Phase 3: Profit(mattmaroon.com)
mattmaroon.com
Phase 3: Profit
http://mattmaroon.com/?p=349
17 comments
The biggest problem with facebook, imo.
All the lovers will come and razz Matt and this comment, but none of them will be able to provide any evidence that facebook is doing anything but spending capital.
All the lovers will come and razz Matt and this comment, but none of them will be able to provide any evidence that facebook is doing anything but spending capital.
My suspicion is that Facebook will have to change how online advertising works, or die.
Look at Compete data: average stay of 15 minutes * 350 million visits/month = 87.5 million hours / month in the US. That is coupled with decent demographic data and ability to target. How much would that much attention be worth in TV or newspaper advertising? A lot more than Facebook is currently getting, I suspect.
If it can convince major brands that Facebook eyeballs are worth the same as traditional advertising (in effect sell them CPM, not CPC - "Facebook is the new TV"), then Facebook will do quite well. That's a very tough sell for smaller players, but it might not be impossible for Facebook.
Look at Compete data: average stay of 15 minutes * 350 million visits/month = 87.5 million hours / month in the US. That is coupled with decent demographic data and ability to target. How much would that much attention be worth in TV or newspaper advertising? A lot more than Facebook is currently getting, I suspect.
If it can convince major brands that Facebook eyeballs are worth the same as traditional advertising (in effect sell them CPM, not CPC - "Facebook is the new TV"), then Facebook will do quite well. That's a very tough sell for smaller players, but it might not be impossible for Facebook.
They can convince major brands to advertise there. The problem is, unlike traditional media ads, web based advertisers can quantify how much bang for their buck they are getting (click throughs, etc).
Turns out that blanket, weakly-targeted advertising just doesn't perform that well, and companies get explicit feedback from these networks on just how bad the typical ad really is in terms of ROI.
Turns out that blanket, weakly-targeted advertising just doesn't perform that well, and companies get explicit feedback from these networks on just how bad the typical ad really is in terms of ROI.
True. Advertisers sometimes say half the money they spend on advertising is wasted, but they don't know which half that is. Internet spending might be smaller because advertisers can figure out which half of ad spending they are wasting.
Brand advertising (most of traditional media ads) isn't measured in click throughs, isn't any easier to measure on the web than elsewhere, and can't be dismissed without evidence.
It wasn't a dismissal. I would strongly disagree with
isn't any easier to measure on the web than elsewhere though. If I place an ad on a site that results in 16 clicks which result in 4 transactions out of an audience of 32, I have a mathematical percentage of the effectiveness of my ad placement. This is possible on any ad placement on the web.
If I run the same ad on tv or print, I have nowhere near the ability to accurately attribute any delta in sales activity to that specific ad run at that specific point in time.
If I run the same ad on tv or print, I have nowhere near the ability to accurately attribute any delta in sales activity to that specific ad run at that specific point in time.
That's not the point of brand advertising though. The point is to hammer the consumer with a brand over and over again until they KNOW that's the brand for them and go out and seek it on their own. Think Coke, Ford, etc. Facebook has terrible click-through rates, so if they're going to make money from advertising, it'll probably be this way.
That was not the point being argued here. He stated that web ads cannot be measured any more efficiently than any other form of advertising, and I provided evidence on how they can.
You're probably right about that being the only form of ad they can monetize, though. The question then becomes when do companies spend as much in that space as they do on tv, if ever?
You're probably right about that being the only form of ad they can monetize, though. The question then becomes when do companies spend as much in that space as they do on tv, if ever?
That doesn't measure what brand advertising wants to measure, though. If one ad gets 16 clickthroughs that result in 4 transactions, that ad is inferior to one that gets 0 clickthroughs but results in 8 sales when customers actually go to the store.
Brand advertising works because most consumers rely on a recognition heuristic when faced with the dozens of products in a store. They'll buy products they recognize, even if they have no personal experience with the product. You don't go out and buy an All-New Mercedes Benz immediately because you saw it on TV - but when it comes time to buy a car, you're far more likely to buy it because of all the associations that its name & image bring up. You can't measure this with any existing web metrics - it may be years before customers actually go out and make a purchase.
