Facebook’s business model

Startups usually succeed because of a single major product or business innovation. Google is unusual in that they succeeded because of two major innovations: their core search product, and their keyword advertising business model. Back in 2000, when Google was wildly popular but generating no revenue, the conventional wisdom was that their business model was uncertain. Then Overture invented keyword advertising and Google adopted the same model. This turned out to be both wildly profitable and also, remarkably, created a better experience for both advertisers and users.

Facebook relies on an old internet business model: display ads. Display ads generally hurt the user experience, and are also not very efficient at producing revenues. Facebook makes about 1/10th of Google’s revenues even though they have 2x the pageviews. Some estimates put Google’s search revenues per pageviews at 100-200x Facebook’s.

The good news for Facebook is there is a lot of room to target ads more effectively and put ads in more places. The bad news is that, if there is one consistent theme in both online and offline advertising, it’s that ads work dramatically better when consumers have purchasing intent. Google makes the vast majority of their revenues when people search for something to buy or hire. They don’t have to stoke demand – they simply harvest it. When people use Facebook, they are generally socializing with friends. You can put billboards all over a park, and maybe sometimes you’ll happen to convert people from non-purchasing to purchasing intents. But you end up with a cluttered park, and not very effective advertising.

The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) Perhaps that business model is sponsored feed entries, as Facebook seems to be hoping (along with Twitter and perhaps Tumblr). The jury is still out on that model. Personally, I have trouble seeing how insertions into the feeds aren’t just more prominent display ads. You still have to stoke demand and convert people from non-purchasing to purchasing intents. A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.

220 thoughts on “Facebook’s business model

  1. While I of course agree that Ads for products and services work dramatically better when consumers have purchasing intent,  I would on the other hand assume that ads for content work dramatically better when users are in “content consumption mode,” which is exactly the mode Facebook users are in.  We are in the dawn of ads for content, especially considering that many brands are only now learning that “content is king”.  Facebook will be the beneficiary of this trend over Google.

    Having said that, I agree that commerce is the end game, and it is hard for me to imagine a world in which Facebook beats Google in the ad revenue game. 

  2. Great analysis. It seems like there are a lot of big players in the SaaS space who use the “eyeballs first, business model later” approach.

    Quora is another company following in the footsteps of Facebook and Google. Do you think that’s wise?

  3. rohit_mod says:

    Facebook could be a big player in brand advertising by focusing on formation of intent vs. capture of intent. To extend your analogy, make the benches in said park more comfortable with discrete signs suggesting who contributed to doing so… in the hope that when you are looking for a couch to buy, you remember how comfy the park bench was and who made it so. FB connect could play a crucial role in tracking the whole lifetime of a different kind of advertising – from initial ‘impression’ to purchase. And doing brand advertising along a trusted axis can be powerful. 

    They have 900M+ users, and many more behaviors and connections to figure this out.

    p.s. you ought to do a favicon – finding an open tab in the sea of tabs is much easier for your readers. http://www.favicon.cc/ or similar should do the job to do a reasonable .ico of your avatar file.

  4. I agree that “content ad models” akin to what Buzzfeed does (disclosure: I’m an investor in Buzzfeed) make a lot of sense in the feed context. But that means getting all the non-content advertisers who spend the big ad dollars (e.g. P&G) to convert their advertising to one where they create good content. And I suspect the RPMs still won’t compete with Google. I’m not saying Facebook’s advertising won’t grow (I expect it will) but just that a new model is in my mind the big factor that could swing the valuation from, say, $25B to $500B.

  5. I admire what Quora is building and love the product. But investors should realize (and I’m sure they do), that there are 2 big risks: getting to scale and finding a good way to monetize. Although: to the extent that people search with purchasing intent on Quora, the business model could look more like Google’s.

  6. jeffreyhuber says:

    I think Facebook has a huge opportunity to nail the personalization that Hunch was doing. They have the data. Why not use Facebook to power better personalized products, services, and experiences? That would be invaluable to consumers and businesses and is something very few other people can do.

  7. timrpeterson says:

    @cdixon:twitter   well said, what are possible alternative business models?  As an App platform (for Zynga, etc.)? Future for that doesn’t seem bright for that either…

  8.  Facebook’s Sponsored Stories (SS) are primarily demand-generation driver, akin to TV.  AdWords are about demand fulfillment, a different and much smaller component of the marketing funnel.  Facebook doesn’t need to fully convert people from non-purchasing to purchasing intents to be effective.  They need to drive awareness, and social context + social validation are incredibly powerful ways of doing this.  The challenge for the SS model is that it works well for companies with good products and is a PR nightmare for brands with shitty products (see: GM).  That said, we’re only at 1% of seeing the potential of SS.  Once marketers integrate Open Graph hooks into actual commercial activity and then amplify it with SS, that’s when the ROI math will become obvious enough for even the most skeptical brands.

  9. Irving Fain says:

    Completely agree Chris. The value is in the data that FB collects and it seems as if they’re taking more steps to lock that down and bring it in-house while still providing just enough value to encourage partners to still use FB connect. Their recent move to expire user tokens after they go dormant for 60 days is as much about preventing partners from perpetually harvesting data as it is about protection of user privacy.

    The unfortunate reality of web advertising (and all advertising in general to an extent) is that branding / awareness marketing is substantially less valuable than ads which can be tied to a drive in sales. Many people looked to the web to provide the latter in more places due to its inherent ability to be measured, however, over time we’ve found that not to be the case. As you said, a display ad in FB isn’t all that different than a billboard we pass on the side of the highway.

