My Facebook For A Kingdom

on November 3, 2014

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.

monthly active users

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.

daily active users

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.

mobile daily active users

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.

revenue by geography

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.

average revenue per user

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.

revenues

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.