
Facebook’s business model - lleims
http://cdixon.org/2012/05/15/facebooks-business-model/
======
kposehn
I think it is quite obvious that Facebook has already succeeded; the only
thing to be decided is to what degree.

> Display ads generally hurt the user experience, and are also not very
> efficient at producing revenues.

Agreed. I would differentiate FB ads from your normal banners however, due to
the against-the-wall approach of most banner buys (from larger advertisers)
and the much more target - and interactive - approach of FB ads.

> Google makes the vast majority of their revenues when people search for
> something to buy or hire. They don’t have to stoke demand – they simply
> harvest it.

Very true, but this also brings a problem. There is much more money in
_creating_ demand vs. _harvesting_ demand. In addition, by capturing users
earlier in their decision process, an advertiser often cuts out later stages
that may sap overall profit margin.

I think that we really should not be comparing Paid Search _at all_ with
Facebook Ads - the two really are completely different. What we should compare
is businesses like Yahoo! Display and AOL's Advertising.com - those are the
ones running scared from this.

~~~
mikeryan
Lets look at the short term since their IPO is around the corner.

I think the short term metric is whether they're worth a 100B valuation. Q1
profits were $205M give them leeway (they did spend $300M cash on Instagram)
say they have 1B in profits this year and their P/E when they go public will
be ~100. That's indicates an extremely high growth company.

Considering their profits are down this quarter and their growth rates are
slowing I think Chris's point may be more of is Facebook worth as much as they
say they are. I, personally, prefer to see them at a P/E of 40. I think this
is a pretty mature company and their primary revenue growth is behind them.
The real short term question for Facebook won't be whether they can continue
to grow their user base (they're likely tapped out) but how well they can
increase the revenues on the users they have.

~~~
jcampbell1
I think your comment is spot on, but I see large opportunities for them to
increase revenues in the near term. Contrary to popular belief, Facebook ads
are not well targeted. The only thing you can target is profile data and some
action data like "likes". That is weak because stated preferences are less
valuable than revealed preferences. Their remarketing offerings are non-
existant. For instance, I can't target people that have visited my site, and
GM can't target people that have already searched and looked at the chevy
equinox.

I have bought about $5k of facebook ads, and they were not great. If I could
remarket on facebook, I'd likely spend several thousand a month, and GM would
spend a ton more than the $10M they recently cancelled.

I honestly think I could re-work their ad platform, and double revenues over
time without changing the product.

Right now, on facebook I am seeing ads for generic stuff like cell phones, and
clothing. On other sites on the internet, I am seeing ads with a special offer
for a local gym that I was considering.

~~~
slantyyz
Your comment made me realize that while I click on ads on Google all the time,
I have _never_ clicked on an ad on Facebook.

I don't have a really good explanation why, except that maybe the ads I see on
my Facebook pages seem to have a 'scammy' feel to them (the most common ad I
see is for Canadian Pardons - Facebook must think I'm a criminal).

~~~
joering2
since most Ads dont work, and people advertising "healthy food" and "local
plumbing" figured it out already, the only one truly left are the advertisers
that make money of ripping off innocent or unaware people: ads such as mom
that makes $150 per hour, amazing cream for deep jungle that makes grandma
looks like shes 30, pills that will let you lose 50 pounds in 1 week, etc.

------
qq66
Disregarding the incredible business opportunities that are available to
Facebook (Credits, taxing Connect more broadly, targeted offers based on very
detailed demographic profiles), the fact of the matter is that Facebook may be
able to one day identify purchasing intent not only before Google, but before
the user themselves identifies that intent.

If Facebook knows that you recently got married, and that you just surfed over
to a baby website (equipped with the "Like" button), you might be intending to
have a child, even if you're not yet pregnant. They can start selling you a
daily-deal on diapers before a kid exists to soil them.

~~~
Jare
They will be selling me diapers while I'm socializing (!), not when I'm trying
to buy diapers. It's just not very powerful.

~~~
waterlesscloud
What are you doing when you're at a baseball game?

