If the worst news you can find about Facebook is a few rumors that they might miss a revenue projection, a prediction that their ad revenue growth rate will decrease from its current 60% (note: ads are not the only way FB can make money), and a random class action lawsuit, then Facebook's prospects look about as good as any company's ever get.
This amount of badness is background radiation. You could scrape together at least this much about any public company.
It does raise the question "What is Facebook's Killer business model?". They have defaulted into ads because that's what Google did and that's what works for many other businesses. But I've never clicked on a Facebook ad and I don't know anyone who has unless it was research. I'm seeing highly targeted ads based on my interests and demographic and I just don't click because I'm too busy social networking. Whereas with Google my intent is "search" and so I occasionally click.
After recently starting to use them again I'm blown away at how useful and engaging the app is. But the revenue just seems to be hobbling along considering their scale.
They've tried so many models and none really stuck like AdWords for Google. Long term I just don't see the same kind of revenue growth that companies like Google and Amazon have had and continue to have. For any investor in public companies that's kind of terrifying when it's not clear how revenue will grow.
>But I've never clicked on a Facebook ad and I don't know anyone who has unless it was research.
I often hear this on HN and from other techies. I bet you've never ran a serious Facebook or any other Ad campaign and measured effectiveness (in terms of business ROI).
I used to think like you, but they do work (even 0.05% click thru rate is considered effective!) and hence these companies make billions of dollars. Please stop making such ignorant statements. $3 billion revenue is not a small number.
In my experience, click-through rates aren't that great and conversion is really pretty bad. I've worked at 2 decent size ecommerce companies and the CPO hasn't ever really been profitable for social media ads especially compared to Google and Bing ads. Their advertising is really more comparable to traditional display or remarketing ads at this point which are generally less efficient for marketing spend and hence less profitable for FB's customers.
Their killer business model hasn't been released yet, but it will ultimately be a competitor to Google's Content Network Ads. Facebook is the ULTIMATE retargeting machine (hence why Google created Google+, it's not because they want everyone to be more social, they want your social data for ad targeting).
I bet within the next 24 months, Facebook launches their content network ad platform and it will be the first true competitor Google will need to deal with simply because of Facebook's massive scale.
Yeah, but where will those ads appear? I have absolutely no data on this, but it seems people are spending less and less of their web time on "the open web", and more of it on medium-to-huge websites, and those usually sell their own ads directly. Facebook will succeed at what you're suggesting only if their targeting proves so effective that medium-sized websites (say the big blogs and online magazines/news sites) can make more money running Facebook ads (after giving Facebook its share) than from staying independent.
They'll appear anywhere you see a site currently running adsense ads. There's tens of millions of sites running those ads, there is far from a shortage of publishers for a new advertising network.
Yeah, people are crying out for an alternative to adsense but can't get anything near it due to the amount of information Google has to target ads and the inventory size. Facebook is well placed to offer as good returns with even better targeting. Just look at the amount of targeting options you get on Facebook now, I'd take those any day to what adsense gives.
Even "techies" click on Facebook ads. I can share my experience: how do you raise awareness for a startup conference, since obviously no one goes on Google to search for it. Facebook is great at telling you about things you may want to know, but are not currently looking for.
The reason it works for Facebook is because of the amazing (scary) imformatiom they have on their users. But it can be put to good use.
I work in online advertising and I would agree if it weren't for the number. But, Facebook are selling ads. They probably still have a lot of low hanging fruit to pick. Advertisers have probably been getting a decent bang for their buck because it hasn't been the kind of economic climate that's very friendly to frivolous ad spending.
The only "theory" I can think of that would explain Facebook ad revenue as a temporary phenomenon is businesses trying it out or trying to get in early in anticipation of the ad platform improving. I don't buy that though, not at this point. I wish I understand the economics of it better.
I'm working on a project that has some similarities to what you guys were discussing. Could we connect via email? You can reach me on stefan-at-wantr.com. Cheers.
I know I am just one example but I am the opposite of you. I have never clicked a google ad (purposefully at least) while I have clicked many facebook ads. Facebook's ads just seem more relevant.
>"You could scrape together at least this much about any public company"
Point to another public company that has a P/E ratio as high Facebook that is missing earnings estimates. Nobody is claiming the company is going to fall apart tomorrow, but if growth is slowing already then they certainly aren't worth $100BB, or anywhere close.
I don't know how bad this really is, and we are still in a shaky economic climate. But if we assume that the information being reported is true, this is pretty bad. As the article suggests, they're applying some "quick fixes" to crank up the ad spends. Is that the best they can do?
Probably not the place for this, but I wouldn't touch CRM with a ten-foot pole. Read through the earnings report and look at all the fancy, non-GAAP accounting tricks they use, like booking deferred revenue. Remember when Zynga played those games? Pretty shady, in my opinion.
Facebook hasn't missed any earnings estimates. This is just a rumor, reported by a company I've never heard of, that they might. You can presumably find rumors of that type about almost any company.
And that's exactly what we're discussing: a rumour. You're right that this may prove to be completely out to lunch. If so, I'll eat my hat.
