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Could this explain the Instagram deal? (privco.com)
45 points by somid3 1783 days ago | hide | past | web | 38 comments | favorite

I think this issue with mobile users (harder to monetize) ties into the big problem for Facebook over the next 5-10 years.

To turn into a profitable company, valued at (say) a hundred billion dollars, they need to start making more money.

Now, there are two main ways they can do this.

1.) Increase number of users.

2.) Increase average revenue per user

They can attempt to increase their number of users by focussing on countries with low penetration. The problem with this, is that these users are harder to make money off (on average poorer, advertisers less interested in their eyeballs). In fact the article claims that these users are loss-making for Facebook at this time. There is (I guess) little scope for absolute user growth in the US, UK and European markets, in fact, its been suggested that user numbers are tailing off here.

Revenue per user: Given the constraints on users mentioned in the last paragraph it becomes really hard to increase your revenue per user. Especially if they're shifting to mobile which is harder to monetize. Any new users are probably going to harm this metric even more (as they'll tend to be poorer than existing users)

So, if Facebook want to say double their revenues how are they going to go about it?

All good points. The next step — pay a billion dollars for a company with lots of users and no business model — is still not leaping out at me though.

It seems to me that, say, three years ago building an absolutely kickass mobile client, or just iPhone client, should have been a major priority (versus, say, randomly thrashing the timeline interface over and over).

> versus, say, randomly thrashing the timeline interface over and over

Hey don't knock timeline! It's incredibly valuable for discovering that the two most important times in most people's lives are the year they were born and the year they joined Facebook.

Paying for lots of engaged, loyal, and happy users is a very different thing from paying for eyeballs.

I think paying for eyeballs is a stupid strategy as well that undervalues the network of users dramatically.

Advertising is largely the art of throwing shit at a wall and seeing what sticks. Yeah, with a lot of tools and the information Facebook has about their users, we can perfect the art of how to make shit stick.

This is the classic failure of big media: treating your users like an audience (eyeballs). Facebook understands its users interactions, designs around them and is doing brilliantly at keeping them engaged, then they bring in people from the advertising world and treat them like an audience.

They should be monetizing the edges, not the nodes.

I think the question of if the users are loyal is still up in the air. Facebook hasn't been around long enough on this massive scale to prove if the users are loyal. I personally don't think it's user base is loyal. The younger, more tech-savy generation on FB will jump ship as soon as something better comes along like some were doing already to Instagram or Twitter. The older generation might not necessarily be loyal to FB either, they are just too scared to move, or don't have the ability.

Users are anything but loyal. Mobile users have a bit better loyalty than web users, but lets face it - it's a free service with very little strings attached, and all of the lock-in that Facebook has tried to create has just frustrated users.

>> Revenue per user: Given the constraints on users mentioned in the last paragraph it becomes really hard to increase your revenue per user.

This is true, but nobody said that growing a large successful company was easy. FTA:

>> Daily Active Users (DAUs) have grown faster than the number of deliverable ads due to the limited mobile format

So step #1 for growing mobile revenue is to insert ads into mobile. I'm guessing they can manage this.

But the larger question of revenue for FB is interesting. And I think the conventional wisdom about their impending crash will be proven out if FB is managed poorly post-IPO. Specifically, if they don't innovate and deliver successful new products, they will fail. This is true of all technology companies. Facebook is no different because it's a social network. In fact, Facebook is much more like the past than e.g. Microsoft was at its IPO.

The shift to mobile has potential to be a major issue for any web service that currently relies on display advertising in the browser. Sooner or later these companies are going to need to find a way to monetize mobile app users.

Third party mobile apps will also become an issue as consumers shift to mobile. For example Facebook, Twitter and Reddit all have very popular third party applications that bring in zero revenue for them. This is fine when the name of the game is all about increasing the number of users, but eventually they are going to need to increase the revenue per user.

No, but it explains how the bubble is going to deflate. Within two years, Facebook will be MySpace. We just haven't discovered what the replacement will be yet.

I assume the downvotes are for the bubble comment, but I agree with you on the other point. Social seems like an inherently fickle business to be in. The ficklest. So much of it is basically style and fashion and trendiness - things come into fashion and things go out of fashion. MySpace did, and imho Facebook will to. I mean really, what's to keep people there if something else that all your friends were using came along? I think a lot of people like joining something new, and social web apps scratch that itch. There's almost zero cost associated with leaving - maybe figuring out what to do with that chunk of your day that you have back now.

Anyway, not surprised at all to see this report.

People don't leave the social network scene. They simply move to a new social network. As a social network moves to monetize, it becomes increasingly more intrusive and less functional. This reduces its utility to a point where another social network, which may not be to the monetizing 'step,' will have higher utility and thus will see an explosion of users, investment, etc.

"As a social network moves to monetize, it becomes increasingly more intrusive and less functional."

Well put. We agree. I don't have the link handy, but there was a post floating around on here a couple weeks ago about having customers, not users. Point being, social et all might be the sexy thing to be into, but from a business perspective it's basically a distraction. The real money is and probably always will be in the enterprise, government, health care - sectors where costs of acquiring, adapting, and leaving technology are all significant and so are the profits to be made.

Anyway, that post made an impact on me.

Then just after that our 3rd boy was born in Morristown Hospital in New Jersey. Supposedly voted "the best hospital in New Jersey". I was pretty amused to see that the state of the medical art that was networked all over the hospital was still running largely on Windows 98. I have to guess the contract to upgrade that software when it does come along will be worth what? Half a billion dollars? For one hospital? Anyway, I digress...

