(Originally published in iMediaConnection, February 2012) by Eric Picard
I’ve been watching and reading the Facebook IPO announcement frenzy with curiosity. The most curious meme floating around is the one that pooh-pooh’s its strike price, market cap, and valuation because its ad business “clearly isn’t going to be able to sustain growth the way Google’s did” — to which I call BS.
Here’s why Facebook will ultimately be the powerhouse in brand advertising online (and eventually offline as well):
Facebook is a platform
To really do this one justice, I’d need to write a whole article about the power of platforms and explain why platform effects are almost impossible to defeat once they’ve started. Platform effects are similar to network effects, so let’s start there in case you’re one of the 20 people left on the planet who haven’t learned about them. Network effects are basically when multiple users have adopted a platform or network, causing the platform or network to be more valuable. Telephones are the primal example here — the more people who have a phone, the more valuable the phone platform or network is to its users, therefore more people get telephones. Facebook has cracked that nut — it’s a vast social network, and network effects have rendered it as difficult to avoid getting a Facebook account as they have rendered not having a telephone or email address to be almost impossible.
Platform effects are similar, but even stickier: They come from opening a platform to third party developers. Once you have developers creating software that relies on the use of a platform, the platform becomes more useful and therefore becomes more adopted by end-users. This has been proven repeatedly — from Windows beating the Mac originally because so many software developers and hardware manufacturers supported the Windows PC platform. Apple has of course had the last laugh there, with the iPod/iPhone/iPad apps marketplace taking a page right out of Microsoft’s playbook and kicking them in the teeth.
Facebook is a platform that “consumer facing applications” like Zynga and other game companies have made good use of. But also it’s a massive data and business to business platform, which has been less broadly publicized, but which is beginning to gain adoption. And that part of its platform, tied to the data from the consumer side of its platform, is why advertising will ultimately bow to Facebook (barring some horrible misstep on their part.)
Facebook takes user data in return for free access to the Facebook platform
Facebook requires all users to opt into its platform — and despite all the various privacy debates and discussions about Facebook, it is actually pretty good about being transparent and providing value to users in return for sharing all sorts of data.
Facebook is right now (my opinion — open to debate) the most authoritative source of data on consumers, their interests, and brand affiliations. It’s going to grow and become more comprehensive, meaning that it will become the main source of all data used by brand advertisers to reach targeted users.
To my mind this is already destined to happen — and locked up due to the fact that Facebook is a platform. It builds content that no media company would be able to build (social content.) So in that way it really doesn’t compete with online publishers. Online publishers wisely have adopted Facebook as a distribution platform as well as an authentication platform for allowing consumers to accesstheir content.
It’s only a matter of time before publishers become so intertwined with Facebook’s platform that all their content becomes effectively part of the Facebook platform. But not in a way that publishers should be worried about Facebook disintermediating them. If Facebook is smart, it will work this out now and find a way to give publishers what they want in return for this: Let the publishers own their own targeting data, and work out a way to help them make more money without losing that data ownership.
Facebook will own brand advertising, and will not need to own direct response
Most of the wonks in the ad space are pooh-poohing Facebook because of a near-sighted over focus on direct response advertising. They believe in this false premise because of a single proof point, which is Google paid search advertising. The idea is that, “Since Facebook owns ad inventory that is further ‘up’ the purchase funnel than Google’s, Facebook will never justify a high enough CPM to compete for supremacy in the online space. Since Google is the owner of advertising online, and it did this by creating a vast pool of inventory that is sold at extremely high CPMs (because it is so close to the purchase on the purchase funnel) and because most of the online ad industry has been focused on DR for its entire existence, DR is where online must go.”
The wonks are wrong on this topic. Google undisputedly “owns” paid search advertising. But the entire paid search market is made up of something close to 250 billion monthly ad impressions. Google gets a very high premium on those ads — around $75 CPM. But Facebook has many more ways to play in the ad space than Google, and a lot more inventory to play with. Estimates put display ad volume well above 5 trillion monthly impressions, and Facebook has a huge percentage of these. Since Facebook can cater to brands, it can be an efficient platform for selling ads to brands that target authoritatively to very granular audiences. Nobody has cracked that nut yet — the targeted reach at granularity and scale “nut” (disclaimer — this is specifically the problem I’ve been working on for the last year.)
So Facebook could own brand advertising online, could own a role as the authoritative data provider for brand advertising, could own the way that the big brand content platform of TV makes its way into a more modern and effective ad model, and could very well be the winner of the online advertising (nay the entire advertising) space for brands.
Facebook will dominate local advertising
Facebook has already grown a massive advertising business, and my bet is that when the details of its ad revenue are fully disclosed, a big chunk of that business will prove to be locally based. It is the only real play to be had for local businesses online right now; the only place to get local audience reach at any kind of scale. Local is a massive advertising market — one that nobody has been able to crack online, and Facebook will be the gateway between traditional media and online media for local advertising. Zuckerberg must already secretly have 200 people working on this problem as I type.
I’m very bullish on Facebook, but then, this is all just my opinion: I don’t have any idea how much of this Facebook really understands itself. All it really needs is some decent ad formats, and it’s got everything pretty well sewn up.