That said, Facebook is, for better or worse, the biggest thing this industry has seen in a while. So that fact these rumours are being discussed in earnest, rather than "Facebook is still on such an insane revenue growth path that anyone who claims otherwise is an idiot" is substantial.
But the story here isn't about Facebook's success; it's about their valuation. And valuations matter a lot. The entire US economy collapsed when house prices simply failed to meet growth expectations. Banks loan money backed by (overvalued) equity, and so the entire economy is in effect backed by predictions of future earnings.
I've said it here before, but I think many of the tech and app companies are grossly overvalued simply because the market can be so easily upset. If newcomers can get such positive projections, then surely they must be perceived as a viable risk to the big companies.
Facebook specifically is grossly overvalued because as long as they are making all their money from ads, their revenue comes from the amount of time people spend staring at a Facebook page, and this might be at its peak. True, there are more ways to make money, but there are more risks as well. Please, let's spare ourselves another bubble.
The utility of money is not linear across large ranges.
Do you not buy insurance?
I have insurance against catastrophic events, because incurring $100,000 in medical expenses is more than 100 times as bad as spending $1000 in premiums. I don't buy extended warranties.
Do you buy lots of Powerball tickets when the jackpot gets large enough to make the average return exceed their cost?
No, because winning $100 million isn't 100 times as good as winning $1 million.
I tend to agree. Call me crazy, call me naive, call me idiotic, but I just don't see any actual problems for Facebook until/unless a serious competitor for its userbase emerges. Pinterest isn't (yet?) that competitor, inasmuch as it's not currently a substitute for Facebook; they seem to cohabitate pretty well. Other interest-based networks aren't competitors for the same reason. Google+ doesn't seem to be making much of a dent, probably because the switching costs of rebuilding a social network from scratch are more daunting for most users than anyone expected.
That's not to say a competitor won't emerge, and users won't switch to that competitor if Facebook really mucks up its UX in some unforgivable way. But we should bear in mind that Facebook users aren't just going to jump overboard into the ocean. If they're going to jump ship, it'll be because a better ship has pulled up alongside it.
Revenue challenges? Facebook's got plenty of time to figure those out, and meanwhile, Facebook Connect seems like a pretty powerful weapon of mass monetization in the making.
A lot of the anti-Facebook sentiment out there right now reads like wishful thinking.
I might be wrong, but I don't think the question is "will Facebook be overturned by another social network?" so much as it is "are social networks even profitable?"
I don't claim to know nearly enough about economics to even have an opinion on this subject, I'm just saying that I thought the question the article was asking was more about the economic value of Facebook (and, by extension, social networks, though, this extension may be pushing it), than it was about whether or not some competitor would be able to "dethrone Facebook", as it were.
As long as they hold onto their user base, that would be on the low end of what you could expect from them in terms of revenue per user. They are trending towards better targeted somewhat more invasive ads. Virtual currency hasn't really got going yet and as mentioned above people expect them to eventually offer something similar to adsense which would have a high chance of being successful because I think they hold the edge of Google in targeting data.
Of course pushing for more profit could turn off users. Google+ though is showing how hard it is right now though to make a significant dent as an opposing social network.
As long as Facebook don't do anything stupid I find it hard to see how they will be beaten with a similar model. It is more likely that something else will be built which changes the whole social networking paradigm and makes Facebook less relevant.
That was my response as well, so they generate a slightly less ginomous net revenue and that is a problem how exactly.
Looking at worst case numbers it looks like Facebook will be close to 'accumulating cash' mode at the outset. That is a pretty good thing.
Now it would be nice to get some more visibility into their execution against advertising system changes but this reads more like a 'place' piece where the author hopes that if things go good people will forget they ever read it, and if they go really bad he'll be on record early 'predicting' it and will be able to demand huge consulting fees :-)
Of course I have no idea behind the motivations of the author, I just wondered how he can look at $5B in revenue and not be "well ok, their model is working at least."
The biggest reason Facebook has a 100 Billion valuation is because people expect ad revenue to grow rapidly. If there are signs that's slowing down now, before they even go public, it has a huge impact on their valuation. 100 Billion is a very generous valuation, even if you expect Facebook to have tremendous growth, it's an outrageous valuation if you expect them to stay the same (or shrink).
Well if they do manage to do 5B$ revenue this year 100B would be a 20x multiplier on their revenue. Seems in line with other tech companies. But we'll have to wait until they start pushing out those quarterly reports to be sure.
Facebook isn't a public company though. They're pre-IPO. They need to look like a no-risk growth shot, not "just another successful tech company". If you want one of those, go buy GOOG or AAPL.
I had the same thought, further, this quote from the article stood out to me as challenging the author's premise, rather than supporting it: "and the company still hasn't developed a mobile platform that supports advertisements." Surely this is evidence that they haven't even come close to fully developing all of their possible revenue streams.
