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.


Yahoo should invest in products, not advertising

For 10 years, Yahoo was my default home page.  Now I can barely stand using the site.  I still use it for Finance and Flickr, but that’s it. The new home page design has windows popping up everywhere and mind numbing celebrity gossip up top.

Now we learn Yahoo is going to spend $100 million on an advertising campaign.  The slogan is “It’s Y!ou” which sounds like one of those meaningless taglines invented by PR firms.  I’m quite sure no one will remember it and their money will be wasted (quick, name the tagline of any big tech company).

By CEO Carol Bartz’s own admission, Yahoo is incredibly well known, especially outside of techie circles:

When you get outside of New York City and Silicon Valley, everybody loves Yahoo…. We do great things for [users] and we’re excited about what we are.

Yes, Yahoo has one of the best brands on the web. Which is precisely why they shouldn’t be spending $100M on branding.  That’s the last thing Yahoo needs.  What they need are new technologies, new revenue streams, and new products that people love.  If they can’t build those things themselves, then they should acquire them.  They’re coasting on inertia right now.  As we saw with AOL and countless other tech companies before them, that inertia will be lost if they fail to innovate.

I think the Yahoo-Bing search deal is a great thing for startups as it potentially makes search competitive again.  But as a longtime Yahoo user it makes me kind of sad.  Between the branding campaign and the search deal, it feels like Yahoo has thrown in the towel.