Facebook is hotter than Phoenix in July, but more users mean larger infrastructure
requirements, which cost money. User interface redesigns cost money. Employees cost
money. When the venture capital runs out, where's the money coming from?
In November, 2008, Facebook made a $500 Million offer to purchase Twitter, which the
latter declined. What fascinates this observer, as he's stated to every group who has
hosted him since, is that this attempted purchase and developing rivalry is between
two companies that (probably) have yet to earn a penny of profit (both are private
entities and do not disclose earnings) or show a model by which they transform the
increasing popularity of social media to a consistent and sustainable revenue stream.
Show Me the Money
A few weeks ago, at http://twitter.com/mikehanbery, I posted a Charles Cooper article
(http://news.cnet.com/8301-17939_109-10184856-2.html) about a proposal Facebook has
received, and which has led to a(nother) protest movement within Facebook, wherein
users are voicing displeasure with the notion of paying for the service. As the
article states, with 200 million users, even a $1 per year subscription fee would
provide a kickin' chunk of change. That said, Facebook has promised not to pursue it.
Facebook's revenues are drawn from the ads it wisely places noticeably but relatively
innocuously, on the right side of the page and in peripheral view of the user. Do
they work? The short answer is, historically, no
(http://gawker.com/tech/advertising/facebook-consistently-the-worst-performing-site-24
2234.php). $400 Million is the high end estimate of Facebook's 2008 revenues, $250
Million the low. These figures taken against the 200 million user figure place revenue
per user in the $1.25 to $2.00 range. That's 2 bucks per user...per year. So
Microsoft, Facebook's principal benefactor, values the site at $15 billion? Well, it
wouldn't be the first time they knew something we didn't.
The Facebook demographic is rapidly growing older, which means more purchasing power
for the overall base. Kudos to the site for pursuing an innovative "engagement"
formats for ads, which the New York Times explains in an article today:
Facebook’s approach is to invite advertisers to join in the conversation. New
“engagement” ads ask users to become fans of products and companies — sometimes with the promise of discounts. If a person gives in, that commercial allegiance is then
broadcast to all of the person’s friends on the site
(http://www.nytimes.com/2009/03/29/technology/internet/29face.html?_r=1).
What's so very cool about this approach is that it maintains the balance of
unobtrusiveness for the user with indiscreet positioning for the advertiser while emphasizing
interactive Web 2.0 functionality. Working against it is the aforementioned poor
performance record of social networking ads and that the vast majority of social media
content is created by a whopping nine percent of its population
(http://www.useit.com/alertbox/participation_inequality.html). This means that the
range for Facebook's annual revenue per active user is (again, probably) somewhere
between $13.89 and $22.22. Still a small sum, yes, but an indication that the
aforementioned $2/user/year figure may be off by as much or more than one thousand percent, and consequently that Facebook's goals should shift from user acquisition to user engagement, i.e. converting the 90 percent of the inactive or observant population--"lurkers"--to contributors. In fact, given Facebook's probable high level of operational expenses and the large amount of debt it continues to accumulate (http://www.businessweek.com/technology/content/mar2009/tc20090326_604141.htm), let's change that "shift from," in the last sentence to "expand to include."
Conclusion
Why does this matter? Because the mighty have fallen and taken a piece of us in the process; just ask anyone with Lehman stock. Facebook can't be a loss leader forever, especially as it operates in the aura of its younger rival, Twitter. What's the solution? Try this on: You are. Your public profile (aka "Page"), your ads, in fact all of your efforts will be successful to the extent that you as a user can bring active users to your network...your Facebook network.
Preview
Kickin' Twitter in the next post. They don't even sell ads and they gotta feed the monkey like the rest of us.
About the Blogger
Mike Hanbery (http://www.linkedin.com/in/mikehanbery) is an Executive MBA with 20
years of experience in marketing and media at the national and local level for
startups to Fortune 500. His company, Hanbery & Hanbery, Inc. (http://www.hanbery.com)
works with small nonprofit and for profit businesses in accounting, business
development and marketing. Mike speaks on, trains, designs and implements social media
strategies and is co-author of a book due in April, 2009: Connect and Contribute:
Creating a Social Business.
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