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Last spring the Internet was aghast at news that Facebook turned
down a $750 million acquisition offer, and was holding out for $2 billion. Bloggers blasted founder Mark Zuckerberg, saying he had drunk
far too much of the Kool-aid and was heading for a bubble 2.0 crash. These critics were wrong. The endless photos of students holding red
pixie cups full of beer belie the truth that Facebook is an untapped gold mine. The
intersection of two trends - the shift of spending from offline to online, and
the increasing power of targeted advertising - will make Facebook worth far
more than $2 billion.
Explaining Google’s
Revenue Explosion
Google had already become a very popular search engine before it figured
out its true business model. It wasn’t
until 2002 Google that Google launched its Cost-Per-Click (CPC) AdWords program that its revenue
skyrocketed. Using AdWords, Advertisers could purchase advertisements for
certain keywords, and only pay if the user clicked on the ad. Google employed advanced algorithms to
control ad placement and to ensure the highest revenue for Google. This
targeting proved highly effective. A
person who is actively searching for health insurance, is very likely to click
on an ad for health insurance quotes.
That click is worth a lot of money to an advertiser.
When launched, average CPC prices were around $.10. Two years later, the prices were around
$.50. Today they are approaching $1 and
they are still rising fast. This
represents an increase in revenue by 10X in four years, without Google having
to do anything to improve its search engine.
All Google had to do is create an easy interface to let anyone buy and
track advertisements, then let companies bid keywords up to the level of market
efficiency. A whole ecosystem of affiliate marketers and
search marketing agencies sprung up to help less savvy businesses sell online. As companies learned better tactics for
landing pages, targeting and conversions, the price only got pushed up more and
more.
Facebook –
Google-like potential that is yet untapped
According to ComScore, in 2006 Facebook had a similar number of page views
as Google. Facebook was ranked 7th
and Google was 6th. Facebook
also has a similar potential to target advertisements. While Google can target based on keyword,
Facebook can potentially target the exact person. However, currently, Facebook’s targeting
technology is in the dark ages compared to Google.
To illustrate this point, here is a sample of Facebook
advertisements that I viewed last night, and a note on how they could be
improved:
University of Phoenix – Bacheleors Degree
Programs Facebook nows I already have a Bachelors
degree from a first tier university. Why
would I want another one from an online university? I got about ten of these
banners in thirty page views. It was a
complete waste of money.
Netflix – The ad just advertised the service
in general. Facebook knows which movies
I like, why not give me a targeted recommendation, with a special offer to get
that movie for a discount?
NBA Store – Facebook knows my home town. This advertisement would be far more
effective if it targeted me with Red Sox, Patriots, or Celtics sports gear.
Only a small fraction of the advertisements I saw on
Facebook were well targeted. Adding
great targeting can easily give from 2X to 20X improvements in click through
rates.
Facebook needs to open up an Ad Center, like Google
does. It needs to allow anyone to buy
highly targeted advertisements. An
advertiser should be able to buy in categories such as: 18-22 year old male, from New England,
mentions sports/baseball/football in his interests categories. Or: Junior in college at a top 10 university,
mentions computer science or programming in his interests.
When Facebook does this, companies will start gaining
expertise how they define their targeting.
Automated analytics programs, like Google analytics, will help them
improve their ad copy. Facebook will see
its revenue increase an order of magnitude, just like Google did.
The $24 billion
dollar opportunity
There are literally tens of billions of dollars waiting to be moved from
offline to online spending. A 2006
Foresster study showed that people of the time people spend viewing media, 22% of
that time is online. However, only 7% of
advertising dollars are spent online.
Meanwhile, people spend only 7% of their media time reading magazines,
yet 21% of advertising dollars are spent on magazines. For
newspapers its 10% of the time, and 22% of the advertising dollars. For
these numbers to equalize so that advertising spending is linked with how
people spend their time, $24 billion
dollars need to shift to online spending.
This is disparity in ad spending is despite the fact that
online advertising is more effective than magazine advertising. Most companies who do search advertising rank
it as their most effective technique, despite that the CPM’s are becoming more
expensive than magazine advertisements.
Because Facebook can target ads so well, it has a golden
opportunity to capture a huge chunk of that $24 billion. Facebook needs to grant the targeting power
to advertisers. It also needs to open
advertising up so that ads can be purchased online by anyone, rather than
needing to call an ad representative.
That will allow the same ecosystem of marketing firms and affiliate
sellers that inhabits Google to move to Facebook and drive up the ad prices to
the market efficient price.
Facebook – the next
Google
The people running Facebook are too smart not to introduce an ad center that
offers highly targeted advertising.
Unlike MySpace, Facebook is still owned by the original founders, who
plan to take it public. It is likely Facebook will go public, and just like
Google, it will start killing its revenue numbers quarter after quarter as
billions of advertising dollars move from magazine spending to targeted, online
advertisements.
