I come not to bury Facebook, but to question it. I seek clarity, assurances. What is Facebook? Is it social media? An app? A global phenomenon? Instant messaging? The place where we connect, share our family photos, check in from our favorite restaurant? Probably it’s all these things.
But is Facebook a viable business?
Last week, Facebook posted third quarter revenues of $3.2 billion, exceeding expectations. Facebook’s profit for the quarter was $1.4 billion.
While the blogosphere cheered, all I could think was: Is this really all there is?
As I write this, Facebook ($FB) has a market cap of about $200 billion. The company is growing. It’s adding new services, buying up new platforms, and led by the only person I am ready to claim as the next Steve Jobs. Why, then, are they making so little money? $3.2 billion for a quarter? Given Facebook’s global influence, shouldn’t we expect much more?
By contrast, Microsoft — doomed, as the blogosphere repeatedly claims — posted quarterly revenues of more than $23 billion and a quarterly profit of nearly $5 billion. Samsung, the other giant tech company that the blogosphere is (so wrongly) touting as doomed, had a profit of $3.9 billion. Still another example: over the same period, PepsiCo had $17 billion in quarterly revenues, netting $2 billion.
Yes, I understand — Facebook is new, it’s growing, it’s connecting the world, and run by Silicon Valley’s best and brightest. Soon, all our photos, our videos, our news, recommendations for what to eat, buy, and watch — will come through Facebook. No one, no thing, no government, will know us as well as Facebook. My concerns, however, are two-fold:
1) what if this doesn’t happen?
2) what if this all happens — only, it still doesn’t matter?
It’s this second question that has me pondering Facebook’s future. Indeed, it has set me to wondering about the future of all global platforms built on digital advertising.
To the charts!
Facebook reported 1.35 billion monthly active users. That is staggering.
Lest you think “monthly active users” is not an appropriate barometer of revenue generation, Facebook proudly reports that it has a nearly unfathomable 864 million daily active users.
Try to comprehend such power and influence upon the world. A service that has nearly a billion people using it every single day.
Should you believe aggregate “user” numbers do not matter much, what with “mobile is eating the world” and all, know that Facebook excels at mobile.
Imagine that: 703 million daily active mobile users. That’s more than everyone on every iOS device visiting every single day. Again, this is nearly unfathomable.
And those users are, obviously, scattered all over the world. Facebook handily breaks out the numbers by location.
Now we’re beginning to see the problem. Almost half of Facebook’s revenues comes from the United States. If it wants to grow, as all companies do, and as investors in a $200 billion conglomerate demand, then it must:
1) extract more money from its existing users and/or
2) gain new users
The former is always very hard for every company, no matter how smart, how timely, how disruptive. Just ask Google how much it’s making from television, music or health data, for example.
That leads us to new users. For Facebook, already with over a billion users, it must now work very hard to add more people to its platform. Offering text-based services, experimenting with drone-powered Internet, and cutting deals with makers of low cost handsets and carriers around the world should help. The company is busy with each of these. However, the money from these unconnected billions, we must assume, will not be much more than Facebook already generates from its “rest of the world” group.
Spoiler: that’s not very much. How much exactly? Er, 87 cents. Really.
Facebook earns an anemic 87 cents per “rest of world” user. That’s it. Not everyday — once a quarter! Think of all Facebook offers. Consider how many already use the service. As each new human being gets connected, purchases a smartphone, they will join Facebook. Good for them.
Yet Facebook’s incremental revenue from these new users may be nothing more than a measly 87 cents per. That seems not just low, but embarrassingly low.
The problem?
Advertising.
For every user type and every geography, nearly every penny Facebook generates is via advertising. Facebook is an advertising company. Specifically, digital advertising.
Is digital advertising really so inconsequential?
Over a billion users, nearly a billion daily and mobile users. All that data. All those features. Yet, Facebook’s quarterly revenues are just over $3 billion. Worldwide, its quarterly revenues per user are only $2.58. I spent as much on this morning’s coffee. I might even go back for a second cup this afternoon.
How much must Facebook know about us, how many billions more people must join Facebook, how many more (free) services must the company offer us all to boost that number to a whopping $3 per user?
Not With A Bang But An Interstitial
Remind me, please, to never ever spend my money on a company who’s entire source of income is dependent upon the very ads I never ever click on, the very ads which I’ve trained my brain to ignore.
The web will continue to spread, evolve and empower our lives and our machines. I can scarcely imagine what it will be like in 2050, 2100 and beyond. But I am confident that web businesses dependent upon display ads are destined for the scrap heap. Probably by no later than 2020.