Brand advertising works because most consumers rely on a recognition heuristic when faced with the dozens of products in a store. They'll buy products they recognize, even if they have no personal experience with the product. You don't go out and buy an All-New Mercedes Benz immediately because you saw it on TV - but when it comes time to buy a car, you're far more likely to buy it because of all the associations that its name & image bring up. You can't measure this with any existing web metrics - it may be years before customers actually go out and make a purchase.
Right, that is how brand advertising works. But given the structure of the web, you can get an estimation of how effective it is by how users respond to it (clicks).
Put yourself in the position of an ad exec who has $n dollars to spend on his campaign and has to present to a superior how effective it was. If he has a web ad placement, the execs in charge of the money are going to immediately query him on what they got out of it (how much traffic they got from it). Adsense has spoiled companies into being far more demanding on number metrics on effectiveness. I can't think of 1 flash ad, branding or not, that does not have the option to click and learn more about the product. They are measuring the ad resonance, transaction driven or not.
The fact of the matter is, companies want a return on their web ads they can quantify. They measure using stuff like this: http://www.vizu.com/
When they don't get it, branded or not, they leave: http://mdurwin.wordpress.com/2007/07/25/corporations-leave-s...
Put yourself in the position of an ad exec who has $n dollars to spend on his campaign and has to present to a superior how effective it was. If he has a web ad placement, the execs in charge of the money are going to immediately query him on what they got out of it (how much traffic they got from it). Adsense has spoiled companies into being far more demanding on number metrics on effectiveness. I can't think of 1 flash ad, branding or not, that does not have the option to click and learn more about the product. They are measuring the ad resonance, transaction driven or not.
The fact of the matter is, companies want a return on their web ads they can quantify. They measure using stuff like this: http://www.vizu.com/
When they don't get it, branded or not, they leave: http://mdurwin.wordpress.com/2007/07/25/corporations-leave-s...
Use geotargeting to target a specific state or small country pour massive amounts of money relatively to the small target zone and monitor changes in consuming habits, brand reach and recognition etc.
I'm not sure most consumer product companies know how to do it properly.
Also some brand advertising isn't always about gaining ground, its about not losing ground to competing brands that do advertise, if Pepsi is pushing a huge TV campaign, Coke feels the pressure to play catch up.
I'm not sure most consumer product companies know how to do it properly.
Also some brand advertising isn't always about gaining ground, its about not losing ground to competing brands that do advertise, if Pepsi is pushing a huge TV campaign, Coke feels the pressure to play catch up.
That's a good point, but those players will want fb to adopt big msn style flash ads. I'm not sure fb's users will go for that now.
I think they're going to have to look at membership or some other direct charge to users, and that's going to really affect that inflated valuation.
I think they're going to have to look at membership or some other direct charge to users, and that's going to really affect that inflated valuation.
Our conversion rates from Facebook were low compared to other methods like AdSense. That might be hurting them as well.
I think that when Facebook introduces a transactions API to their platform to enable frictionless micro-transactions in apps it will start raking in a lot of money by taking a cut of each transaction. How successful it can be is pure speculation, of course.
That assumes someone actually makes an app which is worth using. Let alone paying for...
I can only guess that you're getting downvoted because there are people here who would rather not believe what you're saying because their startup is based on building Facebook apps.
I think the key issue isn't whether apps are worth using, but whether many people actually use them. The answer is a pretty clear "yes."
Not so much. The key issue is whether people will somehow pay for apps, and by extension FB itself. That remains to be seen.
Facebook potentially offers the best kind of advertising: referrals.
The social graph gives companies the data they need to target this kind of advertising. However, this means companies need to be less exploitative and work more with their consumer. I see this as being a bigger benefit for smaller, more personable seeming companies.
