Nut_and_bolt

Facebook's monetisation strategy

Commercial websites are often littered with advertising. Facebook is not. Facebook  has long kept it's site clean and with minimal advertising. Why?

In a television interview this month a Facebook board member said  it could have a billion dollars of revenue per year from ads if it wanted to increase the flow from Facebook's advertising tap. So why does Facebook not do this?

What would you say? Is Facebook's interface design an aesthetic design decision set up to help its users? Alternatively, does the interface design reflect deeper business design or business strategy decision?

Lightbulb ponders this question in three steps.

facebook_v_myspace_usersStep 1: Lightbulb's Theory

Take the purely visual perspective. Facebook's interface design keeps things simple, and has for a long time. The first time I went to Facebook was on reading Marc Andreessen praise for its design. I too was impressed. It used then and continues to use a lot of white space and keeps to an eye-relaxing aqua blue. Some users are nuts about using it, I know, I've tracked use of it by former employees!

  • Compare the interface design of Facebook's competition, for example at Myspace and Yahoo. Myspace permits extensive customisation. It lets members make their own font, colour and other design decisions, typically resulting in a confusing visual mish mash.
  • RESULT: In mid-2006 Myspace (which began in mid-2003) had over 103,103,710 members. It's been losing against Facebook (which went online in February 2004), now with 175 million users.

Now take a philosophical, cultural or political perspective. By not plastering Facebook with brands, its interface designers, board and executives seem to appreciate the popular appeal (especially among youth) of the decade-old anti-brand movement. The Facebook Beacon controversy and privacy concerns may make Facebook cautious in its experimentation with advertising.

  • The anti-brand movement is illustrated by books such as No Logo: Taking Aim at the Brand Bullies, published in 1999 by journalist Naomi Klein. From about the late 1990s it was apparent that consumers saw appeal in what was sometimes also called "cause marketing". Thriving with these styles of message were The Body Shop, Beneton, Apple Computer, Virgin, and locally Mr Dick Smith's start-up ventures. I wrote on "cause marketing" in a major conference paper back in 2002, Developing and Protecting Brands and Trade Marks in Globalising Markets.

Now consider the tap-turning move Facebook might take... when it chooses. As traditional media companies continue to transition to online, there seems to be little advantage going to them. Look at their collapsing valuations.

After the current advertising downturn ends, will online-only Facebook emerge to take more of their rivers of advertising gold?

On the current track record it is heading towards 500 million users. Users are going nuts on Facebook. Why?

Go to Facebook and its artifice is to give you the sense that you're in "your" own zone (your own media?), a place to natter to your "friends". Facebook is working off the growing habit we've coined as "messaging handshake" - see Predictions 2009: Information and Communication Technology - Part 3.

In contrast, go to Myspace and it seems there are images, photos or text messages aplenty screaming at you to "buy stuff here". In place of engagement through messages, it's more like non-interactive one-way traditional media.

Go to traditional news media sites and you can find yourself bombarded by banner ads, pop ups, loud videos. That media is bound to a business model addicted to revenue from ads. Might that addiction be causing, yes causing, ongoing falls in ratings and eyeballs, and hence advertising revenue declines?

Might this be more of an issue during a downturn when historically the mood of the masses swings back to basics and the anti-capitalist line gains prominence? The more we are ad plastered the more we revolt?

Is it then going too far to suggest that the more commercial sites plaster, including with bad design, the more people will huddle at "safe" zones like Facebook?

Whatever is actually heard in the online cacophony, one drum beat has a clear message over the last 12 months. It says - Facebook is enjoying explosive growth in its user base. This month Facebook reached the top of the social media pile in France.

Returning to our theme, despite its escalating growth in users, Facebook has kept to its clean look and resisted urges to turn eyeballs into dollars by increasing the flow from its advertising tap.

Does this Facebook advertising decision go beyond aesthetics? Does it extend to business logic? (Is there a difference?) The answer now clearly seems the decision is driven by business strategy, not just design aesthetics. There's evidence in this  BusinessWeek article.