And yet there are plenty of ads there. Why? How do they work?

~~~
Drbble
Mostly brand awareness, which is famously inefficient and only works for
products with extremely wide mass appeal, like Coke.

------
wolframarnold
It's fascinating to me that nobody has commented on the last few sentences of
the article. To me this is where the real juice lies:

> A more likely outcome is that Facebook uses their assets – a vast number of
> extremely engaged users, it’s social graph, Facebook Connect –to monetize
> through another business model. If they do that, the company is probably
> worth a lot more than the expected $100B IPO valuation. If they don’t, it’s
> probably worth a lot less.

So long Facebook is a "nice-to-have" business models around paying for access
or privacy are dead on arrival, users will just leave or go elsewhere. However
if Facebook becomes a "must-have" in order to participate in society, then
people will do whatever it takes. If Facebook is becoming an infrastructure
provider then they have every incentive to encourage a rich ecosystem and
businesses will pay for access, even consumers perhaps might. The comparison
that comes back to me is the early phone system from 100 years ago. It was a
"nice-to-have" to have a phone number. But phone companies invested in
infrastructure and interoperability and lots of third party applications
emerged that got deeply embedded into societal life. Thereby the telephone
became a "must-have". Facebook today seems to have a similar opportunity in
front of it. If they realize and leverage it, it could be huge.

~~~
simondlr
Absolutely agree. Their social graph is their most important asset. It's a
goldmine for any service. For the most part, it is the best indication out
there of who you are connected to. So many sites and services are using this
'trust' network to provide services that weren't capable before. An example is
a travel site (forgot the name now) that allows you to see if friends of
friends are staying over at a hostel on a certain date.

They somehow have to monetise this.

------
narrator
I got a great model for Facebook. Pay for privacy. You pay for privacy and
they won't give your personal information out to anyone without a judicial
warrant and will let you permanently delete information you post that you'd
rather no one else see. Another privilege is to let you have multiple accounts
under pseudonyms.

However, offering these features is likely to cause damage to the naive belief
that Facebook is actually private.

~~~
rudiger
_> I got a great model for Facebook._

No, you don't.

~~~
dsrguru
narrator was being facetious.

------
waterlesscloud
Facebook Credits are just sitting there. The need for micropayment
infrastructure is just sitting over there. Hmmmmmmm.

30% ain't gonna cut it, though. They'll have to chop that down by an order of
magnitude.

------
alastair
It's interesting to note that 27% of Google's revenue comes from partner sites
[1], aka Adsense on 3rd party sites, where the "purchasing intent" is not so
clear.

I personally think it's unlikely that Facebook will not launch an Adsense
competitor at some point.

Then there's Facebook credits with at least 200 million users [2], potential
there to expand into off-site micro-payments, POS systems, etc.

Or "Premium Features": advanced analytics, promoted posts, photo storage, etc

The $100B valuation is reflective of the market's confidence in their
potential, obviously. It's wise to be cautious, but I wouldn't write them off
just yet.

[1]
[http://investor.google.com/earnings/2012/Q1_google_earnings....](http://investor.google.com/earnings/2012/Q1_google_earnings.html)
[2] <http://www.businessinsider.com/facebook-credits-2011-6>

------
McKittrick
The effectiveness of an ad should be measured by its price - or conversely
stated, by the revenue it generates. Search advertising generates somewhere
between $50 to $100 for every thousand impressions (RPM) for US traffic.
Content/ display ads on a well optimized site will generate somewhere between
$1 and $3 RPM. FB ads, according to their numbers, generate around $.35 RPM.

So in the advertisers mind, search ads are literally orders of magnitude more
effective than FB ads.

W/r/t FB as a business however, it's all well and good becuase, even at $.35
RPM, with billions of page views /day or month, the numbers start adding up
pretty quickly. As long as they continue to crank billions of page views,
justoptimizing the site to move from $.35 to, say, $.40 RPM will have a
massive effect on the growth...provided they keep cranking the page views.

------
Steko
"Display ads" are not simply an "old internet business model" they are the
foundation of all advertising. So really Facebook lacks a business model the
same way the trillion dollar tv and print industries lack business models.

The whole point of Facebook is to get users to spend all their time online
there. At that point Facebook's business model can approximate any and all
other web companies business models. Facebook's Search will be keyword based
and charge Google-like rates per pageview. Facebook's app and content delivery
platforms will take Apple/Netflix/Spotify sized cuts.

------
sparknlaunch12
You just have to think that with all that personal information and large
active audience spending a lot of time on Facebook that someone can print
money.

Surely they can create purchasing intent simply by working out what users want
to buy next based on yet profiles. What about growing existing elements like
events (meetup.com) and chat (Skype, hangouts).

Feels by economies of size and scale Facebook has to create value.

------
Madintelligence
One direction I could see Facebook going is becoming a proxy for real life.
While it already contains all social transactions, evolving that idea into a
platform for purchases that is simpler to use than Amazon or Ebay (and the
respective company websites) means that they have a ready made audience, with
social information to target specific purchases rather than just
advertisements.

------
btian
Does anymore still use the Internet without AdBlock?