Advertisements have always promised more than they deliver. Let’s not weep now that advertising can no longer deliver on its promise.
“1) extract more money from its existing users and/or”
I think Facebook is faced with inoffensively “extracting” money from its existing users. Facebook is in a far better position to target ads than Google is. One thing I remember about Google is an article a long time ago from a designer who worked there. He talked about how metrics trumped what Jobs would call “taste”. If a particular colour blue text got more clicks, then the text was that colour blue, tasteful design be damned. But that’s the only kind of stuff that Google can do.
Facebook has more information on each of us than even Amazon. But at least Amazon’s information is directly related to purchases. Facebook’s information on us is more broad and deep. But to tap into that overtly for advertising, that’s creepy on the level of CurrentC. If anyone thinks the recent study and experiment on our timelines was the only time Facebook has done anything like that, then I’ve got a bullet-proof, hacker-proof network security system to sell them.
So it is (arguably) just a matter of time for Facebook to figure out how to leverage that information without totally freaking everyone out. That’s where the growth potential resides, not just in number of users.
This is not an ethical or moral statement about Facebook or advertising on my part. Just my personal observation.
Joe
If you think that Facebook know more about it’s user and is in far better position to sell ads than Google then you are simply not paying enough attention
but to get my point you also need to understand that Ads as we know it will evolve a lot in the coming year and having a platform or building a platform on top of another one will be key,
The future of Ads will be more likely to Brands, Native, Predictive, contextual, location, and personalize Ads and there are no other company in better position with as much Data on user right now than Google to deliver on that.
Outside of Gmail and Google Plus, the only thing Google has is circumstantial. Lots of circumstantial, which is still informative and useful for advertising, but circumstantial. A lot can be deduced and inferred.
On Facebook we are explicit. No need to deduce if someone is pregnant. We joyfully _tell_ Facebook we are pregnant, getting married, just married, sick, walking, running, eating, what we find humorous, etc. That is a whole lot more solid than Google’s process. Not that Google’s process isn’t deep, but it isn’t as deep. And last I read Facebook deliberately limits Google’s access.
Joe
First of all YouTube is many times more valuable for brands advertising than Facebook will ever be, YouTube is the closest to TV we have online and the only platform that can turn a no one into a start
second
with Card design, deep Linking/App indexing/android notification/Google now and all the other service
Google is in a position to provide predictive Add with context, location and personalization that is many time more useful
(ie) Let say you go to trip advisory to information about travel, with that signal Google is in a position to prepare you with a card that include all the necessary tool to Book an Hotel without the need to open an App,
Then as soon as you arrive to your destination airport with you Location they can also presente you with another Card for an Uber taxi.
then a card to book a restaurant
then a card to visit a museum
then a card to movie theater
then at night a card for a Bar etc..
all of that without the need to open an App and with the new form of intelligent notification they’ll know almost everything you are doing that provide context to what you might do next based on your location and your history.
Facebook cannot do these because they don’t control any plateform hence relying on user opening and stay on their App to make money at a time when we are moving in a Notification centrist platform where we will be able to do almost everything in an App without the need to open it
Yeah, Youtube is great. I wonder how many views at YouTube originated from a Facebook post?
Sure Google can find me on my way to and at the airport. But Facebook already knows _why_ I’m going to the airport because I told all my friends I’m on vacation/going to a funeral/on business, etc.
As for the restaurant, Facebook already knows that I’m celebrating my anniversary. They will likely already know what I ordered once I post and photograph that, too.
Facebook knows that I’m homeschooling my kids at the museum, taking my daughter to the movie to celebrate her birthday, at the bar after a night of hard work backstage with my stagehand co-workers.
And Facebook doesn’t have to (potentially incorrectly) predict anything. I gave all that information willingly to Facebook. Plus i checked in on Facebook when I got to those places so my friends and family can catch up with me.
I won’t disagree that Google has the mechanics already to use the information. that’s the part that Facebook has to figure out. But Facebook has a lot more valuable information to parse out, too.
Joe
Google will know about that too unless you’re not using their services
however having information about users is only one part of the equation, providing context Ads that is useful and not intrusive is another things
while Facebook know all of these, but you still will have to go to their App to provided with Ads in context to these information while Google can push it to you via Google now or even your notification in form of card with ability to interact with it without the need to open the App which for me is better than display Ads
Not intrusive and, as I mentioned, not creepy. If Facebook gets stalker/creepy with their ads they _will_ lose users. But Facebook users have already shown, “opening an app” is no big thing.