    I’d say this spells trouble for more than just FB as many companies are out there talking about “monetizing the user base.” At least FB has the data to fall back on – potentially…..

  10. “This turned out to be both wildly profitable and also, remarkably, created a better experience for both advertisers and users.”

    It is interesting to see the difference in success between Google and Yahoo. Users couldn’t distinguish between the organic results in blind tests, but Google outperformed Yahoo in the quality of the paid results (thus reinforcing the idea in the user’s mind that Google organic results were better too).

  11. The problem with SS is most products in the world – and especially the big ad budgets – are for shitty products. How do you do sponsored stories for Preparation H?

  12. jeffreyhuber says:

    I think the real world is where that gets even more interesting. You authorize your facebook to give some data to starbucks so that when you walk in to order — You are always a regular. Things like that. Or your hotel room tv is set to the sports game of your favorite team when you walk in the door. etc etc. Their unique monopoly and platform position could let them do that and build incredible defensibility. 

  13. fesja says:

    Don’t you think “Facebook Adwords” is the solution to this problem? They have a lot of information about users. They can profile the ads on all the Internet as much as they want. You can even start looking something on a webpage, and then have a ad on Facebook reminding you about that potential purchase.

    You can’t do that with Google. That’s why their interest in Google+.

  14. But doesn’t this miss the opportunity to advertise like TV does, which is a MUCH bigger advertising pie?
    Yes Google knows to offer me Domino’s ads when I search for pizza. But Facebook can show me an ad for Domino’s at 5 pm, when I’m not thinking about pizza, but it’s time to eat and causes me to order from Domino’s when I wouldn’t have in the Google case.I think it’s a harder ad pie to capture but I think in the end could potentially be a much bigger one for Facebook if they can be successful.

  15. Solowalker says:

    Why not offer a no-ads option for $1/mo.? Even if only 100 million users took that offer, that’s instant $1 billion+ per year. 

  16. Hm. Conventional wisdom says people wouldn’t pay. Who else has done this successfully? Might be worth a try, especially if they kept free-with-ads version.

  17. Solowalker says:

    Others have tried it but I think they’ve just charged too much or had too few users (I think ArsTechnica is a good example of both). But with the App Store now, it’s not uncommon to have a free ad-supported version and a paid version at $1 or $2 that has no ads and sometimes another feature or two.

    But Facebook may be able to get away with that because of their near 1 billion users. And people may see an extra incentive to pay the measily $1 especially if Facebook starts trying to hock ads in mobile.

    EDIT: They could also incentivize by making the ads a bit larger and placing more of them, as you mentioned. More ads that are more annoying = more people willing to get rid of them.

    Also, wasn’t there a story out there about letting people tag photos with brand stuff? So like, you take a photo of your drink and you can tag it “Sprite.” They could charge companies for that privilege like they do for advertising.

  18. I think FB’s strategy here is to let other companies (e.g. Zoosk) do this and charge rent via display ads or payments (not sure if they take payment cut on dating though).

  19. Favicon is hard unless you are Tumblr-izing ( http://nonchalantrepreneur.com/ ) 

    Also, Favicon was a cute idea that needs to go away now ( https://msujaws.wordpress.com/2012/04/23/an-update-to-site-identity-in-desktop-firefox/ )

  20. I agree with Chris’s comments about intent.  People are on facebook for one reason only, basically to kill time, not to purchase something.  Google is far superior, in my opinion, in stretching my advertising dollars.  When people search google they are already driven to buy something.  If I am on facebook and see an ad and click it, I may see the site, say that’s cool, and forget about it.

    Consumers go to google not facebook to find products and services. That being said, I don’t think their ad revenue will decrease because big brands with big budgets can use it for brand awareness.  

  21. I think that Facebook Credits will be/should be a major part of their future monetization efforts. They are an incredibly powerful tool for every app, not only games, and are really underused at the moment imho.

  22. Solowalker says:

    That’s true, but I mean that as just a start. As in, that’s $1 billion free that they didn’t have before almost like magic, on top of what they’re already making through ads and games and services. While they should definitely shoot for more, $1 billion could be a good pillar of business to build on.

  23. Hello Chris, I have some questions.

    In your opinion how does high mobile use as their only computer as far as user-bases impact both text/keyword ads and display ads and how does that compare and contrast the two business models, FB’s and Google’s?

  24. I’m not sure what the effect on Google search ads are (I suspect there is data out there on this?). On mobile devices there is little visual space for display ads, so very hard for FB’s current business model.

  25. P&G’s “Thank You, Mom” video and app represents a bunch of unsexy products, but it’s tailor-made for Facebook consumption and SS amplification.  FB doesn’t have to be the best solution for all brands, it just needs to be essential to 20% of them in order to justify a $100B valuation.  

  26. timrpeterson says:

    @cdixon:twitter hmm, payments still seem like an intent issue. Related to this, even ardent FB users have trust issues with it. Unlike sorority party pics, forking over CC to Bank of Zuckerica won’t come easily. 
    Beating Google at its own game via Bing/personalized search seems like a better, though boring, option. IF FB can just remind users enough to use Bing. Seems like a more directed attempt at this tie-in wouldn’t be a waste of time and kinda confused why this isn’t talked about more.