The social graph gives companies the data they need to target this kind of advertising. However, this means companies need to be less exploitative and work more with their consumer. I see this as being a bigger benefit for smaller, more personable seeming companies.
how about growing users?..hmm thats seems like a valuable way to spend your time if your a consumer web company.
When you have over "65 billion page views per month", you don't need to focus on more users.
You need to focus on getting paid. Fast.
EDIT: In other words:
if Money In - Money Out > 0: Success
if Money In - Money Out < 0: Fail
The number of users doesn't matter.
You need to focus on getting paid. Fast.
EDIT: In other words:
if Money In - Money Out > 0: Success
if Money In - Money Out < 0: Fail
The number of users doesn't matter.
Why does Facebook need to focus on "getting paid. Fast."? It's not like they have any difficulty getting funding. Obviously they need to figure out how to make money in the long run, but it's not like they're going to run out of cash any time soon.
I get your point, but given the current economic climate and the understanding that the you can't predict when "the cat'll be out of the bag" in terms of when the valley realizes they're living on funding, the faster they find a way to bring in revenue, the better it is for them.
They'll have difficulty getting funding at some point in the future without a down round, which nobody wants.
They're profitable, though. So if they wanted, they could avoid taking any more funding, ever, and just grow the company off retained earnings.
Profitable, but nowhere near profitable enough to justify the enormous investment they've taken and their valuation.
Good point!
What exactly are facebook users consuming?
And volume is no substitute for probability if every "consumption" is at a loss. Sony can sell the PS3 at a loss because it makes money on the games and in the long run, wins. They can't sell the PS3 at a loss and sell the games at a loss, and make up for it with volume.
That's what facebook seems to be attempting. And they're not even winning the volume game.
And volume is no substitute for probability if every "consumption" is at a loss. Sony can sell the PS3 at a loss because it makes money on the games and in the long run, wins. They can't sell the PS3 at a loss and sell the games at a loss, and make up for it with volume.
That's what facebook seems to be attempting. And they're not even winning the volume game.
Should have read, "volume is no substitute for profitability".
One easy way for them to make money is to charge some nominal fee (say $15/yr) for premium services or ad-free experience. I don't use facebook myself, but most of my friends do, and most of them would gladly pay a small fee to just keep using facebook as is, nevermind premium features.
Mining the social graph is the holy grail of social networks, but facebook, with its millions of addicted users, doesn't have to solve that problem to generate revenue. It can do so with other means until they figure it out.
IMO, Google was in an even more precarious position before it figured out advertising because people could switch easily. Facebook's got its hooks in your life; you can't switch.
Mining the social graph is the holy grail of social networks, but facebook, with its millions of addicted users, doesn't have to solve that problem to generate revenue. It can do so with other means until they figure it out.
IMO, Google was in an even more precarious position before it figured out advertising because people could switch easily. Facebook's got its hooks in your life; you can't switch.
I'd pay $15/yr to automatically block all Facebook Apps.
Sadly I don't think I'm alone. It was useful before, but it's gotten increasingly spammy.
Sadly I don't think I'm alone. It was useful before, but it's gotten increasingly spammy.
Facebook will keep on getting more and more users but it just seems that if they want to get to the next level, they need to do something about this App thing. Once they figure it out I don't doubt they'll be able to offer some type of productivity software - they already have the social infrastructure as well as the users in place for that.
When they launched the API and the apps I, as many others, were excited about the entire idea of a facebook OS but it seems that notion is drifting farther and farther away.
When they launched the API and the apps I, as many others, were excited about the entire idea of a facebook OS but it seems that notion is drifting farther and farther away.
Facebook is a bit sticky, but switching is not as hard as you might think. If I had to dump facebook, I could probably rebuild my network (as much as I really cared about) pretty quickly starting with just a couple of phone numbers and emails.
Try deleting your Facebook account and see how much effort it takes. If you're lucky (and the trick that I worked still works) it might be about an hour. Otherwise it might take you days (hint: you have to delete every single photo, comment, wall post, friend, etc one by one and then contact Facebook to have your account deleted).
You don't have to delete the account to stop using it.
