Facebook’s embedded option

The best way to think of Facebook’s stock is as the sum of two businesses: the existing display ad businesses, and a probability-weighted option on a new line of business. This is how Wall Street views it. For example, here is a section of a recent Goldman Sachs analyst report on Facebook:

Optionality not in the model: further potential upside

While not in our model, as [Facebook] has not publicly expressed pursuit of these areas, we believe there are three obvious opportunities that the company could leverage its platform to capitalize on:

- Developing an external ad network

- Monetizing paid search

- Entering China

Of the three options, search is clearly the most interesting. An external ad network is inevitable. Google proved this model with Adsense. With an already huge base of advertisers bidding on CPCs, it is impossible for most other ad networks to compete on publisher payouts. But Facebook’s traffic is so great now that an external ad network might increase their revenues by 2x or so. The same goes for entering China. They might get another half a billion users who monetize at lower ad rates than US users. Neither move would put them in Google’s revenue range. They need a better business model for that. The only (known) models that deliver RPMs high enough to compete with Google are search, payments, and e-commerce.

At TechCrunch Disrupt last week, Mark Zuckerberg talked about possibly entering the search business. Investors had been concerned that maybe Zuckerberg really meant what he said in his IPO letter – that he just didn’t care that much about making money. By expressing an interest in search, Zuckerberg signaled that he understood Facebook’s immensely valuable embedded option and was thinking about ways to exercise it.

Greg Hines

but search is so damn hard that screwing up search would probably make them more money but cheapen their current slightly cheap brand even more.

http://www.cdixon.org/ chris dixon

True. They’d have to really focus on it and hopefully take advantage of their unique data & network (something Zuckerberg also hinted at).

JamesHRH

I don’t see people using social search – what would the offline equivalent be?

http://hassy.posterous.com/ HH Veldstra

I needed some repairs done on my bike and was asking my friends where I should go.

It’s easy to imagine a situation where I post a status update along the lines of “ugh punctured my tyre and had to walk 2 miles in the rain” and Facebook popping up a helpful suggestion of a repair shop I could take my bike to.

Facebook search engine doesn’t need to look or feel like Google at all. All they need is to figure out where to harvest purchasing intent. A lot of people forget that.

JamesHRH

Not trying to parse this too thin…but that’s not search.

That’s a referral.

And it comes with a large number of social filters that make it anywhere from golden to useless.

Search in social is a non-starter, unless you can prove to eh person submitting the query that the person providing the response is someone you should use as a source.

That’s Yelp or Trip Advisor in side of FB.

I think it is a very large trap to assume that FB can do anything that social media does.

Irving Fain

I think payments is a 4th option that’s missing. Facebook’s ease of authentication could simplify the conversion for ecomm players assuming users trust them enough with credit card info.

http://www.cdixon.org/ chris dixon

Yeah agreed (I mention payments and e-commerce in the post).

Irving Fain

Yep – surprised Goldman and others aren’t more focused on that too…

http://www.cdixon.org/ chris dixon

I think payments/e-commerce are too far afield (to “venture” like) for Wall Street analysts to talk about as serious prospects. They like to draw lines through dots.

http://www.subprint.com joemccann

Agreed. It’s the silent success story that no one is talking about. Year over year growth is staggering and if they start to roll it out internationally beyond in-app/game credits, they become an immediate competitor to Paypal, Stripe, etc.
http://twitter.com/basker Jonathan Basker

You know where I stand on this Totally agree. Both commerce within the FB ecosystem (pages, deals etc) and without (porting identity verification and payment info to other parts of the web).
http://www.facebook.com/people/Ryan-Merket/136300045 Ryan Merket

I don’t think Facebook will move in this direction for 2 reasons. 1) Fraud – margins are notoriously low on payments when you calculate for fraud. 2) User’s pre-conceived social implications – normal users will be reluctant to click ‘Pay with Facebook’ due to the implications of how they use Facebook — to share. Some users might think that their purchases might show up back in Facebook for their friends to see.

http://petegrif.tumblr.com/ Pete Griffiths

Yes. I read a great piece on this (so sorry can’t find) that discussed in great detail just how hard it is to do payments. Answer – very f*g hard.