  27. I agree.  The key challenge is that FBs original insight was the power of the social graph.  But the sad reality is that the social graph correlates poorly with the interest graph.  Because FB is not an intent driven environment (people go there to socialize not to buy) FB has to try to capture interest graph data to better target ads.  But the more they do to improve their interest graph and feed such data back to their users the worse the signal to noise ratio on the key FB user experience – social.  It’s a problem.  Imho the quality of the characteristic FB experience is deteroriating.

  28. deepakthomas says:

    Chris – I get the argument that GOOG is good at helping make the purchase decision once the user has expressed intent. But just because there is no established model (yet) to divine that intent or to stoke demand, does not necessarily mean that it’s an intractable problem (and that’s not what you’re saying). If anyone has a shot at cracking the problem, it should be fb with its massive amounts of behavioral data that should give it a “hunch” about purchase intent? :)

  29. Disagreed that it’s free.

    They are:
    – taking away ads revenue from the users that pay
    – spending a ton of money on micro-transactions
    – reducing the user experience consistently

    Plus, I’ve never ever seen an ad on Facebook thanks to AdBlock.

    I see your point, but it’s one of the most unprofessional and scammy strategies that exist, with untested and probably huge consequences.

  30. Great analysis, Chris. Ads will always be a nice chunk of revenue for Facebook, but it’s unlikely they’ll be able to create similar magic that Google had with AdWords. Search advertising is direct response and connects with users at the precise moment they’re looking for goods / services. FB is much more about branding / display advertising designed drive interest / perception more than sales. Seeing GM pull it’s advertising dollars isn’t a good sign. If companies move their ad dollars towards content creation to drive interest / branding, then FB ad growth could be poor. 

    I doubt FB will get into the search business / buy bing given how poorly search has been doing on mobile (producing 1/100th of the revenue per search versus desktop). But with Sheryl & Co they do have the expertise to build a search advertising business if they choose to do so.

    The opportunity for FB lies in being the social platform for the web and creating monetization strategies around the immense amount of data they have at their fingertips. This is a really big opportunity and where they might be able to create their own magic and blow past a $100B valuation. Payments / digital currency could be another huge market, but I just don’t see users wanting to pay with FB$. 

    I think it will be a very difficult road ahead for FB. I love the company, Zuck, Sheryl & Co, but I wouldn’t touch this $100B IPO, most of the upside has already been realized. They’re bringing in all the dumb money at this point. It’ll be interesting to see how Zuck changes over the next few years under the pressure of being a public company and what kind of monetization strategies they try. 

  31. Jim Christie says:

    The more I think of it the more I like payment. For the exact reason that it *doesn’t* contaminate the social experience. At payment you’ve already made your decision to buy so the creep factor is eliminated. Behind the scenes it would be a different story as for any credit card company but we already tolerate that.

  32. Solowalker says:

    Good point on the ad take away. There’s definitely some questions about its viability, but it would be something to look into. They recently disclosed they made less than $10 per user last year under their current model, so perhaps $1 is too little. $2 may still do it. Even if you account for something like $0.30 lost per transaction, that still raises the ARPU from $9.50 to $20.

    I also happen to be one that uses AdBlock, but I’m literally the only person I know who uses that even after I’ve told people about it, but some of the same people do complain about ads. So my main point is that they should look into an offering that does away with ads for those that want that. Doubling the worth of some users is nothing to snuff at.

  33. All in all, I’m bullish. I’ve never seen anyone execute consistently like Zuck in the consumer internet space, and I’m sure that he will figure out the perfect way to monetize the product while creating value for the world and for shareholders.

  34. nevdull says:

    Google not only made advertising amazingly easy for people to do, they also decided that they would do what they could to make it more effective than if the “free market” were to have its way.  Similarly, Twitter retains some level of control with respect to advertising.

    Facebook may have an immense amount of data which could be used to *understand* users in a way that’d better target ads successfully at them, but instead are simply demographic “channels”.

    They’re collecting facts about users, but it doesn’t feel like they’re learning anything about them.

  35. It’s really interesting to me how private investors don’t usually invest in public markets. I’d love a post on that topic if you feel like it.

    I don’t have a lot of money, but I invest a bit (more than I should) in both private and public companies. The investments serve really different purposes for me.

  36. rschroed says:

    Chris, aren’t you discounting the vast amount of data the FB has for each user? As Dustin Curtis likes to say, google knows what you want to buy but FB knows who you are.

    What if FB started a content ad network? How many advertisers would that kind of targeting appeal to? How big of a chunk could they carve out of the display ad business?

  37. Thanks Chris for referencing the post on the efficiency of Facebook’s revenue engine. I subsequently expanded on that idea into a new Facebook metric called ARPMOE (i.e. average revenue per minute of user engagement) and then compared Facebook with Google, Twitter, Yahoo and (much later) the Superbowl broadcast. You can find the new charts here http://excapite.blogspot.com/2011/09/new-facebook-experience-needs-new.html . The most interesting new insight being that Google’s revenue engine was significantly more efficient back in 2005 than in 2010. Plus Facebook has about 1/5th the efficiency of the Superbowl broadcast and 1/2 that of the US TV.

  38. David Lee says:

    My conspiracy theory based on no data or info whatsoever is that they launch a search engine in 3-5 years using “off-the-shelf” algortithmic search like Bing or Blekko. They combine that with their social data and build the best search engine imaginable and tap into the best internet business model ever.

  39. I expect FB will launch an off-facebook.com display network. But given FB’s vast size and competition with Google, this might get them 2x the pageviews? To your second point: I think you might be underestimating the extent to which Google also knows who you are, and also the extent to which what you want to buy is more monetizable then who you are.