Agreed on all accounts. I think most facebook users think of it as essential enough to pay something as high as $2-10 per month to use it or some set of premium services. That's a good $100M at least monthly. Of course, making the transition from a 100% free site to a very cheap one is a bit tricky, but learning how to do that is a lesson that the industry as a whole can use and will probably have to do at some point.
The product acquires value to users as they use it. Giving it away for free at the beginning and as long as possible while it is manageable to do so is fine and advisable. However, in the long run there is nothing wrong or overly difficult in charging your users a little bit. 37signals is a good example of something similar to this.
The product acquires value to users as they use it. Giving it away for free at the beginning and as long as possible while it is manageable to do so is fine and advisable. However, in the long run there is nothing wrong or overly difficult in charging your users a little bit. 37signals is a good example of something similar to this.
But then they'd have some kind of rational yardstick for measuring valuation, and we have that -and- keep Zuckerberg a paper billionaire.
The difference between Facebook and Google is Technology, the value of goods is define by its availability/scarcity.
There's nothing spectacular about Facebook technology, Fame alone is not enough to justify those billions if you don't think so let see when they go public.
I disagree. Google's value is in the quality of its results and the speed of search. Facebook's value is in 1) all the users (a social site sucks if your friends aren't there) and 2) it's brand (people know about it and trust it). Someone could buy equivalent technology but not the users or the brand. Remember Google Video vs YouTube?
(fwiw, I think Facebook is valuable but if they can't monetize it, then they're in trouble and it won't bode well for all the other social network sites out there either)
(fwiw, I think Facebook is valuable but if they can't monetize it, then they're in trouble and it won't bode well for all the other social network sites out there either)
Facebook's technology is not as impressive as Google's for sure, but they actually do have some fairly impressive technology. For one thing, they process a huge amount of data on a daily basis (I want to say I was told over a trillion "news items" per day, but I don't remember for sure). Admittedly the site has slowed a bit in the last couple months, but not significantly.
Agreed. Facebook will lose dominance shortly because it is so easily replicable. (Although, the way Facebook grew its user base through colleges was genius and would be hard to match.)
The same argument could be made for Google as well. Hadoop is poised to render Google's search technology worthless.
The same argument could be made for Google as well. Hadoop is poised to render Google's search technology worthless.
Somebody should start a poll:
Facebook + Email + IM + Phone vs. HN + Email + IM + Phone
Which would you rather have?
I suspect this would provide some valuable information as to the near future of the internet -- so many of us are on HN because it is specific to our current interests -- whether hobby or professional -- and our desire to know and bounce ideas off of similar minds.
Now for specific interests replace HN with (Popsugar, TMZ, Social Investing sites, etc.)
Facebook + Email + IM + Phone vs. HN + Email + IM + Phone
Which would you rather have?
I suspect this would provide some valuable information as to the near future of the internet -- so many of us are on HN because it is specific to our current interests -- whether hobby or professional -- and our desire to know and bounce ideas off of similar minds.
Now for specific interests replace HN with (Popsugar, TMZ, Social Investing sites, etc.)
Matt reminds me of this:
http://en.wikipedia.org/wiki/The_Emperor's_New_Clothes
http://www.outrunpoker.com/blog/2008/03/a-way-for-social-net...
I don't think social graphs or other "hocus pocus" BS will get them much more CPM than they are currently getting. I believe the only solution is to take more of the revenue stream from advertising by starting some companies in fields where it is possible, and ones that already advertise on FB. This is the most direct approach, and takes the longest and most work, but the most rewarding in the long run due to many reasons.
I don't think social graphs or other "hocus pocus" BS will get them much more CPM than they are currently getting. I believe the only solution is to take more of the revenue stream from advertising by starting some companies in fields where it is possible, and ones that already advertise on FB. This is the most direct approach, and takes the longest and most work, but the most rewarding in the long run due to many reasons.
I go to places because of the value they offer. Facebook offers me next to nothing. I went there exactly once to peek at the Thrift documentation (you can download the source without registering but the link to the docs is a group).