http://www.engag.io/Abdallah Abdallah Al-Hakim

it is very hard becasue as @facebook-136300045:disqus mentioned – people are not on facebook with intent to purchase. The reverse is true Amazon and Apple. Still the commerce area is one that FB need to find a way to crack into it

http://petegrif.tumblr.com/ Pete Griffiths

Very true. But of course a facebook payments system would not have to be on FB. People could buy things anywhere and use fb to pay.
Btw – the difficulty I was referring to was with regard to the sheer mechanics of running a payments business – it is a deceptively difficult business and things like fraud avoidance take a long time to sort out.

http://www.engag.io/Abdallah Abdallah Al-Hakim

thanks for the clarifications Pete. The biggest issue for Facebook might be (as others have pointed out) gaining the trust that Apple and Amazon seem to have been successful in building with their users.

http://www.facebook.com/people/Ryan-Merket/136300045 Ryan Merket

Looks like the technology for the ad network is already built and being used on Zynga.com Looking at the source of Zynga.com, they created an xFBML tag called fb:ad. http://techcrunch.com/2012/06/22/zynga-facebook-ads/

http://www.cdixon.org/ chris dixon

Yeah, I’m surprised they didn’t roll it out a while ago. Seems like there is a tech + business roadmap laid out by Google and others. Maybe they need to buy an ad network to accelerate it.

http://www.facebook.com/people/Ryan-Merket/136300045 Ryan Merket

Why would they need to do that? The LIke button JS is already on millions of sites. All those publishers need to do now is put fb:ad where they want they ads to appear. #trojanhorse

http://www.cdixon.org/ chris dixon

Sometimes big companies need to acquire just to get an injection of talent/experience/relationships. I’m just speculating here. At any rate, an off-FB ad network seems inevitable.

http://www.facebook.com/people/Ryan-Merket/136300045 Ryan Merket

Totally agree. Seems like they already got all three though. Regarding talent & experience, they acquired Gokul Rajaram’s startup shortly after he left Google. He’s known as the ‘Father of Adsense.’ He’s now Director of Ads for Facebook. For relationships, my point on the Like button JS carrying the 3rd party ad network payload should solve the inventory problem. To me, it seems all the pieces are in place.

http://twitter.com/rohit_x_ Rohit Sharma

agree – i think they can pick up a network to accelerate it (Brightroll/RocketFuel/…) – i think fb-adnetwork powering off-fb content will happen.

zeekdavis1983

At TC Disrupt, Zuck mentioned how impressed he was with apps such as Spotify, Runkeeper, Airbnb, etc. – in regards to Open Graph. Toward the end of this topic, he hinted at more features being built for Open Graph – one can infer that the ‘Want’ Button falls into this domain. I’m curious what your opinion is on the rumored ‘Want’ Button? Do you see this being an integral piece to FB’s external ad network? If not, where else do you see FB deriving true purchase-intent from?

http://www.cdixon.org/ chris dixon

I don’t know the details, but “want” definitely seems to get more at purchasing intent than “like.” And online monetization is all about purchasing intent. http://cdixon.org/2009/09/27/online-advertising-is-all-about-purchasing-intent/

http://petegrif.tumblr.com/ Pete Griffiths

Absolutely.
‘Like’ is a social gesture and is aligned with the social graph.
‘Want’ is more personal and aligns more naturally with the interest graph. (having said which it will be used aspirationally and for social signalling and will doubtless be less valuable that it might seem.)
http://twitter.com/AndrewKorf Andrew Korf

I work in app and game distribution – we see a huge opportunity at Facebook to layer the social graph on both games and app distribution to help solve the discovery problem …

http://www.cdixon.org/ chris dixon

so basically with that they’d make money off their app store?