Joe
The two biggest form of Advertising with the Highers margin are Searches and Brand and Google control both with Search and YouTube.
There are 3 things that matter online
1- what you intend to do
2- what you are doing
3- what you have done
and the one that matter the most for advertiser are what you intent to do because you haven’t made up your mind yet
Facebook know more about what it’s user are doing or have done while Google know more about what user are intent to do.
when you want to buy something you either go to Google search or YouTube for video review. or top ten
while on Facebook user are more likely to write a post after their made up their mind on something to let everyone know about it .
when it come to Brand
you need to take into account discovery which Facebook are better positioned right now
but with YouTube i do believe that Google will integrate YouTube in Google Now in the future to deliver Video strait to user as they are doing already with Notification hence you can make a video brands and pay a lot of money for Google to put it in Google now in front of their Billion user who are using Android which will guaranty a lot of view.
Also engagement are Higher on Video Brand than Facebook post for brand.
I disagree. Facebook knows as much about what someone intends to do as what they have done. And they know the _why_ which is more important still. For instance, my wife may go to a seafood restaurant. Google will think this is because she like seafood. Nothing could be further from the truth. She hates seafood. Facebook knows this. Google doesn’t.
Look, I am in no way saying that Google is bad at what they do. I am only saying Facebook has a great deal of deeper information on users. And it doesn’t have to be gathered or “mined”. It is entirely voluntarily, even gleefully, provided. Google can’t say that. It is still yet to be seen if Facebook can make more hay from this than they have. I think they can ad more likely will. This is no way takes away from what Google has and can do.
You talk a lot about seeing the potential. Here is a lot of potential.
Joe
How can Facebook know more about your intent in relation to advertiser when you post about going to a restaurant come only after you made up your mind,
what is in it for advertiser
is not only what you know, is also about the context for advertiser
Google will always know more because on Facebook in most case we only say what we want other to know about while on Google searches you said almost everything that is on your mind
That’s simple. In actuality, at best Google knows what I _might_ do, not even my intent, and virtually never the “why”.
Let’s take your restaurant example. On Facebook, I am doing two things I am asking for recommendations from friends on where to take my wife for our anniversary and I am searching for previous posts from my friends who have done something similar. Someone asks about cuisine, I say I love scallops, but my wife hates seafood, but we both love steak.
So now Facebook knows not only what I am looking for (and likely where I have been in the past, even for my anniversary), but they know what my friends like and recommend. And there is a good chance Facebook even knows what I’ve ordered before which puts them in a far better place to recommend a restaurant to me than Google could even begin to suggest.
Another example (that is real for me) is Facebook already knows what I like and what I have listened to for music (some of it even thanks to YouTube). I have two albums now I purchased through ads on Facebook. And I avoid ads like the plague. To convert me to a purchase from an ad is no small feat.
Joe
I agree to some extent, except that you seem to forget one thing about Google which is Profiling
Google probably have a profile on it’s user base on your interaction in the entire web, you searcher’s history, your email, your phone Notification, you frequent location,(In context to the restaurant you love), your favorite app, article, web, the video you watch on the web, you contact List and their own activity in relation with you and all the deep secret that you never share with friends on Facebook. like you cheating history, you frequently ask question on forum and the type of website you spend your time on and even your porn activity lol ect.
advertising is not about what you Love, is’t about convincing you to either buy something you didn’t know you need or Love something you never knew existed hence with your entire web profile Google is in a better position to do this Job at a scale that Facebook can only dream off hence their 60 billion empire compare to Facebook 4 billion
“advertising is not about what you Love, is’t about convincing you to either buy something you didn’t know you need or Love something you never knew existed ”
Then you don’t know the advertisers and marketing executives I know. Google has been at it longer. That’s the only reason they are in a better position. that’s why Google was so frustrated with Facebook walling themselves from Google search. You’re kidding yourself if Google didn’t want access to the info Facebook has. All that you mentioned is what I mean by circumstantial. They know what I’ve done, but they still don’t know why. That’s why Google’s ad targeting is actually pretty poor:
http://techpinions.com/google_advertising_demands_disrupting/27788
For all that Google _can_ gather, they still can’t gather the why and the psychographics. That’s Facebook’s potential edge over Google. And advertisers would always rather have access to people they can understand over more people they can’t. As the video from Chartbeat that @Naofumi linked to, it is the difference between connecting with index finger clicks vs connecting with your audience.
