Wall Street has a funny way of getting to the bottom of things. When billions of dollars are on the line and experienced investors (i.e. those burned in previous dot com bubbles) are asked to pony up real cash, it’s amazing how fast hard truths surface. Facebook went public this month. And the event was a clash of cultures.
The first culture: Silicon Valley, where wild-eyed optimists believe anything is possible. Just come up with a brilliant idea. Ship it. Scale it. Then monetize it. But how? Don’t worry about that. We’ve got eyeballs. Just give us some money and we’ll all get rich.
The second culture: Wall Street, where hard-nose realists don’t believe anything but numbers and facts. Have a money-making idea? Prove it. If you can, we’ll invest, and we’ll all get rich.
The problem with Facebook's IPO is that they couldn't prove it.
Facebook has nearly a billion users. Monetization? That should be easy, right? How can you not make money from a billion users?
Taking a really good look at Facebook’s ability to monetize users is like pulling a thread on Mark Zuckerberg’s hoodie. Eventually, you have nothing but an exposed CEO. Let’s consider some numbers. Facebook says they have 900 million users and growing. That number is almost certainly the number of account sign-ups, not humans. It includes duplicate and second accounts, abandoned accounts, spammer accounts and other accounts that don't have a real user attached. Let’s say the number of actual humans who have signed up for Facebook is less than 700 million.
More than half of Facebook’s users access the service via mobile devices, which currently don't have ads or any other significant way to monetize. So probably 300 million are using desktop PCs.
Of those desktop PC users, many are using aggregators instead of the actual site. So the number exposed to Facebook ads might be, say, 250 million.
I'm making these numbers up. But Facebook's own IPO paperwork said that the number of people who actually go to the facebook.com site at least once per month is only 161 million.
How many people visit facebook.com at least once per week? I have no idea. It could be less than 100 million.
These are international numbers. So while deep-pocked companies want to sell expensive stuff to big-buying Americans and Europeans, in fact many of the people on Facebook are in countries where people are less, shall we say, consumerist. The actual number of Facebook users who both see ads and are desirable targets for that advertising is low -- probably a few dozen million, max.
And these people aren't paying attention. Not really. I’ve asked a lot of friends whether they’ve ever bought anything based on a Facebook ad, and they all said no. Facebook is a loud, visually noisy site with a lot going on. And unlike sites like Pinterest, people don't go there to shop, or even window shop.
Facebook ads are really easy to ignore. Just ask GM.
Facebook’s IPO got off to a bad start when just before the big day, GM pulled its ads from Facebook.
GM decided that Facebook advertising wasn’t effective, and wanted to make it so by running full-page ads on the network.
Facebook said no. And therein lies the trouble.
GM knows that Facebook’s current ads are ignored by users, and therefore ineffective. Facebook apparently believes that full-page ads -- or any extremely intrusive advertising -- would turn off users and trigger an exodus. And I think they’re right. It’s a catch-22. If Facebook keeps offering only small, ignored, ineffective ads, it can keep growing users. If it tries to turn up the volume on those ads, it would likely face serious declines in users, especially that small number of active users.
Facebook is coping with another catch-22. In comparison with Google+, which is Facebook’s most serious long-term rival, Facebook has an advantage.
Most social network users prefer Facebook over Google+ because people they already know are more likely to be members: mom, granddad, old high school buddies, former co-workers.
Google+ has a lot of interesting strangers, but existing friends are harder to come by. And that’s a problem for Facebook. See, existing relationships are harder to use for profiling individuals.
Looking at my social graph on Facebook tells the company almost nothing about me. In terms of my interests -- in terms of what I’ll buy -- I have very little in common with my old high school friends, or even my blood relatives. We don’t know each other because of our common interests.
And you can tell. Look at the ads Facebook serves up.