try to outline our approach in this letter.

At Facebook, we’re inspired by technologies that have revolutionized how people spread and consume information. We often talk about inventions like the printing press and the television — by simply making communication more efficient, they led to a complete transformation of many important parts of society. They gave more people a voice. They encouraged progress. They changed the way society was organized. They brought us closer together.

Today, our society has reached another tipping point. We live at a moment when the majority of people in the world have access to the internet or mobile phones — the raw tools necessary to start sharing what they’re thinking, feeling and doing with whomever they want. Facebook aspires to build the services that give people the power to share and help them once again transform many of our core institutions and industries.

There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.

We hope to strengthen how people relate to each other.

Even if our mission sounds big, it starts small — with the relationship between two people.

Personal relationships are the fundamental unit of our society. Relationships are how we discover new ideas, understand our world and ultimately derive long-term happiness.

At Facebook, we build tools to help people connect with the people they want and share what they want, and by doing this we are extending people’s capacity to build and maintain relationships.

People sharing more — even if just with their close friends or families — creates a more open culture and leads to a better understanding of the lives and perspectives of others. We believe that this creates a greater number of stronger relationships between people, and that it helps people get exposed to a greater number of diverse perspectives.

By helping people form these connections, we hope to rewire the way people spread and consume information. We think the world’s information infrastructure should resemble the social graph — a network built from the bottom up or peer-to-peer, rather than the monolithic, top-down structure that has existed to date. We also believe that giving people control over what they share is a fundamental principle of this rewiring.

We have already helped more than 800 million people map out more than 100 billion connections so far, and our goal is to help this rewiring accelerate.

We hope to improve how people connect to businesses and the economy.

We think a more open and connected world will help create a stronger economy with more authentic businesses that build better products and services.

As people share more, they have access to more opinions from the people they trust about the products and services they use. This makes it easier to discover the best products and improve the quality and efficiency of their lives.

One result of making it easier to find better products is that businesses will be rewarded for building better products — ones that are personalized and designed around people. We have found that products that are “social by design” tend to be more engaging than their traditional counterparts, and we look forward to seeing more of the world’s products move in this direction.

Our developer platform has already enabled hundreds of thousands of businesses to build higher-quality and more social products. We have seen disruptive new approaches in industries like games, music and news, and we expect to see similar disruption in more industries by new approaches that are social by design.

In addition to building better products, a more open world will also encourage businesses to engage with their customers directly and authentically. More than four million businesses have Pages on Facebook that they use to have a dialogue with their customers. We expect this trend to grow as well.

We hope to change how people relate to their governments and social institutions.

We believe building tools to help people share can bring a more honest and transparent dialogue around government that could lead to more direct empowerment of people, more accountability for officials and better solutions to some of the biggest problems of our time.

 By giving people the power to share, we are starting to see people make their voices heard on a different scale from what has historically been possible. These voices will increase in number and volume. They cannot be ignored. Over time, we expect governments will become more responsive to issues and concerns raised directly by all their people rather than through intermediaries controlled by a select few.

Through this process, we believe that leaders will emerge across all countries who are pro-internet and fight for the rights of their people, including the right to share what they want and the right to access all information that people want to share with them.

Finally, as more of the economy moves towards higher-quality products that are personalized, we also expect to see the emergence of new services that are social by design to address the large worldwide problems we face in job creation, education and health care. We look forward to doing what we can to help this progress.

 Our Mission and Our Business

 As I said above, Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them. This is a different approach for a public company to take, so I want to explain why I think it works.

I started off by writing the first version of Facebook myself because it was something I wanted to exist. Since then, most of the ideas and code that have gone into Facebook have come from the great people we’ve attracted to our team.

Most great people care primarily about building and being a part of great things, but they also want to make money. Through the process of building a team — and also building a developer community, advertising market and investor base — I’ve developed a deep appreciation for how building a strong company with a strong economic engine and strong growth can be the best way to align many people to solve important problems.

Simply put: we don’t build services to make money; we make money to build better services.

And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.

By focusing on our mission and building great services, we believe we will create the most value for our shareholders and partners over the long term — and this in turn will enable us to keep attracting the best people and building more great services. We don’t wake up in the morning with the primary goal of making money, but we understand that the best way to achieve our mission is to build a strong and valuable company.

This is how we think about our IPO as well. We’re going public for our employees and our investors. We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment. As we become a public company, we’re making a similar commitment to our new investors and we will work just as hard to fulfill it.

The Hacker Way

As part of building a strong company, we work hard at making Facebook the best place for great people to have a big impact on the world and learn from other great people. We have cultivated a unique culture and management approach that we call the Hacker Way.

The word “hacker” has an unfairly negative connotation from being portrayed in the media as people who break into computers. In reality, hacking just means building something quickly or testing the boundaries of what can be done. Like most things, it can be used for good or bad, but the vast majority of hackers I’ve met tend to be idealistic people who want to have a positive impact on the world.

The Hacker Way is an approach to building that involves continuous improvement and iteration. Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it — often in the face of people who say it’s impossible or are content with the status quo.

Hackers try to build the best services over the long term by quickly releasing and learning from smaller iterations rather than trying to get everything right all at once. To support this, we have built a testing framework that at any given time can try out thousands of versions of Facebook. We have the words “Done is better than perfect” painted on our walls to remind ourselves to always keep shipping.

Hacking is also an inherently hands-on and active discipline. Instead of debating for days whether a new idea is possible or what the best way to build something is, hackers would rather just prototype something and see what works. There’s a hacker mantra that you’ll hear a lot around Facebook offices: “Code wins arguments.”

Hacker culture is also extremely open and meritocratic. Hackers believe that the best idea and implementation should always win — not the person who is best at lobbying for an idea or the person who manages the most people.

To encourage this approach, every few months we have a hackathon, where everyone builds prototypes for new ideas they have. At the end, the whole team gets together and looks at everything that has been built. Many of our most successful products came out of hackathons, including Timeline, chat, video, our mobile development framework and some of our most important infrastructure like the HipHop compiler.

To make sure all our engineers share this approach, we require all new engineers — even managers whose primary job will not be to write code — to go through a program called Bootcamp where they learn our codebase, our tools and our approach. There are a lot of folks in the industry who manage engineers and don’t want to code themselves, but the type of hands-on people we’re looking for are willing and able to go through Bootcamp.

The examples above all relate to engineering, but we have distilled these principles into five core values for how we run Facebook: 

Focus on Impact

If we want to have the biggest impact, the best way to do this is to make sure we always focus on solving the most important problems. It sounds simple, but we think most companies do this poorly and waste a lot of time. We expect everyone at Facebook to be good at finding the biggest problems to work on.

Move Fast

Moving fast enables us to build more things and learn faster. However, as most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly. We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.

Be Bold

Building great things means taking risks. This can be scary and prevents most companies from doing the bold things they should. However, in a world that’s changing so quickly, you’re guaranteed to fail if you don’t take any risks. We have another saying: “The riskiest thing is to take no risks.” We encourage everyone to make bold decisions, even if that means being wrong some of the time

Be Open

We believe that a more open world is a better world because people with more information can make better decisions and have a greater impact. That goes for running our company as well. We work hard to make sure everyone at Facebook has access to as much information as possible about every part of the company so they can make the best decisions and have the greatest impact.

Build Social Value

Once again, Facebook exists to make the world more open and connected, and not just to build a company. We expect everyone at Facebook to focus every day on how to build real value for the world in everything they do.

Thanks for taking the time to read this letter. We believe that we have an opportunity to have an important impact on the world and build a lasting company in the process. I look forward to building something great together.

 

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