  40. Chris – the key here is creating a better ‘search’ experience, allowing you to ask friends (and friends of friends) specific questions instead of posting as status updates. Having users post questions like “What restaurant in the Soho should I eat at tonight?” in a search specific environment, will allow them to monetize at the same clip (or better) than Google…..

  41. As someone said in these comments, that would be “boring”, but I agree it also might be very sensible (see the “Willie Sutton rule”). I agree the data they have could make the search experience better (assuming they get the search “table stakes” right – operations, indexing plus all the other search algorithmic enhancement Google has worked on for the last 15 years).

  42. georgewscottiii says:

    They should charge businesses for Facebook pages.  Every business could pay $25 without a problem.  Then just have fewer ads, maybe half as many.  Plus put in some occasional text link ads.

  43. David Lee says:

    It would also be akin to what Google tried to do with Google Apps and Microsoft, which was genius (but arguably not well-executed). Sometimes the best defense is a good offense

    Should have read the comments!

  44. There’s an increasingly large ecosystem of startups building on top of FB, so what about the platform play/app store? Do you think they’ll eventually charge for access to their users?

  45. Heh. Unfortunately the sysadmin of my blog is me, and I’m not very good at these things. But thanks for the suggestion and I’ll try to figure it out.

  46. Something tells me that Facebook ads would monetize better offsite than on Facebook. Combine FB’s data with websites where people go to buy things and those ads should do better because all of a sudden they are in the right context. 

  47. cphenner says:

    I had to read really far down before I saw Chris write this in Comments:

    ‘Yeah, personally I think payments is the best bet.’

    And with FB’s public disclosure that payments are 15%+ of its revenue, why does the reader have to work so hard to learn what Chris really thinks?

    My sense is that 100% of folks who read this far (to this comment) have auth’d using FB’s Social Plug-Ins (what we used to call ‘Facebook Connect’) on one or more services, and I have yet to hear anyone say or write that account creation using FB’s Social Plug-Ins is *not* an improvement.  I’ll further-wager that anyone who has read this far uses it 100% when it’s offered as an option.

    Now imagine an experience of that nature that enables payments.  Does anyone think FB will not pursue this (and do insanely well)?

    What struck me about this post is that we had to read four paragraphs worth of Chris’ post above to read a final paragraph that opened with ‘They key question…’ and that closed with two if/then statements and no thesis.

    Perhaps tight if you’re writing code; but I was hopeful for a PoV.

  48. basket41 says:

    Chris:

    FB really could use some hunch magic.  Biggest problem I see about their current ads, is they just show me things that match my profile.

    I played football in college.  I must of clicked that i liked football at one point.  If i see one more football ad, I am going to quit the site.

    They are advertising to where the ball IS…not where it is GOING.

    If you know i like x,y and z.  Dont show me ads for x,y and z.  Show me ads for x2 y2 and z2.

  49. Well, fair enough. I tried to make the post analysis that I could back up with arguments. I figure people who want my (completely speculative) opinion can read the comments but that is better left out of a blog post.

  50. The impression I get is they’ve made ad targeting an afterthought so far while focused on the UX. Which is probably the right choice for long term value.

  51. Chui Tey says:

    FB Beacon was a product ahead of its time. I believe it still has a place in the future when people are comfortable about sharing their purchasing habits. It needs some tuning though. 

    For instance, it could be a better Yelp, since only real purchasers can review, and enjoys more authority if the social graph is used to police spam.

    It could also be used to generate demand and trust. For instance, in a manner similar to “Cities I’ve visited”, it might be “Most popular online shopping sites among your friends”. 

  52. They could implement a direct link selling system similar to http://www.gumroad.com. Keep a simple business model of taking a percentage of sale. Instead of directing users away, facebook can sell through the site keeping eyeballs as well.

    Not sure if there are any other implications associated with that or something obvious I’m missing but curious to hear why something like this hasn’t been used yet. 

  53. Randy Meech says:

    Google added a big improvement to Overture’s model, which was simply to show the highest bidding ad first. AdWords also used relevancy via click-through rate as a major factor. Combined with the purchasing intent a good, unbiased search engine enjoys, this was huge.

    A big hope for Facebook is that it can monetize “word of mouth.” They’re not there yet.

    The big difference between the two is that Google went public after obviously striking oil, Facebook hasn’t quite done that yet.

  54. Agree, Google did rank by RPM, not highest bid, which was smart. They also got rid of the human reviewers who had to score each add. Then they added quality score of landing pages later.

  55. Facebook has said again and again though that they will never charge for access to Facebook.  Though of course that would be just one option, I bet they feel bound by that communication.  Also, given how many of their users are outside the US – that decreases the viability of this idea all the more.  One of FB’s coolest initiatives, Facebook Zero, cuts deals with telecom operators in the developing world to allow users to access Facebook without even paying for Internet use while social networking.

  56. Greg Hao says:

    Funny that shortly after you posted this, news came across that GM is pulling their $10MM direct buy from FB.

  57. Google crushed Yahoo here because they had far higher payouts due to more advertisers bidding due to much larger intent harvesting platform (==Google search). Tough nut to crack.

  58. stbullard says:

    Sounds like Facebook’s Payments platform, which accounts for 14% of their revenue, or Marketplace, which they killed years ago because nobody was using it.

  59. I think the shift to mobile, where ads are particularly terrible as you mention, is going to become increasingly important as it squeezes display ad revenue.

    Facebook has said they aren’t making any significant revenue from their mobile app, despite 400M users. They’ve bought Instagram but no revenue there either.