------
rplnt
> Facebook makes about 1/10th of Google’s revenues even though they have 2x
> the pageviews.

I somehow don't believe that Facebook shows ads on 2x as much pages than
google. If it's really only about pageviews then it's highly irrelevant as
Google serves majority of its ads outside of their pages.

------
throwaway63-90
Google found a business model that works (keyword advertising) before they
went public.

Facebook still does not have a business model that works.

Facebook is surviving on investment, not income.

Mark Zuckerberg is billionaire because of Microsoft's and others' investments,
not because Facebook is making billions in income.

~~~
qq66
"Facebook is surviving on investment, not income."

Better check your facts. Facebook made a $1 billion profit last year.

~~~
veridies
Yeah, but off of overpriced ad revenue with relatively low profit to the
purchasers. It's very likely because of how popular and new Facebook is that
companies are trying to figure out whether they can use it effectively. But
the novelty factor won't last forever.

------
yonasb
Totally agree with this post. If they're going to build a long-term business,
they need another model. The fact that they are now allowing developers to
offer paid apps hints towards where they may be headed. Although, I don't see
myself ever paying for a fb app

------
gfodor
It seems pretty obvious to me how Facebook is going to end up printing money.
We already got a preview with Zynga. Display ads are a red herring and just
there to keep the company profitable while the master plan is rolling into
place. Eventually that ponzi scheme will bottom out but by that point it won't
matter anymore. (Though FB might be cheap for a quarter after it does!)

Zuckerberg's thesis is that eventually all software is going to be social by
default. Does social just mean "it has my friend graph?" No. It means it has
access to all of the things your friends are doing right now and ever. And it
also means it has access to all physical and virtual entities connected to
you. The music you've played, the photos you've viewed, the videos you've
watched, tracking all these things are possible today. In the future it will
mean every little thing you do is getting logged by a big server in the sky.
The places you go, the conversations you have, the things you look at, touch,
smell, and taste. Facebook's goal is to be that server that all that data
streams into. This is the reason that Google is shitting their pants trying to
"iPhone" them by creating stuff like Google Glass, since unless they leapfrog
them Facebook will be a large part of the "world's information" they cannot
organize. It has nothing to do with search not being "social" (another red
herring), it has to do with Google being left behind as Zuck spends 10 years
rewriting the rules of the game, much like how Microsoft is suffering due to
Steve Jobs doing the same. It's one thing for Facebook to make Google search
obsolete somehow, its quite another for Facebook to make _all software Google
writes, now and in the future_ obsolete, which they are poised to do.

As for Microsoft, their investment into Facebook might be looked back upon as
the smartest business transaction of the 21st century, if it gives them
special privileges in building systems that are enabled by the data Facebook
can give them. 2000-2010 might just end up being a "lost decade" for
Microsoft, and they may yet come out ahead in the future of software in a way
Google will be unable to. (And Amazon, as an aside, will be selling AWS
pickaxes to everyone the whole time.)

All apps of the future are going to either be connected to the pulse of this
feed of information or they are not. The ones that are not will slowly but
surely be replaced by those that are, since they will be not just inferior but
essentially braindead.

We are still in the playground stages of all of this since Zuckerberg is still
plugging together the pieces. The stuff being built now is just scratching the
surface since we don't know what we're doing and there are still gaps in the
availability of this data. There is also a generational gap. Most people on HN
cringe when they have to accept a Facebook dialog. Our younger siblings and
kids will have opt-ed in to the big server in the sky in full, no holds
barred, when they turn 13. By 18 it will be a distant memory that these
choices were even made, and that they were choices in the first place. And by
then they will be fully profiled by data mining algorithms, using software
that knows them as well as their parents do (if not better.) And, for most
software, opting out will mean the software basically doesn't work.

Once we are there, Facebook is essentially going to be able to implement a
tax, much like Microsoft did for many years. Its hard to imagine how they will
be usurped if they manage to get to this point, as they will be more
integrated into the fabric of our lives than any other business I can imagine.
More than banking, more than the utility companies, more than any retailers
wet dream. Even more than Google. They have a strong technical team and a
young, visionary founder who has absolute control of the company.