I'd be there if there were some there there.
I'd be there if there were some there there.
From PG's latest: Why Aren't There More Googles
"So what's the real reason there aren't more Googles? Curiously enough, it's the same reason Google and Facebook have remained independent: money guys undervalue the most innovative startups."
Why do people keep repeating that FB is 'worth' $15 Billion?
Is it an American thing for self-delusions?
FB as a business has the same credibility as a Washington Mutual AAA rated CDO.
Is it an American thing for self-delusions?
FB as a business has the same credibility as a Washington Mutual AAA rated CDO.
Because that's their market value based on recent investments.
I've never understood if the $15B valuation is real either (although I understand that it's quoted by everyone as being real). The original $15B number comes from an investment that Microsoft did for a share of the company plus advertising consideration.
If you just valued the company on the share then it would be worth $15B but since there were other considerations you can't know at all what the valuation was.
I've heard of follow-on investments but I never heard any hard facts about the valuation of those investments.
On the other hand, I've heard people who should know (actual VCs, TechCrunch, press) say FB has a $15B valuation. I just don't understand how that's the case. Is it bogus or what is the piece of information that I'm missing?
If you just valued the company on the share then it would be worth $15B but since there were other considerations you can't know at all what the valuation was.
I've heard of follow-on investments but I never heard any hard facts about the valuation of those investments.
On the other hand, I've heard people who should know (actual VCs, TechCrunch, press) say FB has a $15B valuation. I just don't understand how that's the case. Is it bogus or what is the piece of information that I'm missing?
Without knowing the details on the MS deal or the follow on funding, it's hard to say. I would speculate, solely from what I've read, that MS's investment values them at $15 billion while giving them the right to run ads for which they'll have to pay a certain amount as well. So in the case, and assuming other investors also valued them at $15b, that's their actual valuation.
I recall Zuckerberg admitting at SXSW they only valued it at that so that Microsoft could invest their cash and not suck up a big percentage of the company. That would mean not even Zuckerberg pretends its worth $15 billion. It seems a bit lame to repeat this valuation as if Zuckerberg is running around yelling "My company is worth $15 billion!" because he's definitely not doing that.
as if Zuckerberg is running around yelling "My company is worth $15 billion!" because he's definitely not doing that
well current hires are getting their stock at that valuation so the net effect is the same
well current hires are getting their stock at that valuation so the net effect is the same
Confirmed or assumed? If this is true, it's a big point against FaceBook's continued success, because it means current employees are underwater until FaceBook's worth more than Ford. One of the big motivators for a startup employee is seeing those options you got for pennies suddenly being worth dollars; if those options won't be worth anything for the foreseeable future, there's little reason why good employees would choose to work at FaceBook instead of Yahoo or Adobe or any of the other mature tech companies.
i know it for a fact
Regardless of what Zuckerberg says, it's the valuation. It doesn't matter why. It's a simple mathematical equation. He can feign humility all he wants, but legally and technically speaking, their valuation is $15 billion.
I don't know any of their investors, but I'd be willing to bet my left nut that they'd be angry if the next funding round values them at $10b.
I don't know any of their investors, but I'd be willing to bet my left nut that they'd be angry if the next funding round values them at $10b.
I don't disagree with his main idea, but I really find it hard to believe that AIM and most cell phones are open platforms; though someone can prove me wrong.
I know of many apps not built by AOL that use AIM. Meebo, Trillian, Pidgin, Adium, etc. I don't think they meant it to be an open platform (until fairly recently) but it became one.
I meant the phone system. Individual cell phones are not necessarily platforms.
I meant the phone system. Individual cell phones are not necessarily platforms.
