The internet is abuzz with conversation about Facebook’s ascension to become the #1 most-visited web site and recent investments that valued the company at $50 billion. Congratulations to Mark Zuckerberg and company because those are two serious feats. But I have a serious problem with all of the analysis that has arisen based on those gawdy numbers.
All of the journalists in the world have declared the battle between Google and Facebook over. Facebook is the new king! Well, not quite yet. Clearly, the social networking site has a very bright future. You can’t really argue with near-ubiquity and serving a trillion ads a year (about a quarter of the total display ads viewed on the internet). But there are definitely concerning aspects of Facebook’s numbers:
% of U.S. Web Minutes:
Revenue per user:
Facebook owns a substantial portion of America’s minutes on the internet but garners the LOWEST revenue per user out of the tech companies listed. What does that mean? It indicates that Facebook is not very good at monetizing the pageviews/activity of its audience.
So that brings me back to the title of this post: Google Is McDonald’s & Facebook Is Like A Local Coffee Shop (note: this analogy is not about scale — but rather efficiency and margins). Google is like McDonald’s because they know exactly how to make money with their core product. Both McDonald’s and Google want you to visit as often as possible — but when you do visit, they want to get you out the door as quickly as they can. If you “linger” at McDonald’s, they’ll have less space to seat other guests. You’ll probably create more of a mess for them to clean up. Additionally, your presence may also create an unwanted externality for other guests (noise, etc.). So McDonald’s gains nothing by having you “enjoy” the experience of the restaurant (quite literally: time on site). For this reason, McDonald’s gives you a standardized menu (makes processing your order quicker) and has an extremely uncomfortable and unaccommodating seating area. Google’s search product operates in a similar manner. They offer a standardized experience (Google search and results) and try to get you out the door as quickly as possible (accuracy of results, sorting results by type, intuitively providing conversions/definitions, Google Instant, simple/ugly search results page, etc.). This means that Google is maximizing their capacity while minimizing serving cost — and also delivering a clearly defined core product.
Right now, Facebook struggles to make money from their pageviews — their effective CPM (based on raw impression and revenue numbers) can’t be higher than $2. It would be generous to call that number “average” and could even be considered bad. For a site trumpeted with being incredibly engaging and having the ability for hyper-targeting, Facebook has a surprisingly low cost per thousand impressions and, as a result, an extremely low revenue per users. The company still has less overall revenue and revenue per user than Yahoo… a company that many people consider to be dead. Facebook’s main issue is that they only have one thing that people are buying: basic display ads. And they’re selling them at a dramatically lower price than most people probably would have predicted. Back to the eatery analogy, Facebook is like your local coffee shop that planned on breaking the bank with exotic coffee, pricey biscotti, and dessert dishes (or maybe all three, because they really like the atmosphere and spend a lot of time in the shop). But instead, people come in to buy one cup of house blend coffee and then use the free wifi all day. In this example, the coffee shop makes less revenue per customer than predicted and also can’t serve as many customers due to lingerers. It also becomes much harder for the shop to define their core product. Sure, they may be selling an enjoyable experience. But they’re not monetizing that experience in any meaningful way.
My guess is that the “Facebook coffee shop” expected to sell premium products by now — but can’t. If that’s the case, it’s due to lack of sales prowess, attempting to sell premium products that are unappealing, or they simply haven’t created any premium products. I’d also be very interested to find out facebook’s breakdown of ad impressions by content type. I would be surprised if they weren’t serving at least half of their trillion pageviews on photo pages (at the time of this post, 1 ad appeared on the NewsFeed page, 4 appeared on the profile page, and 5 appeared on the photo page). After all, Facebook is the largest photo-sharing site on the internet (over a year and a half ago, Facebook said they were serving 550,000 images PER SECOND at peak times). But if that were the case, all of the hype about interactivity and engagement would be irrelevant. Photos are probably the LEAST valuable aspect of facebook’s site in terms of ad space. On top of that, photo pages are also likely to be among the LEAST profitable pages for Facebook to serve. The first issue is transfer cost since images can rack up bandwidth in a hurry — the photo pages, in my test, contained 254KB to download versus 500KB for the NewsFeed and 365KB for a profile page. Then there are also storage costs… Facebook is the #1 photo-serving site on the internet and recently crowed about having 750 million photos uploaded over New Years Weekend. They also store 4 different copies of each image you upload (the original size and thumbnails). So it’s likely that much of their revenue is derived from this costly, low-margin product that doesn’t have much value for advertisers. That’s not exactly the future of the internet.