What could go wrong? Eventually we might see an anti-trust suit (think
2016-2017 time frame) but Google is doing its best to create the illusion of
competition on that front. And, of course, Facebook still has (and will always
have) a bus factor of 1, which can't be very reassuring to investors. If you
step back and look on a 5, 10, 15 year window, though, you'll realize they are
essentially unstoppable.

~~~
shock-value
Sorry, but I don't see things playing out in this way.

"It means it has access to all of the things your friends are doing right now
and ever. And it also means it has access to all physical and virtual entities
connected to you. The music you've played, the photos you've viewed, the
videos you've watched, tracking all these things are possible today."

In terms of friends' activities, Facebook only has access to what people
voluntarily post to it. And in my experience, only a small percentage of my
"Facebook friends" actually post regularly about their activities. Moreover,
that number seems to be going down, as though my friends have been using
Facebook less as the years go by. Whether that's just because these people are
getting older, or whether Facebook usage really is decreasing across all
users, I don't know.

Sure, Facebook can see and analyze which Facebook photos you've looked at, but
why is this particularly interesting? It's just a bunch of people dancing at
bars, or maybe a few family vacation shots, at least in my experience. For
videos, most videos people watch are on Youtube, not Facebook. So +1 for
Google in that case (although I also don't see how this fits into the master
plan you are describing). And for music, well, Facebook doesn't see what music
I listen to. I don't list it in my profile, nor do I use Spotify or another
Facebook-connected music program. I suspect most others are the same, as I
don't see much music related stuff in my news feed. I don't see this changing
in the future (and I even suspect that Spotify has come to view mandatory
Facebook authentication as a mistake).

"...they will be more integrated into the fabric of our lives than any other
business I can imagine. More than banking, more than the utility companies,
more than any retailers wet dream."

This is ridiculous. Even if a majority of businesses were to use Facebook to
authenticate and track users, they are under no obligation to send this data
back to Facebook (and, through Facebook, to other companies--possibly
competitors--also connected to Facebook). The best Facebook could hope to do
is impose a fee for using their authentication, and since they aren't doing
this now I doubt they would ever.

Businesses just won't accede to sharing their information back to Facebook to
the extent you think they will. They have no reason to, and plenty of reasons
not to. The only things they will share are items users have specifically
authorized them to post into their feeds[1], and based on my Facebook
experience, those things are relatively few and far between (almost all of my
feed is just status updates expressing an opinion or thought, or picture
uploads).

[1] with the possible exception of spammy "social" games, which seem to find
ways to post things even if players didn't really want them to -- but such
spammy updates will only further drive people away from Facebook in the long
run

~~~
gfodor
The point is that eventually all businesses are going to have to integrate
with Facebook if they want to compete. And, as part of that integration, data
will be flowing back into Facebook. The more data that flows back, the more
those businesses can extend the capabilities of their app in novel ways.

Right now things are incredibly primitive. Pictures at bars on the surface
seem useless, but we're living in an era where machine learning and machine
vision can extract tons of information out of those photos and that behavior.
All it takes are a few nuggets of facts about a person that cannot be
ascertained otherwise and Facebook has an unfair advantage as soon as people
learn how to apply those facts in a way that puts them at an advantage.

I would not look to the status quo as an indicator of how this is all going to
tie together. You and I are not going to be part of this, most likey, we are
too old. Facebook hasn't even created a phone yet. Once they have hardware out
in the field that is Facebook-enabled things are going to change rapidly since
those devices are going to make non-Facebook devices look braindead, even
today.

------
jv22222
One way facebook could monetize would be to build/buy a system like skype and
fully integrate a telecoms offering. It makes sense since the whole thing is
about keeping friends in touch.

~~~
joering2
Thats actually an awesome idea! the FB phone rumors were around for a while,
then died. I guess FB realized everyone already has IOS/Android device... but
they never seemed to pat into video a right way, just yet.

if there is none already, somebody could build a skype-type iPhone app to
talk/videochat only with your FB connections. If that gets traction, it may be
bought by FB, given they wont shut down the API connection.

Wish I would know Cocoa...

------
johnnyjustice
I don't understand why facebook doesn't charge to have a fan page. I mean this
is something that I think that you should absolutely charge for.

~~~
slig
Maybe because pages gives them fresh content and visibility for free?

------
funflow
Google took business from The advertising business. Facebook is drying a
different old business: communications

------
SeckinJohn
what about social adsense?

also, don't forget that 90% of the ads budget is spent on creating intent not
satisfying it.

------
ojbyrne
Socializing with friends can sometimes include mentions of purchasing intent.

------
rometest
i guess the display business model doesnot work well. we have already seen the
case with yahoo. but facebook is in better position with all that user data.

------
throwaway63-90
This is a reasonably good blog post, especially the part about Google. However
the title is inaccurate. It should be "Facebook's lack of a business model"

~~~
tmuir
It could also be titled "A summary of the GM/Facebook article's HN comments
from earlier today"

~~~
throwaway63-90
I like it. Much better than my suggestion.