"open AIM" isn't really open, I think this was discussed in a past yc post; there are a lot of terms and conditions that are more overbearing than facebook's or google's terms/conditions
- like if you have x number of users, you must feature AOL ads on your app (or something like that)
Until Google Contacts API came out, I don't remember any major company giving third parties access to their users and their contacts officially. (ok Plaxo did but they had a condition that you couldn't make anything for profit) typically apps like Trillian got access when users gave them access to their own login information which is far from ideal and still not open by choice - more like 'broken into'
"I meant the phone system. Individual cell phones are not necessarily platforms."
the problem is, the social graph (contact info and call history) is contained and accessible from individual cell phones and not the phone system (unless again you trust some company to your login information for your cell phone web site account - still not open and a more dangerous than giving someone access your AIM login).
individual cell phones may not be platforms themselves, but the OS's they run on are...
Until Google Contacts API came out, I don't remember any major company giving third parties access to their users and their contacts officially. (ok Plaxo did but they had a condition that you couldn't make anything for profit) typically apps like Trillian got access when users gave them access to their own login information which is far from ideal and still not open by choice - more like 'broken into'
"I meant the phone system. Individual cell phones are not necessarily platforms."
the problem is, the social graph (contact info and call history) is contained and accessible from individual cell phones and not the phone system (unless again you trust some company to your login information for your cell phone web site account - still not open and a more dangerous than giving someone access your AIM login).
individual cell phones may not be platforms themselves, but the OS's they run on are...
and how is the phone system an open plataform with regards to your "social graph"? and IM services?
I suppose you are only looking for excuses so that your startup doesn't have to create a Facebook app ;-)
Excellent, I love the ZuckerGnome!
A minor nit-pick: only one d in 'adds', in the phrase 'video adds'.
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quick name the only company in the valley that scares googles mngt team?
quick name the only company in the valley thats harvesting googlers like its October in Napa valley?
quick name the only company in the valley thats harvesting googlers like its October in Napa valley?
so many fb haters - yet they keep growing users, keep launching features, you can say they have no tech (baseless), they can't monetize (eer ask pg about this one; build something people want - a business model will emerge) and all the rest - yet you can say nothing about their growth and engagement.
Matt's not saying they aren't getting a lot of traffic, or that a lot of people don't enjoy using Facebook (nobody in their right mind would claim those things). Matt's saying that it's a rare form of chutzpah that Zuckerberg possesses that allows him to make up stuff like "the social graph" as justification for his second-place social network being worth 30 times the first-place social network (he's also saying some other stuff, but I think that's the funniest/truest part). And, of course, it takes an astounding reality distortion field for him to be able to convince half the people in the valley that it's a done deal: Facebook is "the next Google".
Facebook is not the next google for the simple fact that everyone is saying that it is. The Next Big Thing usually slips under the radar until it becomes completely dominant.
Google did that for sure.
nice point - but myspace was a steal for fox and should be kicking themselves for selling so low. fb's valuation is mind boggling indeed and fb is not the next google - it does however have people excited about something besides the big G which is refreshing. chutzpa is making people believe, not telling the literal truth.
Some of the people involved in the MySpace deal are calling shenanigans. I almost have to believe them. Their traffic was just so immense, even then, and that was long before people even imagined how hard it is to monetize social network traffic.
who are these people that keep saying that Facebook is the next google? in what respect is it supposedly the next google? In that they are attracting a lot of talent? Then sure, I guess. In that they are, or will be, businesses of the same magnitude? not even Microsoft's FB valuation justifies that.
Also, and I'm not saying this justifies FB being worth 30x myspace (I don't know), but its very clear to me that in regards to innovation FB is the leader and the rest are playing catch-up at this point. I also doubt that without google's intervention myspace, hi5 or bebo would be able to catch up at all.
Also, and I'm not saying this justifies FB being worth 30x myspace (I don't know), but its very clear to me that in regards to innovation FB is the leader and the rest are playing catch-up at this point. I also doubt that without google's intervention myspace, hi5 or bebo would be able to catch up at all.
Ultimately, the answer may lie in some kind of customized event sponsorship:
e.g. you're planning a poker game with your friends, and facebook allows its clients (beer and snack companies for this example) to offer you a deal on those products.
Or something else entirely.
Either way, I agree with the blog post that they haven't found that something yet.