Thursday, 1 December 2011

Is Facebook Past Its Sell By Date Already?

There is plenty of hand rubbing going on as we build to the projected IPO of Facebook around halfway through next next year. The rumours are that it will even eclipse the IPO of Google and value the company at $100bn.

That's pretty big. That's about half the size of what Facebook sees as its biggest rival, Google, who IPO'd in 2004 amidst huge furore. At that time, the hype wasn't so daft as Google had a great revenue stream and a fantastic business model. Facebook is what I describe as a 'Potential potential' business as it has lots of potential forms of revenue - potentially.

No lesser sage than Sir Martin Sorrell who knows something about advertising, believes that as a commercial advertising medium, Facebook has poor value. The projected figures on advertising revenue for Facebook is only $3bn per annum which doesn't go anyway to justify the enormous price tag.

Some may cynically argue that Facebook is just a glorified database with tons of personal details on it. This is true and the question is how to monetize that without violating privacy or data protection laws which are coming increasingly to fore in the Facebook and Google debate.

What is definitely true is that Facebook is a sticky website. Those who use the site regularly login more regularly than Google users and spend on average 30 minutes each per day on the site which is a potential advertiser's dream. Imagine if those ads could be really customised to the user based on demographic, sex, hobbies, age, looks, size, interests, even buying habits rather than just contextualised. The scope would be enormous but the possibility of data misuse is too horrible to contemplate.

There are two important things to consider about Facebook:

1) Users, as with Twitter, don't really like or want adverts cluttering their viewing area - they see it as intrusive as it is 'their space'. More advertising may cause users to actually use the service less.

2) Businesses are concerned that employees spend too much time on the site in work hours and several companies I know have written policies, some actively block the site during the working day. I know of one company where a director sitting next to a lady asked for a cup of tea via Facebook and she didn't bat an eye and made him one only to realise afterwards that he had been monitoring her using the site through the day.

The issue may be that Facebook actually has already reached its zenith. It has 800m users, over half the population of Britain has an account and the story is similar in some of the other developed countries. New sign ups are not the area of potential growth. Monetizing the existing users is the objective.

As the Founders of Ecademy know, you have to provide a great deal of value to extract subscriptions from users, and then only a small percentage of the subscriber base will pay. No one on a business level will part with cash for no real return, whether that be real money or perceived increase in brand value. LinkedIn have found some rich seams in the B2B market, exploiting the recruitment industry and becoming a decent forum for business or candidate search.

But Facebook is hardly a B2B platform. The vast majority of users are individuals not representing their business. The businesses on there are looking to promote their brands with the users, maybe find new talent at a push but realistically they want consumer products bought.

With the potential data and privacy nightmares yet to really be tested in extremis, with the potential of more advertising on the site to cheese off users and with the potential pressure from businesses to limit its use during business hours, has Facebook already seen its best days?

Are we overstating the potential? Or have we yet to see the real way that money will be made for Facebook? Is it just a big, juicy database after all that can never quite be unlocked to create real value?

Is $100bn vastly over valuing Facebook or is this company really going to be creating sales with twice the profit potential of Tesco, more than Amazon, more than McDonalds?

We'll see.

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