What is Instagram was to be the replacement? Can Facebook, with a lot of cash from the IPO, avert the same fate as MySpace buy buying its supposed successors?

Potentially, but the problem becomes that none of these companies will ever make money - you can't stay on the VC treadmill forever, and over time it's going to be harder and harder to monetize 'SELECT COUNT(*) FROM USERS'

The other problem is that you can't pick the winner in every horse race. Facebook obviously won this round, but it just as easily could have been Orkut or any other social network that was out there. The traction model is almost certainly chaotic.

If it was that, it's actaully a smart move. FB didn't pay in cash so they tied the value of the two companies together. The deal has the potential to remedy at least some of FBs mobile user issues. And it created a lot of media coverage, always good before an IPO.

But one thing I never really got is how you can actually make money in the social space.... But that has nothing to do with the Instagramm / FB deal.

There are a ton of money making opportunities in the social space if you can transparently insert your product or service in the path between two people partaking in a social activity together on which they are spending money.

The money is there. It just isn't trivial to extract just like drilling for oil in deepwater.

It seems like this is such an obvious way for FB to make money. E.g. if I am planning a party or other event, FB should somehow be making it easier (other than managing RSVPs) and taking a commission. The deal that makes sense is Facebook and Papa John's, FB and Ticketmaster, etc etc.

Yup. The same goes for places like meetup.com.

I help with the SFJS meetup and we spend a bunch of money on food and beer (paid for by our lovely sponsors of course), but this is a completely missed opportunity by Meetup.com.

A startup like ZeroCater should be pitching Meetup.com for the opportunity to provide 1-click catering to meetups that want that handled for them.

Between knowing the number of people, ratio of men to women in an audience (us men typically consume more) and the time the event begins, meetup.com has all the info they need to get the food to the event in a semi-automated fashion. All that should be left to do is choose what kind of food. Facebook could do the same for its events.

If never seen FB or similar service as intermediaries between business partners. Again learned something around HN!

On the other hand, I found it pretty obvious that facebook is in a powerfull position. That's an outside perspective since I'm not on it.

Twitter is another business that has boggled my mind. There are interesting ways for them to monetize their users directly as well (without necessarily changing their user experience and focus, mind you), but they've been totally blind to the opportunities.

Revenue = (users) * (revenue per user)

A lot of services get the first operand right and fail to do anything with the second operand and effectively keep multiplying by zero.

TBH, I wouldn't be surprised if, in the current economy, there are some investors suggested to the founders of companies with a large user based that they shouldn't signal a monetization strategy to the market via soundbites like "Right now we're focused on growing, but we've got some ideas on how to monetize our userbase". The general idea being that it will be the acquirer's problem to figure out the monetization strategy. The moment you choose a monetization strategy you effectively allow people to value the company much more realistically instead of optimistically.

It's the Greater Fools theory in action, and actually being actively exploited to generate returns on early stage investments.

They paid a lot in cash ($300M) and with the stock being public soon, the two companies won't be valued together for long.

> Facebook, Inc. just filed a new amendment to its IPO prospectus (S-1) tonight which offers new transparency into its weak Q1 results

Amazing what an IPO can do for transparency. This is the sort of thing you'd never find out about a limited risk small company.

Amazon shows that even a public company can be highly intransparent. Nobody even knows how many Kindles they sold...

But it's probably easier to find out than if Amazon was not publicly traded. I am no expert on this, but I am sure that major stockholders have means to find out everything they want about Amazon's Kindles sales.

Ha! Tell that to Zynga and Groupon - not exactly paragons of transparency and accountability during their IPOs.

I would be surprised if Facebook is not working on their own mobile OS. All those amazing designers they acquihired can't be working on plain-looking webview apps.

The idea of a (widely adopted) Facebook OS really scares me...

As a side note: the Facebook iPad and iPhone apps are really badly designed. It's very hard to use them - comment panes are small, their side menu systems not that good, features are missing from groups (like docs) and if you post a Facebook URL in a group when you click on it it takes you into Safari to view the link... You have to log in to Facebook while logged into Facebook.

My point being - I'm not sure they get mobile apps. Which seems odd to me!

This is why the pervasive ideal company line in Silicon Valley is wrong. The "Lots of Users + ? = $$$". Can you imagine the same being applied to anything else?

"Yes, today we'll be pitching a restaurant. We give away food for free! In a couple months/years when we have millions of people coming in for free food, we'll figure out some way to make money off of them. Probably advertising. Investment please!"

Just charge for the app already. Facebook has become so deeply integrated into most peoples lives they aren't going to care about sending $0.99 their way. Hell charge that annually and no one would care

If you watch the roadshow video, Zuck even makes a point that they are "real soon now" making these advertising platform mobile friendly. Now it seems obvious why they had to emphasise this.

I am 100% sure they will produce a phone and it will be a huge hit and it will be so integrated with facebook that it will make this all moot.

I have read before that FB does not make any meaningful revenue from its mobile users. But, Instagram does not generate any revenue either.

I agree - It's not that people aren't using Facebook mobile, it's that they can't monetize Facebook mobile. I'm not sure how buying Instagram fixes that.

I would say that Instagram buys Facebook time to solve the mobile revenue problem by extending their virtual lock-in on user's photos.

I think they can monetize Instagram easier than they can monetize Facebook Mobile.

How? If Instagram charges for anything or adds ads to their interface people will shift to different photo sharing service, plain and simple.

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