The Facebook Fallacy

Coins of Realms

Very interesting point – is Facebook really a viable business? Will it be around in ten years? Will it be profitable? How?

Facebook is not only on course to go bust, but will take the rest of the ad-supported Web with it.

Given its vast cash reserves and the glacial pace of business reckonings, that will sound hyperbolic. But that doesn’t mean it isn’t true.

At the heart of the Internet business is one of the great business fallacies of our time: that the Web, with all its targeting abilities, can be a more efficient, and hence more profitable, advertising medium than traditional media. Facebook, with its 900 million users, valuation of around $100 billion, and the bulk of its business in traditional display advertising, is now at the heart of the heart of the fallacy.

The daily and stubborn reality for everybody building businesses on the strength of Web advertising is that the value of digital ads decreases every quarter, a consequence of their simultaneous ineffectiveness and efficiency. The nature of people’s behavior on the Web and of how they interact with advertising, as well as the character of those ads themselves and their inability to command real attention, has meant a marked decline in advertising’s impact.

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I don’t know anyone in the ad-Web business who isn’t engaged in a relentless, demoralizing, no-exit operation to realign costs with falling per-user revenues, or who isn’t manically inflating traffic to compensate for ever-lower per-user value.

Facebook, however, has convinced large numbers of otherwise intelligent people that the magic of the medium will reinvent advertising in a heretofore unimaginably profitable way, or that the company will create something new that isn’t advertising, which will produce even more wonderful profits. But at a forward profit-to-earnings ratio of 56 (as of the close of trading on May 21), these innovations will have to be something like alchemy to make the company worth its sticker price. For comparison, Google trades at a forward P/E ratio of 12.

(click here to continue reading The Facebook Fallacy – Technology Review.)

Live to Ride

Facebook may have demographic information on 800,000,000 people, more or less, with more of less accuracy¹, but what are they going to be able to do with this data? Currently, Facebook ads are so poorly targeted as to be a joke. I just looked at my profile, and see seven ads, only one of which is even mildly targeted to me². The others are Dell ads³, luxury clothing ads, credit card ads, and some GMO tea in a plastic bottle. No wonder that GM decided to spend their money elsewhere. They weren’t the first to notice abysmal performance with Facebook ads. I’d be hard pressed to advise an advertiser to spend money on Facebook when there are so many better options.

General Motors Co said on Tuesday it will stop advertising on Facebook, even as the social networking website prepares to go public.

While GM gave no specific reason for dropping Facebook ads, a source familiar with the automaker’s plans said the company’s marketing executives decided Facebook’s ads had little impact on consumers.

(click here to continue reading GM to drop Facebook ads due to low consumer impact | Reuters.)

If I was a broker, I wouldn’t own Facebook stock for long.

1. for instance, I have lots of erroneous information in my profile, just on principle [↩]
2. some sort of hot sauce [↩]
3. plural!! even though one of the only things in my FB profile is a love of Macs! [↩]