Bigger ads, bigger bucks? Facebook feels Wall Street heat
This post was written with Paul Sloan and published on CNET. With Facebook's stock now half of its IPO price, Mark Zuckerberg and company are testing more ways to make money from advertising. And they can do a lot more.
A 'gigantic amount of money'No one expects Zuckerberg to veer dramatically from his strategy, which, in brief, boils down to two key components: On the one hand, the company wants to persuade Madison Avenue of the value of Facebook as a new kind of social advertising medium. At the same time, it needs to solve the $64,000 question facing all ad-driven social media sites and amp up its efforts on mobile. Facebook's story is strong: 955 million monthly users, more than half of them coming back daily; $922 million in revenue from advertising in the last quarter. But Wall Street isn't in the mood for a "story." That's so 1999. It wants proof, in the form of higher revenue and profit growth, especially considering that Facebook, despite the plummet in its share price, still carries a price-to-earnings ratio that dwarfs those of Apple, Google and LinkedIn. If you think about the above ad, this Wall Street problem might actually be a simple problem to solve. Why stop at splashy ads on the logout page? Why not the home page? Facebook could expand beyond those tiny ads on the right side of your screen that force advertisers to use static graphics with separate text. People cry that such ads will ruin the user experience, but would they really? Every other site on the Web uses them. Facebook's could be well targeted, and it could make a lot of money sprinkling them across Facebook and stealing ad dollars now going elsewhere. Heck, with its traffic, Facebook could theoretically soak up the entire display market. Surely there's an acceptable look somewhere between the Facebook of today and the messy MySpace of yesteryear. In fact, given all the additional features to Facebook over the past few years -- including Facebook Ticker and Facebook Chat -- even Facebook no longer looks likes Facebook. Google+, like it or not, is now the clean alternative to Facebook's clutter. How easy would it be to turn Facebook's huge reach into a cash machine? Here's what Marc Andreessen, a venture capitalist and Facebook board member, told Charlie Rose in February 2009:
Facebook is deliberately not taking a lot of the kind of normal brand advertising that a lot of Web sites will take. ...Facebook has made a strategic decision to not take a lot of that business in favor of building its own sort of more organic business model and it's still in the process of doing that and if they crack the code on that which I think that we will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot for normal advertising today, it'd be doing over a billion dollars in revenue. So it's much more a matter of long-term strategy.Then Rose follows up: "So if you want to make a lot of money instantly, you could." To which Andreessen replies, "Yeah, oh, very easily. It could sell out the homepage and it would start making just a gigantic amount of money."
Just reading that I can hear the throngs of Facebook employees and investors screaming, 'Do it! Turn on the spigot!'In the long run, Zuckerberg might very well be right: The types of social ads that Facebook is pushing, such as Sponsored Stories, which appear in your news feed and are less ad-like, could prove really effective. Big, splashy display ads are hardly great performers, after all. But we're not talking a long-term strategy that would replace Zuckerberg's current direction. We're talking triage in the face of a slipping stock that could color everyone's impression of Facebook -- including ad buyers who might start to look at Facebook as a damaged company.
Testing new mobile adsThen there's Facebook's mobile challenge. Facebook is under constant attack for not moving faster to squeeze money out of its growing mobile user base. In the latest quarter, mobile monthly users climbed 67 percent from the prior year to 543 million. Facebook has been careful about how it spreads ads on mobile phones. In March, it began rolling out Sponsored Stories for smartphones, where companies can create "stories" that show up in News Feeds of a brand's fans and their friends.
In the end this may come down to a question of Mark Zuckerberg convincing Mark Zuckerberg to rethink his principles and bend to the sometimes brutal demands that accompany life as a publicly traded company. And if that happens, Facebook stock may get a much-needed jolt.