Wednesday, May 23, 2012

The Fall of Facebook

According to this report Facebook, with its 900 million users, valuation of around $100 billion, with the bulk of its business in traditional display advertising, is now at the heart of the fallacy.

Facebook is, everyone has come to agree, profoundly different from the Web. First of all, it exerts a new level of hegemonic control over users' experiences. And it has its vast scale: 900 million, soon a billion, eventually two billion (one of the problems with the logic of constant growth at this scale and speed, of course, is that eventually it runs out of humans with computers or smart phones). And then it is social. Facebook has, in some yet-to-be-defined way, redefined something. Relationships? Media? Communications? Communities? Something big, anyway. The overt subtext of the popular account of Facebook is that the network has a proprietary claim and special insight into social behavior. For enterprises and advertising agencies, it is therefore the bridge to new modes of human connection. Really, we know what people are thinking about—sometimes before they know!

Facebook currently derives 82 percent of its revenue from advertising. For all its valuation, the social network is just another ad-supported site. The reality for everybody building businesses on the strength of web advertising is that the value of digital ads decreases every quarter, a consequence of their simultaneous ineffectiveness and efficiency. The nature of people's behavior on the web and of how they interact with advertising, as well as the character of those ads themselves and their inability to command real attention, has meant a marked decline in advertising's impact.

 At the same time, network technology allows advertisers to more precisely locate and assemble audiences outside of branded channels. Instead of having to go to CNN for your audience, a generic CNN-like audience can be assembled outside CNN's walls and without the CNN-brand markup. This has resulted in the now famous and cruelly accurate formulation that $10 of offline advertising becomes $1 online.

The result is that the ad-Web business is engaged in a relentless, demoralizing, no-exit operation to realign costs with falling per-user revenues, and manically inflating traffic to compensate for ever-lower per-user value. Facebook has convinced large numbers of otherwise intelligent people that the magic of the medium will reinvent advertising in a heretofore unimaginably profitable way, or that the company will create something new that isn't advertising, which will produce even more wonderful profits. The company makes a pitiful and shrinking $5 per customer per year, which puts it somewhat ahead of the Huffington Post and somewhat behind the New York Times' digital business. Facebook is mired in the same relentless downward pressure of falling per-user revenues as the rest of Web-based media.

Facebook's business only grows on the unsustainable basis that it can add new customers at a faster rate than the value of individual customers declines. It is peddling as fast as it can. And the present scenario gets much worse as its users increasingly interact with the social service on mobile devices, because it is vastly harder, on a small screen, to sell ads and profitably monetize users.

If you're inside the Facebook company  there is endless chatter about a near-utopian (but often quasi-legal or demi-ethical) new medium of marketing. "If we just ... if only ... when we will ..." goes the conversation. If, for instance, frequent-flyer programs and travel destinations actually knew when you were thinking about planning a trip. If a marketer could identify the person who has the most influence on you ... If a marketer could introduce you to someone who would relay the marketer's message ... get it? No ads, just friends! My God! But so far, the sweeping, basic, transformative, and simple way to connect buyer to seller and then get out of the way eludes Facebook. So the social network is left in the same position as all other media companies. Instead of being inevitable and unavoidable, it has to sell the one-off virtue of its audience like every other advertizer on Madison Avenue.

Another worrisome point: Facebook is a company of technologists, not marketers. If you wanted to bet on someone succeeding in the marketing business, you'd bet on technologists only if they could invent some new way to sell; you wouldn't bet on them to sell the way marketers have always sold. But that's what Facebook is doing, selling individual ads. From a revenue perspective, it's an ad-sales business, not a technology company. To meet expectations—the expectations that took it public at $100 billion, the ever-more-vigilant expectations needed to sustain it at that price—it has to sell at near hyperspeed. The growth of its user base and its ever-expanding  page views means an almost infinite inventory to sell. But the expanding supply, together with an equivocal demand, means ever-lowering costs. The math is sickeningly inevitable. Facebook will look forward to slowing or declining growth in a tapped-out market, and ever-falling ad rates, both on the Web and especially in mobile.

n its Herculean efforts to maintain its overall growth, Facebook will continue to lower its per-user revenues, which, given its vast inventory, will force the rest of the ad-driven Web to lower its costs. The low-level panic the owners of every mass-traffic website feel about the ever-downward movement of the cost of a thousand ad impressions (or CPM) is turning to dread, as some big sites observed as much as a 25 percent decrease in the last quarter, following Facebook's own attempt to book more revenue. As Facebook gluts an already glutted market, the fallacy of the Web as a profitable ad medium can no longer be overlooked. The crash will come. And Facebook which is, in reality, only an ad-driven site—will fall with everybody else.

Facebook's answer to its critics is: pay no attention to the carping.

Taken from  here 

2 comments:

ajohnstone said...

http://www.alternet.org/media/155554/10_reasons_you_should_be_suspicious_of_wall_street%27s_facebook_fiasco/?page=entire

Reasons to be suspicious of Facebook

ajohnstone said...

Zuckerberg was able to profit by selling his shares in the knowledge that the share value would likely decline who made £110m by selling early. ome investors are now suing Facebook and the banks that organised its public listing for not revealing information about the firm's financial health prior to flotation. A major point of contention is the claim that a "severe reduction in revenue growth" – linked to the growing numbers of users accessing the website on mobile phones rather than computers – was concealed.
http://www.independent.co.uk/news/business/news/mark-zuckerberg-saved-111m-by-selling-facebook-shares-before-stock-slumped-7786269.html