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The Eternal Search for the Right Facebook Ad

fb_icon_325x325Facebook (NASDAQ:$FB) is by far the biggest social network in the world in terms of active users. However, is an enormous user base a guarantee for a rising stock price and satisfied stakeholders? Ultimately, as a public company it has to be. Unfortunately the IPO of the Century is infamous for all the wrong reasons highlighting the difference between potential and reality. Facebook has made repeated attempts to transform its billion users into billions of advertising dollars to justify its very rich premium, while at the same time not chasing users away.   I still don’ think they have succeeded and may never do so.

This was the biggest issue plaguing Facebook pre-IPO – could they make the transition from internet user darling to public company.  Google (NASDAQ:$GOOG) faced a similar problem when it went public.  Would it be able to make the transition in culture a public company required?  That was the question that was asked.  The better one should have been could they monetize a search engine?   Many thought no; history tells us otherwise.

Has Facebook found it yet?  I don’t think so.

2012: Moves for Money
2012 has been the year of the most rapid and frequent changes in all aspects of the platform, i.e. interface, ads strategy, EdgeRank algorithm, etc. But the most aggressive transformations with most impact were concentrated in its attempt to create advertising strategies so tempting that no brand could resist them. So, with little consideration of users’ complaints about privacy and data infringement Facebook ploughed ahead to collect more and better data.   

What once was a private network for people to connect with socially slowly began resembling the online platform for advertisers to monitor, analyze and reach their target audiences. If you want to review all the specific attempts that Facebook made to turn its users into dollars read The Atlantic Wire’s excellent chronological overview of 2012.

The Instagram Case
In the middle of December, Instagram announced an additional term of use which will become valid from January 2013 bolting advertising onto the application.  According to Sterne Agee analysts Arvind Bhatia and Brett Strauser, if Facebook fills up Instagram with ads, it could generate $500 million to $700 million in advertising revenue over the next three years. Facebook’s stock investment in Instagram has effectively fallen in price to ~$700 million.  If this does not antagonize a huge swath of users then the Instagram purchase was a shrewd one in the short term; converting stock to instant revenue. It is, ultimately, $200- $300 million in direct revenue annually and still does not justify a $64 billion market cap.

Mobile Innovations
In mid-December, the platform introduced a new local search and discovery feature called “Nearby.” It enables users to discover specific places and “Like” the, leading to the business’s Timeline. It is a social feature, so the displayed information will be influenced by users’ friend’s recommendations, check-ins and other social cues. This is one of the better examples of Facebook creating value for their business clients while not making their users feel like they are being ‘sold,’ and the kind of tightrope it has to walk to be more successful.  The value for investors will be the rates Facebook can sell that data back to its clients, which is what needs to be watched carefully.

Video Ads – The TurnItOff! Factor
I know people whose entire life is built around Facebook. They use the platform to connect with colleagues, classmates and friends, look for jobs, read the news, and so on.  Most of these people won’t mind advertising as long as delicate means of grabbing their attention are employed.   But there is a large segment of its user base that is hostile to being overtly sold and would prefer to never see an ad.  Linkedin (NASDAQ:$LKND) neatly avoids this as it was built as an environment for the professional side of your life, not the personal one.

And since Facebook is more living room than cubicle the intrusion of someone walking in and shouting at you to buy their stuff is just rude.

So how well do you think video ads are going to go over?  

Despite the huge growth path that video advertising is on I see Facebook as the wrong vehicle for them.  And with the growth rate that users are flocking to the Facebook’s mobile platform – 15.1% CAGR over the past 8 quarters and more than 600 million active users—video advertising there is not a rational option with people paying directly for their bandwidth usage. 

The WoW Factor

We know how powerful the inertia of time invested in a platform is by looking at Activision Blizzard’s (NASDAQ:$ATVI) World of Warcraft.  Switching and starting again in a different game is a major life change.  Since WoW is also its own social network it mirrors Facebook’s hold on its users nicely.  The MMORPG industry has had to shift to different models to cope with WoW’s dominance and yet WoW still has 10+ million players.  

For proof of Facebook’s power over its users look no further than the relative ‘stickiness’ of its users compared to rival networks.   

Network

Facebook

Tumblr

Pinterest

Twitter

Linkedin

Google+

Avg. Monthly Time per user

6.75 Hrs.

1.5 Hrs.

1.5 Hrs

21 Mins.

17 Mins

3 Mins

The problems with Facebook as an advertising platform may ultimately be a poor interface. Facebook has to bolt the advertising onto the interface like Frankenstein’s monster – or Yahoo! – or embed it so deeply that it’s unrecognizable.  Tumblr and Pinterest let the content itself be the advertising.  Even Microsoft’s new network So.Cl recognizes this shift in design.  The rise of both Tumblr and Pinterest — now the 3rd most popular social network in US in terms of traffic – are more interesting than the failure of Google+.  Facebook is part personal diary, part user message board.  The changes to the timeline have attempted to make it more visually appealing but I don’t think it quite works.  Tumblr, Pinterest and So.Cl are visually based and there’s no changing that without changing Facebook.  

At this point I still have to think that Facebook’s stock price is over-estimating its leadership’s ability to see these issues for what they are and make use of the high quality data they are collecting.  I keep seeing them trying new ways to re-invent Google’s and Yahoo’s (NASDAQ:$YHOO) revenues streams in the same way that Google and Yahoo! tried to tie Facebook’s platform to their revenue streams and it hasn’t worked either. 

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Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital.  (read more)

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