Joe
You are completely right my friend except that All of what you said was true only before the Mobile revolution
But right Google know the why even of our deepest secret because we search for the answer about it on Google which they can connect to you personally with the Help of your phone and Google+
Also
If you know and advertisers and marketing executives who spend company’s money advertising on something people already Love or something they already wanted to buy then you can tell him that he is an Idiot for wasting the company’s money
“You are completely right my friend except that All of what you said was true only before the Mobile revolution
…
If you know and advertisers and marketing executives who spend company’s money advertising on something people already Love or something they already wanted to buy then you can tell him that he is an Idiot for wasting the company’s money”
Uh, yeah, sure. Let me know how that goes for you.
Joe
I mean, really. Do you not know how many times a day people ask their friends for suggestions on Facebook?
Joe
i understand that, but it’s not only a matter of suggestion or the information that you provide about yourself on Facebook rather your entire profile
and all the deep secret about yourself that you never share on Facebook are more valuable to advertiser because of the fact the it related to your true feeling an emotion hence more engaged to Ads that are also in context with that.
Facebook is valuable to advertiser but not more so than Google
Maybe. I actually follow a few brands on Facebook. Facebook will find ways to better monetize all that. But I’m not sure it will be much.
i do believe that Facebook can Double their revenue every two years because of the huge amount of money that is coming to Mobile advertising
i am more optimistic about Facebook potential than any product company except maybe Apple because of their Brand Power.
Thanks. I agree that this is what Facebook will attempt, I’m just not convinced it will work.
It is sort of strange, but we are at the first point in history where companies can reach maximal size. When you think about Facebook and its $3 per person per quarter revenue, the largest that Facebook can become is $90 billion per year in revenue based on every person in the world using it. That’s Facebook’s top end. Of course it won’t ever get to that. But, you sort of have to start thinking like that for every digital company.
so, generating more income per user, diversifying… are not options ?
i’m not convinced they can diversify
Neither am I, but what the OP is saying is basically the Ford also had a maximal size, once everyone had a Model T.
Yes, however, at the time of Model T production, it made no sense to think about everyone in the world having a Model T as there was no way to get there (no infrastructure to do it, not enough resources, etc). Now, for companies like Facebook, it is actually possible to get their products into the hands of every person in the world.
do you talking about diversify of business model or product ?
They are options, both are very difficult options though. Look at how hard it has been for Google to diversify its revenue stream. They are trying all kinds of things, and a lot of them are not working. Once you are the size of Facebook, to diversify in such a way that it has a large impact on its revenue basically means you need to become a different company.
And again, in terms of more income per user, this is difficult as the income per user is something that is directly manipulated by Facebook, it is determined by advertising revenue which has a myriad of forces affecting it.
A closer comparison is probably MS. They started off doing ROMs with a barebones OS and a BASIC interpreter, graduated to doing MS-DOS (and GW-Basic !), then Windows, client apps, server apps…
It’s not so much about your current product, as about the customers/users you’ve established a relationship with. Once you’ve got an in, you can expand sideways: look at what Apple is doing with their unrelenting (and way under-analyzed) focus on lock-in.
The problem for them in increasing their revenue stream is that their revenue is tied to advertising, and the value of that does not scale linearly. There comes a point where adding more advertising into a users life will not increase the revenue from those ads. What I would like to see is a prediction of what the maximal size of advertising can be. That’s their growth potential without changing their business in a substantial way. I think we are already near the largest possible size for advertising revenue. So Facebook is trying to claw its money from Google, from TV ads, from radio ads, from print ads. This is a tough market with limited growth.
@Brian S Hall, everything you said about Facebook can also be said about any other company, primarily the product company,
No. He said that Facebook has very thin profits compared to Microsoft. And Google and Apple too for that matter. So not everything he said about Facebook can also be said about any other company.
revenue or even actual profit per revenue is not the best way to evaluate a company’s future potential.
I’m confused. Google is desperate to be fb and fb wants to serve targeted ads like Google. Google can’t stand a little competition or it can’t afford to miss out on any ad income. Fb still can’t figure out how to target ads because whenever I make the mistake of following a “some crap that we think is exciting is happening now on fb” link, (it never is), the same porno ads (these horny chicks want to meet YOU NOW) are always there. Hardly suitable for family viewing, even though fb doesn’t actually know any thing about me (fake mini profile), and even though it manages to suggest some amazing links through people on my list. I guess they might MySpace out by 2020.
Google must be crapping their pants at the ways apple is achieving to circumvent them in search. The world’s most valuable customers being weaned off direct search and the rest are too cheap (or broke due to the GFC) to even cough up for a decent phone that doesn’t spy on you 24/7. How do they really make money? Sell tracking data to spy agencies? The fb guys seem pretty smart but profit seems to be rounding error, so with the insane amount of info they have on a significant part of the planet, they can barely move ahead. How does Google, with less specific info, really do it?