    I think the winners integrate revenue – ads or otherwise – into the core experience of mobile. Sponsored posts and photos in your feed coming soon. In this regard I think Twitter is way ahead of them.

    Facebook Connect for better or worse is becoming an integral part of the web. Can you think of a startup in the past 12 months that doesn’t use FB Connect in some way?

    It could be the Bloomberg strategy: sell everyone a Bloomberg terminal, but the real money is in the data.

  60. “I think the winners integrate revenue – ads or otherwise – into the core experience of mobile. Sponsored posts and photos in your feed coming soon. In this regard I think Twitter is way ahead of them.” << Agree they need to, just not sure how they actually pull it off in a way that generates interesting RPMs and doesn't hurt UX.

    "Facebook Connect for better or worse is becoming an integral part of the web. Can you think of a startup in the past 12 months that doesn't use FB Connect in some way?" << agree. How do they make money off this? Start charging? That is what some smart people speculate. I don't know.

    "It could be the Bloomberg strategy: sell everyone a Bloomberg terminal, but the real money is in the data." << I've been out of finance for a while but last time I talked to bond traders (where Bloomberg is strongest) they use it mostly for the internal IM functionality (that is mostly where bond traders conduct trades). Also BB amazingly has stayed close where you have to buy the terminal and haven't gotten beaten by Thomson Reuters open strategy.

  61. I was an insignificant part of a company that invested $ into Facebook in 2005. I thought FB could shed insight and unique behaviors of 18-24 year olds and the upside was big.

    Eh, I was kinda sorta right, but not really.

    Looking at Facebook in 2012, amazed and blown away by the numbers and time spent, but would be scared as all hell to be an investor. As an ad person, you can’t deny the #s and usage; as a marketer that likes to sell things, I would be in constant test mode moreso than commerce-seeking mode.

    Facebook will continue to be a big part of people’s activity. Just not so sure they will be as big a part of being able to monetize that behavior…though I recall a day when Amazon just sold books and built a decent business just off that. Evolution has a funny way of evolving. 

  62. I’d be hesitant to draw broad conclusions from one advertiser’s actions. For all we know there was a personal spat or some other non-systematic issue.

  63. People are on facebook to socialize. To socialize with friends and things they like like brands. When a user already aknowledged that they want updates from a brand, they are likely to purchase if that brand announces some new offer or product. Facebook is pushing pages heavily for these reasons in my opinion. 

  64. I have a piece of TV tuner hardware, and when I found out that the manufacturer was working on a new model with more features, I subscribed to their Facebook page (or whatever the hell that action is called now), with the hope that I would find out ASAP when the new model was released. Subscribing/friending/following/etc. brands seems to me to work about the same way as signing up for a periodic email newsletter, but in a way that is much more convenient to filter or unsubscribe from.

  65. “A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model.” >> By which (from the comments) you mean app store, payments, and search? I’ve heard Roger McNamee talk about FB charging the NYT or others to have access to FB Connect.  Do you see that as even feasible?  

  66. tunjung says:

    with all data supplied from it’s user,has Facebook never attempted to sell any data mapping of some sort?

  67. tunjung says:

     Agree.I don’t believe Facebook can’t build or at least recruit people who is able to build user behavior prediction of some sort

  68. Diego says:

    What about charging all the brands for their facebook pages? Coca-Cola has 41M fans with whom communicates through facebook for free.

  69. On payments, the opportunity is huge and so are the challenges. Today there are only three US companies that have “one click” billing permission with consumers at scale: PayPal, Amazon, and Apple. Google’s been trying to get on that list with Checkout and the Play Store, but they’re not there yet. Microsoft’s making some inroads with Xbox Live.

    Facebook has been careful to purposely only allow Credits to be used for game credits; no purchases of real world physical goods or services. That buys them some time to clear some really big anti-fraud and anti-money-laundering hurdles. If/when they do, they could become the biggest global online payment rails overnight.

  70. chrislacy says:

    I think the concept of ‘money’ in general is one that is ripe for disruption. Why can’t I pay my phone bill with something other than my country’s currency? 

    Adding a new payment method would obviously be hugely challenging in every respect, but there could be an opportunity for Facebook, Amazon, Apple & maybe Google to do something in this space. 

    PS. Sorry about the image. This was my first time posting and I thought I had to add a profile image :(

  71. Not too familiar with the payments platform, but the marketplace is a little different than direct link sharing i’d say. the marketplace is still around in app form.

  72. toddhoff says:

    Then they can’t sell some of their most valuable users to advertisers. That’s why the no ad thing isn’t viable. Who would do a buy targeting people who couldn’t afford not to see ads?

  73. Tom Maxwell says:

    Doesn’t Facebook make an average of more than $1/mo off of each user with display ads already?

  74. YES EXACTLY, THANK YOU. Finally someone understands that Facebook Ads are getting less relavant and they can’t survive with their current business model. And I’m also disappointed with FB new Ads strategy, making Ads more relavant. It seems that Zuckerberg didn’t get it yet, just let me have a peaceful walk with my friends in your damn park. 

  75. Juicefly says:

    Given the volume of data that flows through Facebook, which will arguably increase a hundred-fold over the next few years, surely deciphering intent will become easier over time? If I’m liking cars, talking about cars, reading about cars, sharing photos of cars, and commenting on car blogs then I’m probably a car buyer. As much as I would be if I searched for ‘cars’ on Google. Layer a personal profile on top of those signals and you’ve got a pretty well-targeted prospect. Then just serve ads in whatever format works best – text, video, in-feed etc. Facebook just needs to infiltrate every corner of the web with its social graph which is exactly what it’s doing. Isn’t that worth $100bn?

