Facebook as Online Ad Nirvana?
So Fortune writer David Kirkpatrick, in his weigh-in on Facebook’s potential shakedown of Bill Gates’s wallet–as reported, Microsoft is apparently thinking of investing in the hot social-networking site at a ridiculous $10 billion valuation–called my analysis of the company and its possible shortcomings “glib.”
OK, so I looked up the word in the dictionary, and it turns out it means: “readily fluent, often thoughtlessly, superficially, or insincerely.”
Thanks, Dave! Given my long history as someone who has been pretty bullish on the Web, it’s unusual for me to be the irksome tsk-tsk voice of reason about the bubble being blown up here, so I am glad to be thought of as superficial!
Writes Kirkpatrick:
How can you put a price tag on the future? That’s what any investor in Facebook would be doing.
“There’s no way the company is worth that kind of money today, despite the 43 million active users it claims. (The Journal reports that private Facebook this year expects to make $30 million profit on $150 million in revenues.) But that is not the same thing as saying that somebody would be insane to buy a small chunk at such a valuation. (For a glib and contrasting view from Kara Swisher, see AllThingsD.)”
After that, he goes on to call the service the Internet equivalent of the second coming of Google, except with its people-centric, six-degrees-of-separation vision called a “social graph” by Facebook founder Mark Zuckerberg.
(Calling AOL! Some kid hijacked your old vision and is about to make bank with it!)
More importantly with all this relevant interconnectedness, posits Kirkpatrick, Facebook is apparently the promised land of advertising of the future, which is all about giving the consumers ads they actually want!
Ads as a service! Ads as a benefit! Ads not as an intrusion!
I don’t mean to be glib, but this kind of ad cheerleading has been trotted out by AOL, by Yahoo, by every dot-com start-up I ever met and its promise has always been more, shall we say, bloated than its delivery.
And even now, with all the advances in online behavior-targeting–which I like to call “consumer-stalking”–it’s mostly still just a lot of marketing blabbery that is good for flimflamming the media buyers at Procter & Gamble and little else.
Other new buzzy phrases in this genre include: claiming consumers want to be “brand ambassadors” for a wide range of products (I suspect that list is quite short); declaring all advertising as needing to be “viral,” which should be enough to make buyers ill; and even claiming that ads are content (so far, only Apple’s Mac/PC commercials seem to rate in this department).
While Facebook is certainly a very good place to test all these theories, perhaps even the best place at the moment, a smarter investor might want to use such money to play all over the Web, testing out all sorts of new ad formats.
And spending hundreds of millions to get a small stake in this game in just one company–which is still No. 2 in the market, lest we forget about rival MySpace–seems like a recipe for disappointment.
That is especially true if what GigaOm’s Om Malik writes about government pressures to make the service safer for young people comes to pass–which could land Facebook into a miasma of controversy.
To Kirkpatrick’s credit, he is quite right when he writes about the drive of Zuckerberg, pictured below, who appears to be very confident, thoughtful and hard-charging, although I am not so sure his comparison of Zuckerberg to Microsoft’s Bill Gates is a good one to make.
Zuckerberg shouldn’t be a wannabe of him, given that company’s history of bullying domination, any more than he should try to pattern himself after the arrogant brainiac style of Google.
If I were him, if he has to be like anyone, I would act more like Steve Jobs, whose iconoclastic style has left a lot of possible market power on the table in the past, but whose single-minded devotion to product excellence has made Apple a brand for the ages.
Steve Jobs even took money from Microsoft, but it was only when he had no other choice. Zuckerberg does have a choice, a lot of them, which is often harder than having none.
So, by all means, dream big. By all means, run as fast as you can to grow what we can all agree is a great platform. By all means, take the money if it means it will help you get there.
But I don’t mean to be insincere when I say too: For all your promise, think hard about what you can actually deliver.
Comments
I think if and when (nov. 5th?) google gets its social strategy together overtime facebook’s role as the ‘next big thing’ is going to diminish. In my mind google already has the most popular social service offerings in the world gmail , youTube ,gTalk , googleDocs , and orkut.
But like many of there other products they have done a relatively poor job tying these things together into a seamless social experience.
My thinking is that after they tie it all up and execute on the idea of a highly distributed social experience , then I’m not so sure anymore if facebook has a the stranglehold on the nerd mindshare like it does now.
Btw I really enjoyed your ‘glib’ piece on facebook it was a breath of fresh air. Social Technology myopia has become ever rampant in the blog scene as of late.
Posted by Nima Negahban at September 28th, 2007 at 4:21 amSome aspire for greatness, and others have greatness thrust on them. In the case of MarkZ it seems like the latter. Kara, you are absolutely right in that he should aspire for a Steve Jobs like legacy, not Bill Gates. The parallels are so many - they both have an aptitude for visual media, the platform is well integrated but they control the apps that come on board, the core community (of American college students) is also well defined.
I dont think most people realize how incredible a global brand is the “US College”. World over there is phenomenal admiration for the American college life - the free thinking approach to innovation in that one important facet of life. As school kids graduate from Asia/Europe most of them aspire for an American college education. With severe competition for admissions increasing, their appeal is getting only stronger. It would be foolish for facebook to turn its back on the core demographic and go broader with its technology - catering to business users, families, etc.