Google are everywhere, FB is mostly only on FB (20% of web traffic ?), and Apple on iOS (10% of users ?). That’s why they’re happy to invest a few tens of millions a year on Android, knowing they’ll get the lion’s share of ad views generated by these users.
you don’t know what you are talking about
Apple IOS is de facto a Facebook and Google platform because the majority of their users their majority of their time on App from these two giant
Could fb, now that it’s so big, offer a premium no ads option? It’s blackmail, like many other “premium services”, but for regular users, it might be appealing. I’m too lazy to run any numbers, but I’m sure someone wants to prove it’s stupid.
Like all content (think: TV, radio, papers), I’m sure we’ll get premium, for-pay options, alongside ad-supported content.
All other premium channels do not simply remove ads, but also offer exclusive content. The tricky part for social web is to figure out interesting premium content/features that are not network-effects dependent.
There are some smart people at FB and they have surely considered this. The problem is the customers who would pay to remove adds are the most valuable for advertisers to target. It would dramatically cut the price they get per click, which would mean they would have to charge a lot for you to opt out. If the average customer is worth 3 bucks, they would have to charge at least $100 to let you opt out. That would invite all kinds of bad press which would ultimately hurt the product.
I would totally pay five bucks a year for FB. It’s become a part of people’s lives. There would be outrage no doubt but reasonable people would probably pay up happily.
Yep. This is part of the quandary they face. To scale, it must be free. But to earn money, they may need to require payment.
Or do a better job with ads and the design of the site. It’s a bit junky, lots of room for improvement, and useful ads that aren’t crappy or ‘hard sell’ do have some value, I don’t mind those at all.
The web design, particularly if you want us to see/click ads, is surprisingly bad. I have no explanation for this.
My guess would be culture (much of what Google does is poorly designed, geeks think design doesn’t matter) and time (Facebook is moving quickly). However, Facebook has hired a lot of design talent. Now, can that overcome a culture which doesn’t value design? I don’t know. Maybe. I hope so. I don’t use LinkedIn mainly because it’s a nightmare design-wise, I just can’t stand using the site. Facebook is passable, but it could be loads better.
that’s non sense
the only reason you are willing to pay 5$ buck now is because you haven’t ask to do so which is not different than unemployed men saying that he will take any low paying job until he get an offers
I don’t know how productive Facebook is and how valuable that company is. One thing that it can provide is the sociological and psychological mind state of its users. Many feel empty and need acknowledgement from others. Facebook creates that sense of being wanted and appreciated. Many post things like quotes and comments that does not truly project their real selves. But they want to appear as virtuous or free and liberal. Many start yearning for the number of people they are connected to and the number of likes and responses they get from others. Some are so addicted that they keep looking on their smartphones for responses and immediately respond from their side. Facebook has cut into the productivity of people, much like text messages have done. If someone founded a company just based on text messaging, imagine how silly it would be. Facebook has just done that and I am always amazed by its stock price and market capitalization. It all sounds farcical to me. They do not seem like a company in a true sense. It only seems to provide some kind of psychological solace to many who are using it to fill their emptiness and are losing touch with being around real people.
Considering the distribution of income and wealth in the world, where something like the top 9% wealthiest people own about 85% of the total worldwide wealth (Credit Suisse estimates for 2013) it really is foolish to assess Facebook’s (and Google’s, Microsoft’s, Apple’s, etc.) figures on number of users or customers without breaking out the demographics.
I’ve always thought surely there must be a ceiling on how many ads can be effectively posted/played/displayed. It’s just diminishing returns. It’s limited by an inescapable biological or neurological fact –how much ads people can pay attention to before they start getting tuned out, or rejected in disgust. This type of limit is not true of physical products.
Facebook and Google know this of course that’s why they’re doing everything to find and develop that product line that doesn’t have the fixed ceiling that ads does.
I felt the same way, then I realized that they are no more about facilitating display adds than Google. Display adds are simply the tool that best lends itself to the current technology, what they really do is own THE social network. Regardless if we are using a desktops, mobile phones, smart TVs, VR headsets or the Holodeck (Star Trek), Facebook will be the glue that connects people. I’m sure they will find some way to monetize that.
All true. I hold no brief for Facebook. But I notice lots of local, regional nonprofits, entrepreneurs, and interest groups using Facebook to publicize their efforts. Free, And others push this info widely by sharing.
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