  76. Good point, personally I agree that Facebook’s attraction is its largely untapped potential to generate alternative revenues elsewhere with the gigantic data they have. Who knows if they could create a whole new ecosystem of commerce within facebook itself?

  77. the partnership with zynga over social gaming and social gaming monetization was one area that it seemed they were harvesting demand. but the zynga partnership is not growing much these days

  78. Facebook used to offer virtual gifts. I don’t know why they can’t also offer physical gifts and become a sort of social commerce platform.

    Usually when I visit Google I have no purchase intent but sometimes I do, and it’s those sometimes where Google can make its money. Facebook can engineer a similar situation: I might have purchasing intent on a close friend’s birthday; I might ask my Facebook friends to recommend a local plumber. Facebook should be able to react to that in some way (“300 people in your local area liked Drains R us… why not give them a call?”).

    People use Facebook too:

    – Arrange dates and days out — Facebook can suggest places
    – Ask for movie recommendations — Facebook can suggest cinemas
    – Ask for advice on buying houses, car seats, washing machines, laptops

    A lot of the big purchases we used to ask Google about we now ask Facebook about. Facebook needs to develop an advertising platform that answers those questions.

  79. Guys, I’m not sure you’ll easily find the solution for Facebook revenue model by looking at the current advertising industry. 
    I think Facebook should focus on the core of their users’ interests. 

    Why people entering Facebook? Without starting an endless argument, I’ll say in general: to stay tuned. 

    SO, Maybe I can use my Facebook to stay tuned about NEWS? and I’m not talking about Liking CNN page, I’m talking about a smart news feed that can easily flipped into a social news-reading experience. 

    What about MUSIC? maybe I can watch TV together with friends? Maybe I can create a professional mini-networking group for my small business? Maybe I’ll be able to open Facebook Email account for my business… Moreover, Facebook can offer me amazing engaging features for my Facebook page!

    All these services CAN be monetized.

    By redefining the entire social experience, Facebook can integrate new amazing revenue models (at least I believe!).

  80. mekalav says:

    How about charging for brand pages?  How about Improving on the shopping front,once click buy? facebook instant offers? May be facebook should buy Pinterest?

  81. I disagree. Facebook Ads are disruptive for Display Brand Advertising. they are creating a direct link btw the brand and the user. you’re not just pushing your brand, but you’re targeting a user and create a community.

  82. What I’ve observed about Facebook and Twitter to some extent, is that these one-to-many, gesture-based models are great for advertising, poor for engagement and interestingly, in Facebook’s case, almost completely devoid of transactions.

    I struggled with this topic but force out my thoughts on the connection between community and commerce here:  http://awe.sm/5qhUT

  83. No need for a new biz model.

    Viewable Impressions (being pushed thru via the 3MS initiative) combined with Attribution will demonstrate the value of brand awareness vs. purchase intent.

    The big roadblock:  Facebook’s unwillingness to open up their platform to third party measurement.

  84. Facebook’s ads aren’t “display,” though. And your “park” analogy could apply to almost any brand advertising. So, it seems many of the points being made this week are claiming “all brand advertising does not work,” not “Facebook advertising doesn’t work.” So if it’s all intent based, what do we do to generate intent and build brands?

  85. Great post, Chris. Facebook likely will pursue multiple models rather than one simple one, as Google did. I’m guessing they indeed move strongly into search and creating a real-time bidding platform that replicates what is happening elsewhere in the Web with exchanges. They’ll also likely become a massive financial services firm, capturing credit cards, payments and loyalty. Finally, they’ll probably get into ecommerce and social shopping. In other words, flavors of Google, PayPal and Amazon. What’s really interesting to me is that all this attention on Facebook’s real model and value will soon be directed towards the next set of darlings – ie, Twitter, foursquare, tumblr and Pinterest. Despite conventional wisdom, public markets have a way of forcing rigor and scrutiny on long-term value opportunity, which is a good thing.

  86. Facebook should compete directly with ebay
    both in terms of really challenging paypal and also the auction side of things. If I want to buy a car – I can then go to facebook and see which of my friends has a car for sale, or which of my friends friends has a car for sale. I can then ask my friend if their friends is a trust worthy person to buy a car from.

    I buy lots of stuff from Amazon cos it is really easy. Facebook should throw money at making it easier to buy through Facebook than any other system.

  87. Google did not innovate the keyword advertising business model.
    They stole it from GOTO/Overture, and then eventually paid $1+ billion in legal costs to Yahoo/Overture.

  88. They could also buy Automattic – WordPress.com has a great network of blogs that Facebook could push ads through. If people are not looking to buy when they are using Facebook then go looking for the people when they are looking to buy.

    There are millions of blogs with reviews, or about people interests etc where Facebook ads could be successfully used.

    It would also allow for tight integration between Facebook pages and a WordPress blog with a brands own domain name.

  89. Paul Park says:

    The search business model is broken. Period. Whether google realizes it or not, it will not be sustainable in 5-10 years. Here’s why. 

    Search inherently is good at finding pages that contain “keywords”. Hence, the most benefit is derived from discovering various “keywords” across millions of disparate webpages, and displaying them in somewhat of a ranked fashion. What real value does a result list of 13 million pages provide me? Do we all not simply look at the top 10 results, and perhaps if we are desperate flip to page 2, only to discover there’s nothing relevant there?