They should use their money from Microsoft to build a next-generation commerce platform that expands the core market from within, e.g. spreading the scope of American-brand education to global audiences, enabling service providers for this market to deliver targeted services to the core audience, etc. And of course, a highly specific rich-media interactive Ad platform integrated with “events” (read parties) - now that is an Ad platform in which any college kid would love to participate!
Posted by Srini Srinivasan at September 28th, 2007 at 5:13 amI agree with your unglib analysis on this topic. The only ads on the web today that I’d call “something I actually want” are ones for relevant services shown to me just as I’m about to buy something (search engines and shopping comparison engines come to mind). Any other type of ad is just a variation of the same old billboard shoved in my face trying to distract me from what I was really trying to accomplish. OK, maybe I’ll voluntarily watch the occasional clever TV ad on YouTube. But that’s it.
Clearly people are not about to purchase something when they’re in the middle of catching up on their friend’s activities on Facebook. So I agree with Kirkpatrick when he says that Facebook has to invent a new type of useful advertising to justify its lofty valuation. And if Microsoft is willing to spend billions on buying ad networks that incrementally improve the performance of today’s less than useful ads, maybe it’s worth it for them to spend a few hundred million to be on the vanguard of trying out new “social ad” ideas? Or they could just wait and see what Facebook and hundreds of social networking startups try next.
Posted by Toni Schneider at September 29th, 2007 at 9:28 amKara,
The community is focused on Microsoft’s past ills and they forget the sheer amount of philanthropy generated by the Bill & Melinda Gates Foundation. Microsoft’s investment in Facebook gives Bill Gates an opportunity to act as an advisor to a young visionary, helping him avoid the mistakes that he made in the past with Microsoft. Together, Facebook and Microsoft can build an online business and entertainment platform that will revolutionize how the online landscape is monetized.
What bothers me is that that the technology community keeps focusing on Facebook as just another “social networking website” that provides cute gimmicks to bubbly students. In my humble opinion, because many people in this sector joined three years after the site was started, they miss how Facebook truly grew to where it is today. I first joined Facebook in September 2004 when it became available to my University. I was told about the site — which at the time was located at thefacebook.com, by my friend Sara who had used the site at WashU. Facebook followed an organic growth model, building slowly, and became available to most universities. This created two effects: College students had an easy way to connect with each other and maintain relationships post graduation, and an opportunity to reconnect with people from their past.
Facebook was created to focus first on people we knew, not people we thought looked cute a-la Myspace. This is why the growth that Facebook sees now is sustainable until they mature, and why Myspace is increasingly losing its market share. A prime example of someone using Facebook against its intended use is Robert Scoble, who is proud that he found Facebook’s limitation in connections. This attitude, which I find to be prominent in the technology sector, is that the internet is a popularity contest and they dilute the value of their friends / followers / connections / etc. Most sites on the Web maintain this attitude because it is their belief that the more eyeballs they have, the more money they can make through AdSense revenue. Eventually, we are going to reach a point where Google becomes too saturated with advertising partners that it will no longer be a strong source of revenue generation.
Google’s approach to advertise the global internet landscape has caused them to lose focus on how to build a viable company. Instead of focusing on being the top player in the search business, they are trying to take Microsoft and Facebook head on by offering competing productivity software and social networks respectively. Their growth model is acquisitive, taking advantage of their overvaluation in the global capital market to overpay for difficult to monetize and / or legally troubled acquisitions. In comparison, Microsoft is valued at 1/20th of the price, pays a 1.50% dividend, has no debt, and a boatload of cash. They have tangible products in their software and consumer electronics divisions and have been planning their investments carefully. While I agree that Facebook’s valuation may be high, Microsoft is spending $500MM to buy a 5% equity stake in a web platform with 40MM users.
“A typical PE deal involves buying a company for 4-5x cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization) and injecting 20-30% of its own equity. The remaining equity would be borrowed from the banks and the debt would become part of the acquired company. This allowed investors to make small improvements to the acquired companies to improve performance and recuperate their investment.
However, over the past few years low interest rates made borrowing funds cheaper for the PE investors, and they began to overpay for companies. Prior to the subprime crisis, investors were paying upwards of 15x EBITDA for companies and did not have a viable plan to create value out of their investments. These overpayments increased the debt needed to complete the transaction, and while rates were low, interest payments were too high for companies to sustain themselves.”
(http://www.techcrunch.com/2007/09/28/private-equity-eats-avaya-for-82-billion-and-3com-for-22b-burp/trackback/)
In the shadow of the sub prime real estate crisis, I understand the fear about overvaluation and how it further stretches this bubble. The difference between this deal and to a certain extent the outright purchase of 3COM, is the amount of debt that is assumed by the investors. From what I understand about Microsoft’s investment, they are injecting their own cash which bypasses the leverage risk associated with most private equity investments.
I don’t know how Microsoft and Facebook will create their predictive advertising model, but IMHO it will involve human oversight, and not an easily manipulated algorithm.
David
Posted by David Litsky at September 29th, 2007 at 2:57 pm