Can someone explain to me Facebook's value? And please understand, I don't ask that to be antagonistic - from what I understand and have read, I've yet to take a side on whether facebook is the new king in SV or if its a sign of another bubble. If someone can calmly explain what value they provide, their prospects for future growth, and future competitive advantage, I'd seriously be grateful.
Here is what I understand:
Facebook earned $650M in revenue in 2009. Most of that came from brand and performance-based advertising. $50M from Microsoft ads alone. $10M on virtual goods. [1]
Their biggest revenue share comes from advertising. Now, again, from what I understand, their ad targeting isn't as focused as, say, Google. I'm going to make an assumption, but it makes sense to me that Google users demonstrate more purchasing intent, which is why they can charge high CPC. I've never found a Facebook ad relevant to my purpose for being on the site, but regardless, I can understand the value for any company to spend money on brand awareness, getting views on a high traffic site with quantifiable demographics.
Performance advertising is interesting in facebook's case. When I type in 'Digital Camera' in google, I'm voluntarily giving out a query in exchange for information. Ads for digital cameras, photography books, etc would in fact be quite welcome for a decent percentage of people. But the search-engine user controls that exchange of service. Its akin to using a hammer. Google is the tool. The functionality is in your hands.
Facebook's model is more of an extraction process. Someone has opened a coffee shop with free coffee - but its only free if you hang around the place. Over time, they are trying to develop a model of you based on information that is overheard and asked of you. This is where I'm unsure if its sustainable. I'd also say a great majority of facebook users don't realize how the site has changed since its inception. A large majority of my non-technical friends have no idea how information is being analyzed. I'm not sure how robust facebook's brand is if some terrible scandal/event breaks out and people become really sensitive to what they share with the site. This "social contract" between users, facebook, and advertisers is something I don't think the majority of users understand. They just see it as a site with their friends. And its to facebook's benefit for users not to fully understand.
The last point I want to make is about Social Media. I understand how its shifted interaction and all that. But my concern is with its ties to the capitalistic sense of value. Technological progress does not always = making a ton of money. There are a lot of major technologies that changed the world . There were 2000 car companies at one point, and now only 3 american companies remain. Cars changed everything, city planning, etc, but investors, in aggregate, got fucked. The airline business is a similar story. There was also the tech bubble.
EDIT: I also want to add that since it is a private company, it is in almost everyone's favor to drive up its valuation. Founders, investors, and employees with stock, etc all benefit. When a company is public, there is an incentive to introduce negative information (hence the utility of short sellers).
Now, I'd love to hear an explanation on why its such an 800lb gorilla in the valley.
I can think of a few things that would make Facebook worth a lot more money. The biggest is the "Instant Personalization" idea.
You say, rightly so, that Google's ads are more targeted than Facebook's, because users show purchasing intent. But Facebook knows a lot more about users overall than Google knows (Google only knows a search term). Right now, this isn't such a big deal, since Facebook isn't really exploiting it. But pretty soon, Instant Personalization will give any site you visit a lot of useful information about you that can help them sell you stuff. This is something companies will pay a lot for.
Let's take a simple example. Let's say I have a friend called "Tom" who has a birthday next week. I visit Amazon's site (just looking for something for myself), but right there on Amazon's front page, I see a huge ad, with a picture of Tom, saying "Tom has a birthday next week. Why not buy him this book from his favorite author?" Obviously this is just a quick first example, but I'm guessing ads like this will drive up sales for Amazon big time. How much would Amazon pay Facebook for making ads like the above possible?
I think you underestimate the "social" value that FB brings to the table.
For the last 10 years, every time you were looking for some information regarding places you should visit, things you should buy, you were going to Google, typed your query and filter through its results to find something you might like. For serious purchases, you'd go to review sites, forums and other user generated content sites.
Today, most of your friends are on FB. Let's say you're planning a trip to Italy and don't really know the places you should go, and hotels you should stay at. If you ask that question on FB (which thus replace Google), some of your friends might give you recommendations based on their past experiences. If your best friend stayed in a nice hotel in Firenze, and was satisfied by the experience, his recommendation weights much more importance than a random guy on a random forum.
A significant part of ad dollars that would traditionally go to Google, would fly to FB. Hunch and Quora play in the same league. Google is dethroned from the number 1 destination to "ask for information".
Facebook questions + credits will certainly bring in a ton of revenues for FB but I doubt they'll make FB worth $25 billion one day…
Here is what I understand:
Facebook earned $650M in revenue in 2009. Most of that came from brand and performance-based advertising. $50M from Microsoft ads alone. $10M on virtual goods. [1]
Their biggest revenue share comes from advertising. Now, again, from what I understand, their ad targeting isn't as focused as, say, Google. I'm going to make an assumption, but it makes sense to me that Google users demonstrate more purchasing intent, which is why they can charge high CPC. I've never found a Facebook ad relevant to my purpose for being on the site, but regardless, I can understand the value for any company to spend money on brand awareness, getting views on a high traffic site with quantifiable demographics.
Performance advertising is interesting in facebook's case. When I type in 'Digital Camera' in google, I'm voluntarily giving out a query in exchange for information. Ads for digital cameras, photography books, etc would in fact be quite welcome for a decent percentage of people. But the search-engine user controls that exchange of service. Its akin to using a hammer. Google is the tool. The functionality is in your hands.
Facebook's model is more of an extraction process. Someone has opened a coffee shop with free coffee - but its only free if you hang around the place. Over time, they are trying to develop a model of you based on information that is overheard and asked of you. This is where I'm unsure if its sustainable. I'd also say a great majority of facebook users don't realize how the site has changed since its inception. A large majority of my non-technical friends have no idea how information is being analyzed. I'm not sure how robust facebook's brand is if some terrible scandal/event breaks out and people become really sensitive to what they share with the site. This "social contract" between users, facebook, and advertisers is something I don't think the majority of users understand. They just see it as a site with their friends. And its to facebook's benefit for users not to fully understand.
The last point I want to make is about Social Media. I understand how its shifted interaction and all that. But my concern is with its ties to the capitalistic sense of value. Technological progress does not always = making a ton of money. There are a lot of major technologies that changed the world . There were 2000 car companies at one point, and now only 3 american companies remain. Cars changed everything, city planning, etc, but investors, in aggregate, got fucked. The airline business is a similar story. There was also the tech bubble.
EDIT: I also want to add that since it is a private company, it is in almost everyone's favor to drive up its valuation. Founders, investors, and employees with stock, etc all benefit. When a company is public, there is an incentive to introduce negative information (hence the utility of short sellers).
Now, I'd love to hear an explanation on why its such an 800lb gorilla in the valley.
[1] http://www.businessinsider.com/facebook-wont-be-a-multi-bill...