    Think about this. The Internet, can be likened to a giant hard drive. Whenever trying to obtain information from your personal hard drive, whether it be documents, photos or videos, do you always use the “search” function or do you only use it when doing a deep-dive into a particular “keyword”? 

    The fact is, search is good at finding webpages, not websites. I’ve developed a new model that will disrupt the entire paid keyword advertisement scheme and provide more benefit to the end user. 

  90. as a former big brand advertiser at p&g, the value of FB ads is more discovery than actual click throughs. google has been pitching its zero momemt of truth, the step consumers take to research something before they go into the store (First moment of truth). What FB can uniquely do better than anyone else on the planet is the discovery of new products/services, before someone goes and types a keyword/product into google.  The biggest problem FB has today is a product/concept misfit.  The concept of FB ads sell something completely different (instant sales, conversion), than what the ad product is meant to do, which is drive awareness and discovery at massive scale. 

  91. The NY Times decision is telling.  Facebook is rapidly becoming the de facto authentication provider for consumers on the web.  
    At some point in time, I would think they’ll start charging developers to use the Open Graph:  they’ll have no choice but to pay for it to engage those users in the way those users want to engage.  

    It’ll be the Web’s O/S just like Windows was on the desktop.  Or something like that …

    I’d rather have their user-base with a shitty model than neither.  That’s what Google had, they were patient, and they pounced when the right model that fit their business came around.  My guess is that the same things will likely happen with Facebook.

    Eventually, someone will figure it out, and then they’ll be in position to out-execute and at scale.

  92. You nailed it. Facebook has a world-class team looking at this challenge, but the game will be won in the nuances, rules and policies as much as in the placement and format of ads. Get an important variable wrong and you lose. Yahoo’s ad system failed relative to Adwords because they got rules and policies wrong. They simply didn’t make the right decisions fast enough. One example to highlight what I mean: Google adopted a 25 character title and a 35 character description very early on. We (at Quigo) had empirical evidence to prove that their policy was optimal for driving CTR. It took Yahoo a few years to make this change. Of course, by then, it was too late as they did several other things that were sub-optimal.

    Advertisers that are bidding on media like to spot repeatable patterns. This makes ad performance more predictable. This is IMHO key to the success of any ad system.

  93. I think it will be something in the vein of social gaming that leverages their audience in a contextually relevant way – perhaps an American Idol type contest where users share and ultimately pay a nominal voting fee to support their favorites?

  94. Great post.  I think FB is a tremendous success and I have tremendous respect for Mark Zuckerberg but $100B?  …Amazon market cap is $102B I think FB is a really big bet at $100B.  I don’t believe the current revenue model will support $100B – however I do think Mark Zuckerberg can figure it out.

  95. Greg Hao says:

    Completely agreed.  It’s just amusing that the GM story broke shortly after you posted this.

  96. David Anderson says:

    The answer lies in stepping off the cliff: http://charleseisenstein.net/for-facebook-a-modest-proposal/ (not my link — this dude is really smart, think about it, at least as a devil’s advocate)

  97. Great post. I think all “media” companies should be divided into “purchasing intent” vs “no purchasing intent”. The profitability of the media businesses where the customer has purchasing intent – and what is being sold to advertisers is that intent – is totally totally different from the media companies where all that can be sold is a demographic. 

  98. ryanbrown says:

    You hire a smart creative agency to figure it out for you. The value of SS for FB/Tumblr/Twitter is that it blends FAR MORE seamlessly into the stream. IE, people are already sharing content they’ve produced and are far more inclined to have a positive, emotional reaction to a brand’s “story” in that context. Also, not for nothing, this is the way television advertising has worked for well over 50 years.

  99. I disagree. I have used Facebook connect only once, and then I undid it afterwards. I currently actively avoid services which require using Facebook authentication, and I’m not alone in doing so. Unique accounts and passwords (especially passwords) matter to me, even if I wind up keeping my username the same or similar across sites. So I disagree that identity management is a feature that gets 100% adoption by people who would read this far at all.

  100. Simon Baptist says:

    Jed Williams from Kelsey wrote a pretty good analysis of if the stock is worth it or not and I’d recommend having a look at that.

    One thing I’ve started to think of is FB as an infrastructure play, i.e. akin to AWS.  FB has solved some pretty big scaling problems, e.g. picture uploading, and so like how they have solved the universal login they could also make those kind of features available.

    You can see the work Josh Williams and co on the Location team and checkin aggregation and sharing as an example of the way it could play out.

  101. patricknew says:

    great article. wrt future business model, data is the obvious fulcrum, but the nuance of intent-related data versus non-intent-related data is crucial.

    social graph mapping is great for attempting to deliver relevant info (as in search) and allowing for mapping across social graphs is a key to unlocking this. but this is only for discovering information (could be very useful media & entertainment content discovery, FB data driving recommendations for IP-TV), and is more useful in contextual discovery (i.e. no pre-existing need had to exist, therefor intent is created at the moment, making intent-based ad models difficult to service). FB could become an interesting component of next-generation of search, but the current ad model may not work as effectively in this situation.the other approach is to tie the non-intent related data to intent-related data and begin to target causality chains (who buys what, where did they learn about it, who did they buy from, when, who influenced, etc.) but this requires a payment mechanism and enough transaction volume to make the data useful.the question is, what are the core competencies of FB at the strategy and product and business development side of intent-related data collection, analysis and monetization. there are a lot of large players equally well positioned, and i doubt anyone wants to hand FB the keys to payment and data collection that comes with it.Zuckerberg has shown focus on the product that attracts users, yet that may not be the side that pays bills in the long run, yet to not focus on innovation there risks losing that huge audience. the req is that there be a concurrent effort for product development that monetizes the user base and data, but in a way that doesn’t disrupt or alienate the base.developing compelling product on both sides of the fence will be the key to long run value for FB and it’s soundness as an investment.