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http://twitter.com/mschaecher Michael Schaecher

I’ve always said they should get in to ticketing. Buy eventbrite, integrate deeply in to facebook events and go from there. Almost every event nowadays get’s a facebook event to represent it. In fact you can do almost everything you’d want for an event on facebook already, except for buy/sell tickets.

http://www.cdixon.org/ chris dixon

Makes sense, although how big is the ticket market? If they get, say, 10% of it, can that get them to order of magnitude greater revenues?

http://www.facebook.com/maui314159 Mark Uhrmacher

Well, Stubhub did $2BB of GMV last year with a 20% commission last year and that was all aftermarket sales (ie. people reselling tickets after the primary purchase) in the USA. If FB managed to grab some of that and get into primary ticket sales too it could be huge. Taking out an existing player, like viagogo, could jumpstart the business. However, I think extending the ad network offsite would be much easier..

http://indtechie.com Sidharth Dassani

1 billion searches a month . Ya great . After hearing this I analyzed my searches on Facebook and every single one was for a name of a friend already in my friend list . Facebook as a search engine ? Thanks but no thanks . Never know when Facebook will start posting my searches in my friends news feed . And there is no option to use FB anonymously . I can use google without them knowing who I am . Impossible to do with FB.

http://www.cdixon.org/ chris dixon

I hear you. Zuck acknowledged that at Disrupt so he knows the challenge too.

http://bothsidesofthetable.com msuster

My vote (other than “all of the above”) would be payments. I think people underestimate the strength of Amazon / Apple due to having our credit cards and therefore one-click purchasing. Same with PayPal. I see this as the one chink in Google’s armor and the reason that apps monetize so poorly on Android.

JamesHRH

Bingo! Payments from FB would be completely unsiloed ( made that word up, but still ).
http://petegrif.tumblr.com/ Pete Griffiths

Completely agree. Those millions of credit cards are an absolutely fundamental strength of their respective ecosystems.
http://arnoldwaldstein.com/ awaldstein

Agree… but just like I don’t see a natural behavior towards ‘wanting’ and ‘purchasing’ on Facebook, I see less core motivation towards giving them the trust that i have with Apple and Amazon.

You are right of course that this is the gold ring for them.

They are a talented one trick pony and to date, have not shown that they understand their audience enough to migrate our behaviors naturally.
http://www.cdixon.org/ chris dixon

Yeah I agree. Payments seems increasingly like “table stakes” for the big tech companies. One of the main reasons Microsoft bought Skype was for Skype’s large number of users who gave them their credit card. For all of MS’s B2C background, they never took consumer credit cards (besides Xbox)

JamesHRH

Always wondered what the hidden asset was in the Skype sale….that makes total sense.

http://twitter.com/kaigradert Kai Gradert

Mark, I think you are underestimating what it takes to get a users Credit Card on file. It’s not just adding the feature and a form to capture the card. You also have to add something so desirable that the user is willing to enter the card in the first place. And the user has to be in the mindset to even consider you for the transaction. Both are monumental challenges to overcome.

http://www.desinle.com/ Desinle

monetizing paid search will be a killer to what google is doing.. i fail to get proper results with google these days.. it can be worse for facebook, if they do not handle the spamming side of the facebook platform properly, as it can get irrelevant results..
also think they are tunning their embedding ad network options by their already present widgets of recommend and activity widgets on many peoples websites.. they would also need to prove a lot to webmasters before they switch from adsense..
https://plus.google.com/117204671830298752568/about Vishi Gondi

Getting FB Adsense up and running needs three other puzzle pieces to fall in place:

* A search engine: Advertisers place ads against search engine intent. All other views on adsense networks are a bonus, but are not the driver of adsense ads. A search engine is critical to start an Adsense network.

* Critical mass of user action data: FB wants to know that “I drank a tall chai at Starbucks”, so it can get others “like me” to do the same. FB is promoting startups that publish data to it’s opengraph like crazy. Pinterest and Hulu have benefited tremendously due to this. Look for other e-commerce startups to do the same. (Shameless plug: Checkout how we do it. http://digitalscientists.com/rately )

* Recommendation engine (Search): The future of search is proactive recommendations. Google Now and Siri will be the de-facto recommendation platforms over the next few years, but its Facebook that will have the treasure trove of normalized action data. Even Apple can’t reliably search across all the scrappy startups that FB is promoting like crazy. Look for FB and Apple to iron out their differences and integrate FB recommendations into Siri next year. Google might launch their version of action api that will drive traffic via search & G+ shortly.