There's also an advertising revenue rationale. Don Dodge explains the economics of online advertising. He notes that as at May 2008, 2.5 billion page views per month translates to US$1M in ad revenues. He compares the ad revenue position of social media sites like Facebook to that of Google. "Google revolutionized the search business by banning display ads sold on a CPM basis, and instead offering text based ads where you only pay when someone clicks on the ad, what we now refer to as CPC." He then makes the search engine versus social media site ad revenue comparison:

  CPM versus CPC - Big audiences are great but how you monetise them is the key to financial success. Google and the search companies are able to sell Cost Per Click (CPC) ads and command very high rates. Content sites and social networks don't have a search term to key off so they charge Cost Per Thousand (Mil) or CPM rates. In some cases it can take 1,000 page views to generate the same revenue as one click on an ad.

This is all in line with a statement by Facebook CEO, Mark Zuckerman quoted in Wikipedia from October 2008: "I don't think social networks can be monetised in the same way that search did. ... In three years from now we have to figure out what the optimum model is. But that is not our primary focus today."

Step 2: Facebook Boardmember Speaks

We need go no further than the horse's mouth, a board member of Facebook.

After years of chatter about what Facebook is worth, whether it has a business model, and how much it earns from ads, this month Marc Andressen during his television interview with Charlie Rose shed light on thinking from the Facebook boardroom. (The full video transcript is at TechCrunch.)

Andressen is a Facebook board member and significant shareholder, maybe owning something less than 1.6% of its shares (don't know if its common stock or preferred stock). Read the following exchange between him and his TV interviewer, Charlie Rose.

 

Marc Andreessen: ... But look it’s [Facebook] got 175 million active users. It’s the sixth most populated country in the world right now if you compare it to countries. It’s on its way to 500 million users. I mean, it’s going to be a multibillion dollar success

Charlie Rose: So what’s going to be the trick to monetise it? ...

Marc Andreessen: There’s a lot of confusion out there. Facebook is deliberately not taking a lot of the kind of normal brand advertising that a lot of Web sites will take. So you go to — a company like Yahoo which is another fantastic business and they’ve got these you know banner ads and brand ads all over the place, Facebook has made a strategic decision to not take a lot of that business in favor of building its own sort of more organic business model and it’s still in the process of doing that and if they crack the code on that which I think that we will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot for normal advertising today, it’d be doing over a billion dollars in revenue. So it’s much more a matter of long term strategy.

Step 3: Lightbulb's Translation

It's worth repeating Andreessen's last paragraph of words, with Lightbulb's emphasis and black text translations.

marc_andreessen_dissected"There’s a lot of confusion out there." [TRANSLATION: The chatter is off the mark.] Facebook is deliberately not taking a lot of the kind of normal brand advertising that a lot of Web sites will take. So you go to — a company like Yahoo which is another fantastic business [TRANSLATION: Yahoo is a turkey, but they are Silicon Valley neighbours so I have to be nice] and they’ve got these you know banner ads and brand ads all over the place [TRANSLATION: Yeah, really disgusting stuff from a design perspective.], Facebook has made a strategic decision to not take a lot of that business in favor of building its own sort of more organic business model [TRANSLATION: "organic" sounds natural so nobody is threatened by it, but I really mean "clever" and "foresightful"] and it’s still in the process of doing that and if they crack the code on that which I think that we will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot [TRANSLATION: spigot means tap] for normal advertising today, it’d be doing over a billion dollars in revenue. So it’s much more a matter of long term strategy [TRANSLATION: Facebook is in ad business stealth mode, growing user numbers to lead to advertising revenue big wins long term.].

nut_and_bot_actionSo our view is that Facebook is working in business stealth mode consistent with anti-ad current user tastes and desires. Its interface and advertising decisions involve a longer-term strategy. It is gathering nuts, oops users, 75 million odd joined in just the last six months or so. The strategy remains to screw each in by keeping Facebook a habit for them, and even more people. It's the internet's network effect at work.

As screwed in users load up more and more of their personal content, they'll bolt themselves more and more into Facebook's future.

Facebook tried a stratagem last week when it changed its terms of use [video from Rocketboom] to become more acquisitive of uploaded content. Those new terms sought to permit Facebook to keep people's content (photos, names, whatever) even after they left Facebook. In response to howls of protest Facebook quickly reverted to its prior terms of use.

In time with hundreds of millions of nuts bolted in, Facebook will progressively further open its advertising tap. The slide in advertising revenues currenty for old media makes the the longer-term vision of Facebook ready for the advertising upswing in time. In 2009 its advertising revenues will be US$250 to US$300 million (source: BusinessWeek), what will they be in a few years time or before it announces it will become a public company?

Comments welcome.

 


Further reading - information design, law and simplicity:

Further reading - Facebook:

Further reading on social media:


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