  102. masaccio68 says:

    I created this facebook account solely for use in authenticating myself.

    Bad facebook: no data for you.

  103. given the amount of time that people spend here already, powering a commerce experience with special features like group shopping, like and check-in based personalization might get users into the high-intent mode.  they have to nail the user experience, which they actually suck at.  secondly, they can build the largest and most potent off-site display, video and mobile ad network powered by the user’s data.  how to avoid the creepiness factor? they might want to try sharing the ad/transaction revenue with the end-user.  this last thing could be a game changer.  if display ads are to work on the site, they need to get a lot more creative.  basically, facebook could become a big yawn in a few years.  the open authentication API is really meh for me…  it should really be done by someone much more trust worthy like a bank or even the government, it’s a utility of value but you can’t charge. people need to realize that despite the traffic, facebook is really not good anything that involves deep math, algorithms, really high performance computing or great user interfaces.  apple (mac os x, iOS), google (map reduce, Google file system, true scale), amazon (cloud services) and microsoft (lots of great stuff over the years) have done amazing innovations over the years.  can’t really say facebook has innovated on anything at all.  there’s no wow to anything that facebook has done to date. in fact their attempt at news feed really is very poor, mostly because they don’t have data processing rigor or great systems folks like at google.   

  104. I’m surprised you didn’t touch on Facebook Credits.  Both Facebook and Apple have been slow to roll these out beyond their own ecosystems but both will be fighting to become your digital wallet.

    Jason Calacanis has a great post about Apple’s opportunity: http://www.launch.co/blog/the-one-product-that-makes-apple-a-trillion-dollar-company-o.html

  105. Chris i am not sure the future of FB is in the ad business although it will still be a very important one. I see facebook becoming a critical player in the transaction business (credits, billing, ecommerce) specially on mobile which is totally under leveraged by facebook today. 

  106. timo.bozsolik says:

    I think another key factor in Facebook’s possible growth scenario might be diversification. Even if today 85% of their earnings are created by ads, this number might change in future. As Google’s list of acqusitions is quite long, Facebook could go the same way and look for other sources of profit. After today, they have money to spend.

    http://thekairosaiproject.blogspot.com/

  107. Chris,

    Great article.

    I am looking forward to their proposed App store to see whether that becomes a key cornerstone of their strategy. Also, perhaps facebook (for some) will become a workplace environment. There is german startup that recently developed a file sharing app called Pipe – http://www.theverge.com/2012/5/17/3022808/pipe-file-sharing-facebook – that allows online users to easily exchange files (up to 1GB). You can imagine facebook becomes a combination of skype+dropbox+GoogleDocs type of service for some online users working on a project.

  108. Chris,

    Great article

    I would be looking forward to facebook’s app store and how they implement that in their business model.

    Also, I ready today about interesting German startup  – pipe – (http://www.theverge.com/2012/5/17/3022808/pipe-file-sharing-facebook)
    that developed an app to let online users on facebook exchange files up to 1GB. This could become important as more people might start to use facebook as a work envirnoment. One can imagine facebook become a combination of skype/dropbox/googledocs that users working on a particular project will use. Businesses are willing to pay for skype and dropbox could be willing to pay for such a suite of apps

  109. Nadav Manham says:

    I think Google’s use of Vickrey auction elements was also an important pro-user (in this case the advertiser) innovation. 

  110. Sundar says:

    We can’t discount another possibility. What if Facebook adds something that will make users come to it *when they do have* purchase intent? Sort of happening already I’d say. I sometimes know which of my friends/groups would’ve “used/liked/recommended” certain non-commodity products and go look at their pages when I want something.

  111. Chris… This is a great post. Most people don’t think about conversion rates, Google is converting users into clicks and then in many instances converting these users into paying customers since the “purchasing intent” is there.

    The Facebook ads feel more like the Snickers bars, batteries and M&M’s when you are on line checking out at the supermarket! You may not need any of those items but when you are bored waiting on line you may purchase one! (of course they are targeted to my age, location, likes etc.)

    I guess the question is… With Facebook’s 900 million users why not create a search engine integrated into the Facebook experience. They already have the self service ad platform and the audience.

  112. Vanja Šebek says:

    Facebook will end up using Google Insights and Analytics to target their ads… Maybe they should start using Google AdSense right away.

  113. snow21man says:

    I feel the same. Facebook needs another business model to keep their valuation. Social gaming and apps might boost their income , but there are other companies already  focusing in games and apps , and I don’t think facebook is going to be a competitable player because they only focus on developing their platform. If they put more ads , users might move to another sns . If Facebook starts developing social games by themselves, they might loose other chances to monetize their platform. I also don’t think Facebook is going to be a company like MS or Google or Apple. Many communities in the internet grew and vanished like myspace. The social graph isn’t durable and their might be more companies that collect  personal data in the future. I also don’t think SNS is the ultimate system for personal communication. There might be more sites or new types in the  future.

  114. Prat says:

    If they start charging for that, businesses might start moving elsewhere. Besides, with money comes the responsibility to provide support, and with that comes a lot of expenses and problems.

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