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.

Comments (20 Responses so far)

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

    AOL and other companies with IM platforms know first hand what it’s like to have bunches of users, and little revenue.

    Person to person communication is NOT media, and will resist being monetized by interruption advertising.

  2. “Person to person communication is NOT media, and will resist being monetized by interruption advertising.”

    And that’s why ad rates on forums are low. :)

  3. Hashim,

    You do have history on your side, but… nobody thought search was a form of media

  4. I think your assessment is a good one. But Facebook also seems to be developing quite the database of information about its users. Beyond the shopping cart tie-ins, the Book’s developed an interesting feature that lets users rate ads that appear alongside their friends profiles and pictures.

    If you rate the ad positively, a pop-up window says “Why did you like this ad?”

    You can then choose: Interesting, Relevant to me, Good offer, or Other.

    If you rate the ad negatively, the pop-up asks “Why didn’t you like this ad?”

    You can then choose: Misleading, Offensive, Pornographic, Uninteresting, Irrelevant, Repetitive, or Other.

    Google’s direct-connect between advertising and users is a great relationship. But Facebook’s potential to learn preferences from individual users and potentially specialize advertising to each user is at least intriguing.

    Once users engage in the advertising process, they could be more likely to be aware of it.

  5. [...] Why Isn’t Facebook Making More Money? (Hint: Advertiser Value and User Value Are Not Aligned)Read this if you want to make money with a social network. [...]

  6. [...] am a bit behind on my reading. While I finished this post I noticed that Skott Karp has a very similar post up now in which he questions why Facebook doesn’t make more advertisement revenues. His [...]

  7. [...] is a nice article at Publishing 2.0 tells about the mis-predictions about Facebook’s revenues. Comparing [...]

  8. Your comments are valid and well stated, but you are comparing apples to oranges. Both sites may have massive page view statistics and use advertising as their primary source of revenue, but user interactions with each site are otherwise completely different.

    Facebook can not compete with the Google-model: “I’m here right now, I’m searching for X right now, show me the money”, but if they are clever enough, they will use the information that people are willingly offering up in more interesting ways.

    There is immense value in being able to precisely target your audience demographic and this is where these and other companies will be fighting over advertising revenues, whilst fighting privacy concerns in parallel.

  9. dave,

    But I think Scott’s distinction is right on:

    “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.”

    Most ads on Facebook still just try to get info out there. What companies ought to be using Facebook for is the incredible potential for direct interaction with their users. Facebook Pages, done right, can increase users’ brand loyalty (like the series of free playlists Apple gave out to its members a year ago). NPR also has a fantastic Page with RSS feeds and several podcasts that lets a young demographic discover its content.

    Maybe advertisers need to shift their focus from awareness to interaction. It’s not always about what new product you have; sometimes it’s about creating a relationship between your company and your customers, a subject Sam Meers writes about constantly.

  10. [...] Read the rest of this post Print all_things_di220:http://voices.allthingsd.com/20080924/karp-2/ SHARETHIS.addEntry({ title: “Why Isn’t Facebook Making More Money?”, url: “http://voices.allthingsd.com/20080924/karp-2/” }); Sphere Comment Tagged: Facebook, Publishing 2.0, Scott Karp, Voices | permalink [...]

  11. You definitely make many good points, but one thing about facebook advertising that no one talks about is the quality of their customer service. Basically, it sucks.

    I work for a (real) company that is spending a good amount of money on facebook. It’s not adwords, but the quality of the targeting is so good that it’d be stupid not to try it, especially since it’s pay per click.

    We’d like to increase our spend, but there are a number of issues we’d like to discuss with FB before doing that. However, all attempts to arrange any sort of meeting with FB are met with a form email along the lines of “sorry but we don’t offer phone support, please email me your questions.” It’s truly perplexing considering the amount of money we are spending and the amount we’d be willing to increase it. It’s a huge contrast to Google, which bends over backwards when it comes to getting advertisers in the fold.

  12. I agree with other commenters. Social networks shouldn’t be relied on in terms of advertising revenue as much as traditional search engine advertising. People go onto search engines to interact and not to buy whereas many search engine users are looking to buy… it’s pretty easy as to why most ads don’t convert on there.

  13. 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.

  14. 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

  15. @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

  16. [...] op 21 oktober 2008 om 16:21 en is gearchiveerd onder Laatste nieuws, Need, Need-Home, Need-Nieuws. Bronvermelding . Volg reacties op dit artikel via deze RSS 2.0 feed. Een reactie achter laten.  Mail [...]

  17. 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?

  18. 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.

  19. well said. facebook should grow up…

  20. Video marketing has taken the Internet by storm. It has become so popular that you can find big production commercials at online video advertising networks. Take for instance this Pepsi video advertisement.

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