Why Facebook Wants to Be Google

Wednesday May 30th 2012 by Mike Elgan
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Facebook's IPO revealed that the company doesn't know how to monetize users.

Wall Street has a funny way of getting to the bottom of things. When billions of dollars are on the line and experienced investors (i.e. those burned in previous dot com bubbles) are asked to pony up real cash, it’s amazing how fast hard truths surface. Facebook went public this month. And the event was a clash of cultures.

The first culture: Silicon Valley, where wild-eyed optimists believe anything is possible. Just come up with a brilliant idea. Ship it. Scale it. Then monetize it. But how? Don’t worry about that. We’ve got eyeballs. Just give us some money and we’ll all get rich.

The second culture: Wall Street, where hard-nose realists don’t believe anything but numbers and facts. Have a money-making idea? Prove it. If you can, we’ll invest, and we’ll all get rich.

The problem with Facebook's IPO is that they couldn't prove it.

How Does Facebook Monetize Users?

Facebook has nearly a billion users. Monetization? That should be easy, right? How can you not make money from a billion users?

Taking a really good look at Facebook’s ability to monetize users is like pulling a thread on Mark Zuckerberg’s hoodie. Eventually, you have nothing but an exposed CEO. Let’s consider some numbers. Facebook says they have 900 million users and growing. That number is almost certainly the number of account sign-ups, not humans. It includes duplicate and second accounts, abandoned accounts, spammer accounts and other accounts that don't have a real user attached. Let’s say the number of actual humans who have signed up for Facebook is less than 700 million.

More than half of Facebook’s users access the service via mobile devices, which currently don't have ads or any other significant way to monetize. So probably 300 million are using desktop PCs.

Of those desktop PC users, many are using aggregators instead of the actual site. So the number exposed to Facebook ads might be, say, 250 million.

I'm making these numbers up. But Facebook's own IPO paperwork said that the number of people who actually go to the facebook.com site at least once per month is only 161 million.

How many people visit facebook.com at least once per week? I have no idea. It could be less than 100 million.

These are international numbers. So while deep-pocked companies want to sell expensive stuff to big-buying Americans and Europeans, in fact many of the people on Facebook are in countries where people are less, shall we say, consumerist. The actual number of Facebook users who both see ads and are desirable targets for that advertising is low -- probably a few dozen million, max.

And these people aren't paying attention. Not really. I’ve asked a lot of friends whether they’ve ever bought anything based on a Facebook ad, and they all said no. Facebook is a loud, visually noisy site with a lot going on. And unlike sites like Pinterest, people don't go there to shop, or even window shop.

Facebook ads are really easy to ignore. Just ask GM.

Facebook’s Catch-22

Facebook’s IPO got off to a bad start when just before the big day, GM pulled its ads from Facebook.

GM decided that Facebook advertising wasn’t effective, and wanted to make it so by running full-page ads on the network.

Facebook said no. And therein lies the trouble.

GM knows that Facebook’s current ads are ignored by users, and therefore ineffective. Facebook apparently believes that full-page ads -- or any extremely intrusive advertising -- would turn off users and trigger an exodus. And I think they’re right. It’s a catch-22. If Facebook keeps offering only small, ignored, ineffective ads, it can keep growing users. If it tries to turn up the volume on those ads, it would likely face serious declines in users, especially that small number of active users.

Facebook’s Other Catch-22

Facebook is coping with another catch-22. In comparison with Google+, which is Facebook’s most serious long-term rival, Facebook has an advantage.

Most social network users prefer Facebook over Google+ because people they already know are more likely to be members: mom, granddad, old high school buddies, former co-workers.

Google+ has a lot of interesting strangers, but existing friends are harder to come by. And that’s a problem for Facebook. See, existing relationships are harder to use for profiling individuals.

Looking at my social graph on Facebook tells the company almost nothing about me. In terms of my interests -- in terms of what I’ll buy -- I have very little in common with my old high school friends, or even my blood relatives. We don’t know each other because of our common interests.

And you can tell. Look at the ads Facebook serves up.

 

I checked the ads on Facebook for this column, and it's clear that Facebook doesn't know anything about me.

It’s serving me an ad for a mortgage company (I'm not buying a house), Dell computers (I’m a Mac user), a war strategy game (I don’t play online games), yearbooks for people who graduated from high school in the 70s (I’m not quite that old), wooden headphone covers (I don’t know why anyone would want this), financial services tips (I have no interest) and an ad that asks: “Are you a CEO?” (I'm a writer). Seven ads, and not one of them is even remotely relevant.

Social graphs on Google+, on the other hand, are almost entirely about shared interest. Looking at who I’ve circled - - even looking at the names I've chosen for those circles -- Google could easily tell that I’m a tech freak, a photo nut, a foodie, a traveler and all kinds of other things that would enable them to monetize the heck out of me.

And even when my family and friends eventually migrate to Google+, the site's "Circles" lets Google discard groups like "Family" and "Friends" to divine my interests.

So that’s Facebook’s catch-22. The very quality that makes them appealing to users is the same quality that muddles the social graph waters for monetization.

That’s why Facebook pushes frictionless sharing. If people auto-share what they read and listen to, maybe Facebook can figure out what they want.

Unfortunately, users are rejecting this. So there it is. Facebook has not successfully demonstrated an ability to monetize at a scale that would justify its valuation or anything near it.

And that’s why Facebook wants to be more like Google.

How Facebook Is Trying to Be Google

Google has a winning business model. Facebook does not.

Google uses Google+ to generate user engagement and “signals” it can use to monetize users -- not necessarily on Google+ itself -- but on Search, Gmail, YouTube and on other sites where Google currently sells ads.

Google can right-size advertising based on the various tolerances of people on different sites. So they might only be able to get away with small banner ads on Gmail, they can run 15 second videos on YouTube. They might even keep ads off the social network indefinitely. Unlike Facebook, Google is in no hurry to monetize the social network itself.

Also: Google gets mobile. While Facebook's mobile revenue is essentially non-existent, Google is on track to make about $6 billion on mobile advertising this year, doubling what they made last year.

Users are rapidly moving from desktop to mobile devices. Google is already raking in the dough in mobile, and Facebook's got nothing.

And that’s why Facebook is in a hurry to become Google.

Facebook is taking billions in IPO money and going on a buying spree to quickly grab Google-like capabilities. For example, Facebook is rumored to be buying Face.com, which might give it Google-like photo auto-tagging. Facebook is reportedly in talks to buy Opera Software. The company makes speedy mobile web browsers. There's also serious chatter about Facebook launching a Facebook phone.

The company has already attempted to buy Instagram, an acquisition now being looked at by the FTC.

Facebook is trying to buy itself a mobile business model that looks a lot more like Google's.

They're also doing something odd: They're breaking up their service into multiple apps. Facebook offers a Facebook app. They've also got a Messenger app. And this month they launched a photo- sharing app called Facebook Camera.

I think we can expect more desperate acquisitions. Facebook is no doubt trying to increase its "shelf space" on local browsers, as well as opportunities for monetization of mobile.

If the Facebook IPO did anything, it was to shatter the illusion that Facebook can easily monetize users. In fact, it demonstrated the opposite. So now the strategy appears to be: Copy Google and hope for the best.

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