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Facebook’s Social Revenues

Posted on | November 10, 2008 |

Articles on potential Facebook revenue models run the gamut. Comments following those articles span the galaxy. The consensus on Facebook revenues falls into two general categories:

  1. They’re like Google - They’ve got oodles of traffic and oodles of ways to monetize it.
  2. They’re like eToys - They’ve got an unsustainable business model, users prone to flip and a management exodus.

The fact is, according to Mark Zuckerberg, they put up $150M in revenue in 2007 and are targeting $300M in 2008 with $50M EBITDA. How? They have: 1. A search deal with Microsoft’s MSN, 2. Classic “portal” placements on user profile page with $200K+ 2007 “ad sponsor” price tags, 3. “Social” a.k.a. behavioral ads which run elsewhere on the site, 4. ROS (run-of-site) inventory that is largely sold off to ad networks, and 5. Referral revenue off on-site gifting (i.e., where users send off-line gifts to each other). With 161M uniques and 61B page views each month, they’re their own ad network. So, they’re Google. Right?

Facebook Portal Placement

Facebook Portal Placement

Maybe not. While they raised $250M from Microsoft in 2007 (on a $15B valuation) and another $235M debt / equity investment in 2008, the latest scuttlebutt from outlets such as TechCrunch is that Facebook may be in need of cash. Apparently social network CPMs (cost per thousand impressions, a primary revenue driver) are dismal and expenses are ramping with a vengeance.

Irony

Opinion articles are ramping faster than Facebook revenues. In a recent article in Slate, Farhad Manjoo suggested Facebook charge its super-users to use the service. He reasoned that it worked for 37Signals. Therefore, it will work for Facebook. The only problem, 37Signals flagship product, Basecamp, targets businesses already paying for Microsoft Project. They took project management software, put it online, added collaboration and then charged a premium.

Facebook targets consumers who have other, substantially free, applications competing for their time (Delicious, Twitter, MySpace, Friendster, LinkedIn, FriendFeed, etc.) To understand the downside of content charging in competitive markets, look to Slate’s own history. They abandoned their subscription model in January…1999. Further, while super-users get inordinate value from Facebook, Facebook gets inordinate value from super-users. The prospect that charging would make them super-users of competing platforms is frightening.

Value

The right Facebook revenue model will create value for the user. Witness Google, a great search engine made better by the addition of paid links. Why? Because advertisers compete with algorithms to provide focused propositions. If they don’t, they go away. Facebook is starting down this road launching music and classified ad services.

Not one to shoot holes in other people’s prescriptions without providing a target or two of my one, I’ve taken a stab several revenue streams which leverage Facebook’s social nature:

  • Real Estate: If you want to charge for use of the platform, target providers of the 20,000 Facebook applications. One time, per month or per click, the result would be rationalization. Like Adwords, Facebook’s traffic-starved widget makers would have to build value into their apps, use their own charging models and bid for placement. But, most of them are not charging, you say. Maybe not for that app, but they are using the traffic to sell other products.
  • Scale Economies: Facebook Groups + Amazon = book volume discounts. Facebook + Aetna = insurance volume discounts. Regardless of the good, charge a vig like any other broker.
  • Crowd Wisdom: So, you think Netfix’s movie recommendation engine is powerful? Maybe you’re impressed with Amazon’s. While their start was a bit tawdry, Facebook made its first foray into harnessing the wisdom of crowds in its “Beacon” system. Basically, it tracked user purchases telling others in their network in hopes of stimulating follow-on purchases. Facebook can easily go about this the other way, collecting your reviews and ratings. Take that data to a retailer or direct to the manufacturer, and you’ve got the foundation for a killer app.
  • Value-Added Services: Charge for services for which there is no, or are few, free substitutes. Facebook’s music initiative is perhaps the best example. There are a lot of others. Data backup and storage comes to mind. How about matchmaking? No, not Match.com, eHarmony. You need the “science” of compatibility to justify the charging scheme. Again, don’t invent, partner.
  • People Data: Facebook makes you think of finding people. Sometimes you find them. Sometimes you don’t. Sometimes that is because they’re not on the service yet. PeopleFinder charges $40 for public records searches. Sounds like a rev-share.

The right social network business model will be based on a number of revenue streams. Each will take time, experimentation. In the meantime, Facebook needs to continue to innovate its “free” features, sinking hooks into a heretofore transitory users. That leaves one major challenge remaining…

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