Social economics - how useful is an ad on Facebook?
This article at the Economist makes some very strong points about Facebook as a business, and is well worth reading. Given that the whole value of the company is in its right to market to its users, the value of that marketing really has to be thought through. Lots of people are predicting Facebook will be the next behemoth Internet business, comparing it with Google, but is this a valid argument?
One of the first creative directors I worked with used to talk about “mission marketing”, creating advertising that online consumers were responsive to because it helped them with whatever task they were carrying out. If they’re searching on Google, adwords are a perfect example of this, and that’s why they’re so successful. But you can do it in other ways too: mortgage calculators on property sites, entertainment for our downtime, even cleverly placed 468×60 banners can help users complete their missions.
But what’s our mission when we’re on Facebook? We’re catching up with friends, gossip, making plans for the weekend. Sure, some advertising might help us with that, but an awful lot of brands have nothing to do with this particular mission, and could easily be seen as a nuisance or distraction.
It’s certainly possible to develop clever campaigns that help people research their holidays, or swap tips on the best DVD player, or whatever, and to incorporate those in Facebook, but how scaleable is that model compared to sponsored search listings? How many Facebook apps will one person install and use? It seems pretty clear (and this is one of the Economist’s points) that the comparison with Google is specious.
Which takes me back to the valuation question: is Facebook really worth $15bn? When people value companies, they do it on the basis of long term expected return on investments. If I invest $100 in one company, instead of another, or a savings account, I expect my money back eventually, and I expect an income that is greater than I’d get elsewhere, especially if there’s some risk attached. A company’s value (number of shares in issue times price per share) is often worked out as a ratio to annual earnings or profit. British Airways, with earnings of $500m, is worth about $5bn, so the price/earnings ratio is about 10 (11.18 when I looked, but I’m simplifying!)
What do those numbers look like for Facebook? $100m in earnings this year, and a $15bn valuation based on the Microsoft deal, means it would take them 150 years to earn back their market cap. Obviously they’re expected to grow, but how much growth is possible? And will they be around for long enough to repay all this enthusiasm?