Don’t hold your breath though, FB Adsense and the Search/Recommendation engine might take another year before all the puzzle pieces to fall in place.

http://twitter.com/AndrewKorf Andrew Korf

A socially powered “smart” version of Chomp – would/could be an interesting space for Facebook (as previously mentioned), especially if/when iTV or the promise of IPTV ever happens.

Anonymous

Search is to Facebook as Social is to Google. It would be arrogant and a painful exercise for FB to go down that path. What is the consumer problem they would solve with an inferior search engine? Facebook needs to get better at supporting and building tools that help e-commerce business extract purchase intent across the web. Then their ads will convert, then their RPMs will rise. If Zuckerberg makes the mistake of believing that one platform will rule them all, he should consult the history books to see where ‘portals’ end up.
http://petegrif.tumblr.com/ Pete Griffiths

Spot on.
http://www.jroller.com/shareme/ shareme

There is a 3rd option Chris..

Mobile app store mobile device combination
Anonymous

Sounds like a pretty solid plan to me dude. Wow.
AnonWays.tk
http://twitter.com/intelligentspec IntelligentSpec

Could not agree more.. valuing Facebook with its current model makes no sense to me. They could launch that external network overnight and revenues+profits would double… those other ideas are also very possible.
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http://twitter.com/AndrewKorf Andrew Korf

Real-time social search is a huge need – Try googling “what game should I try out”, “what bands are playing tonight in _____ ?”, “News item ____” – bing starts to get it right, but its bing. Twitter search is great but its Twitter. Solid social search by Facebook has the potential to be disruptive. IMHO.
Doug Gibbs

Facebook doing search and advertising is a bad idea. Bad idea.
First, don’t do something because a Goldman Sachs analyst report says it is a good idea. The implementation will be half a$$ed and fail.
Second, we use Google to search for things. When I am looking for something specific, an add for the product is helpful, not always, but more so than an add on TV or a magazine.
People use Facebook to socialize, not search for things. If you eat at a restaurant, and you have a waffle, then the waiter tries to sell you a waffle iron, you would get annoyed. Same thing here.
Facebook is at the upper limit of annoyance to their users.
Ah-ha! THIS is the strategy of Chris and the analysis. Get Facebook to do stupid things, start projects without high level buy-in, piss off the talent so they leave, then invest in the simplified better Instagram style platform, and make a big payout. Brilliant!
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http://twitter.com/jim_shook Jim Shook

I wonder what implications Facebook’s relationship with MSFT would have on going after the search market.

Also, while I totally think that search is a much higher margin business than display ads (and see why its attractive), it also seems a bit antithetical to their notion of promoting the Facebook web over the open web.
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http://technbiz.blogspot.com paramendra

I think Facebook is ready for a full blown search. But that is not what Zuck hinted at.
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Fabio Lalli

In my opinion the situation of Facebook is very hard: convert the critical mass in a business without impact on a users privacy and motivation of users is not trivial. Insert the paid search or the advertising in search result does not make much sense to me.

I think Facebook should aim to payment systems in mobility through the use of authentication facebook, considering the number of users accessing from mobile: imho Facebook should produce “Passbook” like Apple or clone Square with FB auth.
http://florianfeder.org Florian Feder

Chris – Could you explain why you use the words “embedded option” instead of just talking about an opportunity for development?

http://www.cdixon.org/ chris dixon

it’s a term from finance referring to a security like a stock + option. I think the option is far more extreme here than the normal development opportunity.

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Anonymous

Great artciles
http://www.feed.us RacerRick

The ‘off facebook’ ad option has always confused me. Who the hell would run Facebook ads? I know I wouldn’t and I’ve been on Adsense for 10 years. Adsense is popular because there was nothing like it when it launched. Now there are plenty of options.

Facebook would have to do something very unique to make this popular.

But they don’t make enough on ads to give the publisher a good enough cut.

http://www.cdixon.org/ chris dixon

Their mobile ads might work since so many apps are FB connected.

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Chris Dixon