September 22nd, 2008

Why Isn’t Facebook Making More Money? (Hint: Advertiser Value and User Value Are Not Aligned)

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I happened to visit Facebook’s Business Solutions page, and was struck by how, at least on the surface, these advertising formats seem like exactly the kind of innovation that should be helping Facebook achieve Goolge-style revenue — which is of course what Facebook’s $15 billion valuation assumes will happen.

And yet with 100 MILLION users, Facebook’s 2008 revenue was only projected to be $300 million. (The number may higher, haven’t seen, but it would be big news if it was much higher.)

Can you imagine a traditional media company with 100 MILLION viewers/readers/subscribers and only $300 million in revenue?

Which leads to the question that should be on the mind of every media executive, from startups to big legacy players:

Why isn’t Facebook making more money?

Thinking about that question, I went over to Google’s Advertising Solutions page to compare the way AdWords is described to the way Facebook’s offerings are described.

So let’s compare Google’s value proposition with Facebook’s:

Google says:

Reach people actively looking for information about your products and services online

Facebook says:

Promote your website or Facebook Page with highly-targeted advertising. Make your ads even more effective by attaching them to News Feed stories about the users’ friends.

Allow your customers to share with their friends the actions they take on your website.

Connect with your customers on Facebook similar to the way they connect with their friends.

With Google you can reach people who are looking for precisely what you have to offer.

With Facebook you can insert your ad into news about peoples’ friends. You can let people share their shopping habits with their friends. And you can, as a company/brand, be “friends” with your consumers.

What’s the key difference between Google’s value proposition and Facebook’s?

With Google, the value to users and the value to advertisers is perfectly aligned. Everybody wins.

With Facebook, if you read between the lines, it’s really the same value proposition as traditional advertising — advertisers forcing themselves on users, in a way that creates little or no value for the users.

How many Facebook users have a burning need to find ads in their friends’ newsfeeds? Or share their shopping habits? Or make friends with brands?

On Google, when you search for something, the adds are a form of search result — i.e. something you asked for, that you opted in to receive.

On Facebook, the ads, despite all the innovation, still aren’t something users are really asking for.

Is it possible on the web to have a more perfect alignment between advertiser and user value than search advertising?

I don’t know, but it seems a pretty safe bet that Facebook’s ad formats aren’t it.

(And pre-roll video advertising sure as heck ain’t it.  Could there be anything more antithetical to the fundamental web experience in the broadband era than having to wait 15 seconds to access the content you’re trying to load?)

If you’re in media in the web era, you’d better be working on a business model that creates huge value for users. Either that, or be content to have a small business by traditional media standards.

  • Wes

    Shahjahan,

    That's a great point, but one that companies seem so scared to try. A lot of the clients my agency works with are very focused on generating sales and revenue, and that's the most important goal. It's understandable, since without those things they kind of go bankrupt. But the value of brand interaction with customers is far greater than the value of generating a one-time sale. A loyal customer will return to your company over and over again (think dedicated airline fliers), generating several purchases over their lifetime.

    Rob,

    I agree that sticking ads in users' faces isn't a good way to go, but I'm not sure this is Facebook's fault. The problem may not be Facebook's limited vision. They have creative alternatves: their Pages application is a wonderful way to promote a brand, and the application's free! The problem may be companies' out-dated approach to advertising. They only want to do what they're comfortable with.

  • Online advertising is expected to deliver immediate sales. But that doesn't have to be the case.

    Non-search based advertising makes sense when you can reach your target demographic repeatedly, building interaction with your brand.

    E.g there are 10,000 19-year old girls in London and you sell heels to that age group in that city. Let's say the cost of advertising to them is $5 per 1000 impressions. You decide to reach each girl 200 times, with a banner that focuses on interaction with your brand on your website (not on immediate sales). So you spend $1 per girl (or $10,000 for the campaign).

    Each girl, in case she becomes a buyer, will give you a profit of $100 per year. That's $1 million in profits per year. Except for the lack of funds, why wouldn't you use a social networking site to reach your target demographic?

  • @Dave,

    You are right about the 'apples to oranges' analogy: Googe=Search - Facebook=Friends & social networking. If someone is searching for 'blenders' on Google, they are much more inclined click a 'WillItBlend.com' ad than those meeting a particular demographic are while catching up on the activity of friends.

    Ads in the web-era are an impotent means of monetizing. The Internet began as a communications medium, not as a unidirectional broadcast medium like newspaper, magazines, radio and television where ads were the only revenue means for their simplex orientation. Facebook has 120M+ members and the only revenue model it can think of is to hold an ad in their faces? Same with Google. This model is a testament to the level of inexperience of each.

    Employ the 120M...that's the answer. Get them to do the work for you, Facebook. It will remove those intrusive ads from my sight and put me in touch with those who know.

    Rob

  • I wonder: now that MySpace has launched its new highly targeted, algorithm-based advertising network, how it will stack up against Google and Facebook?

    And not to be a jerk, but you have a spelling error in the first paragraph of your story: "Goolge style media" Thought you might want to know.

    Peace - Love - Lunges,
    Sam Page

  • Ray Peabody

    A better frame for the Google / FaceBook discussion is GMail rather than Google search. The GMail ads are contextually relevant to the message which is much more effective than interrupting the flow of the conversation.

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