> "note: ads are not the only way FB can make money"
Facebook still has at least one massive hand to play, and they tipped it in the documents outlining their agreements with Zynga. Those documents stated that if Zynga created a first party site to host their games, Facebook would be the ones to provide ads for the pages. If they were to roll out an AdSense competitor which uses personal data rather than contextual to place ads on publisher sites it could be a huge win.
badness such as this IS background radiation, but for private companies. On the eve of a highly anticipated IPO, these types of rumors that strike at the core of Facebook's business could quickly blossom to full-on nuclear fusion - regardless of whether or not they are true.
I don't disagree that Facebook's prospects look extremely strong, but I do think that their decision to IPO now was wrong and potentially sets up a poisonous precedent for how they run and manage their business.
Facebook is still figuring out how to properly grow their revenue model, and now they'll be faced with the very public distractions of being a public company. Not only that, it opens up all kinds of intelligence for competitors.
I think that Mark and his team are in for one heck of a ride this year. And it isn't going to be fun.
As far as a historical account is concerned, you're more correct, but not entirely so. Suetonius mentions that some claim Julius Caesar uttered those words as he died, however his ultimate conclusion was that Caesar, in fact, uttered nothing in death. Plutarch, the other relavant historical account of what happened, came to the same conclusion.
I'd have to say that they're probably right, or are at least in a better position to say what happened than us ;)
I'm kind of smelling some negative press push here about the IPO. A lot of the stuff doesn't seem to add up - despite supposedly solid leaks about documents, etc.
What this might be an indicator of is a dedicated effort to push the stock price post-IPO lower so that various traders/funds can make a nice chunk of change off a rebound post-earnings.
I'm fairly skeptical of this sort of conclusion - especially about supposed ad revenue or other issues - due to my personal experience using the platform. I have spent a small fortune (of my own money) on online advertising as an affiliate for several years. Out of all the various ad networks and venues, the most consistently profitable has been Facebook, bar none.
On a typical campaign, I'll net a 200-300% profit on my ad spend. Compare this with 60-100% on Google AdWords and 50-65% on Bing. Don't even get me started on buying display ads. I'll spend any free ad budget on FB before any other network, simply because I _know_ I'll profit from it - the risk is far lower and the margin far higher.
I guess my point is, like when Google started, people just don't get the power that FB holds when it comes to advertising. Storefronts in FB were never the point - what is far more important is engagement and interest.
I'll spend any free ad budget on FB before any other network, simply because I _know_ I'll profit from it - the risk is far lower and the margin far higher.
After reading that, I went to your HN profile, where you write, "Entrepreneur and rabble-rouser with an eye for monetization and innovative business concepts. Tempered by the reality of being an affiliate marketer for 3+ years. Forged in the fire of having to compete tooth and nail to succeed in that industry. Prone to writing silly and/or odd descriptions of himself. Named his company after his cat."
I still don't know what industry you are in, but I suppose different businesses in different industries get different results from Facebook ads. I don't know either how Facebook compares to the great majority of places to sell advertisements online, but isn't it possible that your experience is exceptional, and that there aren't enough businesses like yours to sustain a business with the expenses Facebook has?
Good point. I have given a lot of thought to sustainability with Facebook Ads, and my optimism follows the basic data of my experience ever since it opened up.
Originally, low CPC's were quite commonplace. I could advertise something and get a pretty good rate - $0.10 or so - and make some really good money. Over time, the base CPC has risen across the world. Right now, you're looking at $1.20 or so just to hit the US untargeted (this isn't the suggested bid, this is actually running all-US ads).
What is really telling however is CPC's on very tight interest groups. Let's say I target a set of interests in a city that gets me about ~2k people in the profile. It used to be, even a year ago, that I'd pay about $0.80 per click. Today, you'll be lucky to find $1.30 on the low end. As niches get narrower and people get better at mining interest, the CPC climbs. Long term, sustained CPC trends are clear indicators of increasing demand and the ROI to sustain them.
Why this isn't talked about so much has to do with barriers to entry. I'm telling everyone here a lot about what I do without revealing the finer details. Also, I would say that as with any venue, some products do better than others. You can sell big-ticket stuff on FB, you just have to go about it much differently. You can lose a lot of money on Facebook quite easily, so how you approach the market is a big factor.
That said, the secrecy surrounding the success FB advertisers like myself are having is a much stronger indicator than anything that is said publicly. Will it keep FB from missing earnings targets? Probably not, but I remain very bullish on where they are going and what they have to offer.
Since your evidence is anecdotal I'll point out that there have been a number of "unhappy ending" stories regarding Facebook advertising on the front page of HN over the last year and a half. Perhaps your niche works well with their offerings, but it seems like you're the exception and not the rule.
Well, most of the unhappy endings have suffered from one or more of these problems:
1. The advertiser does not put enough money in to fully test the product/niche/demographic
2. The product targeting mix is not well thought through, targets too many people or doesn't take in to account other factors.
3. The advertiser is not testing enough ads to find what gets people to respond.
There are many more reasons as well, and I won't try and cover them all here. Suffice to say, most of the time people don't really put enough on the line to find where they can succeed with FB ads. This has kept the market fairly clear for people like me - I'll happily drop $1k to test something, because if even 1-2 ad/target combos is reliably profitable, I know I've hit something.
A very broad range of products work quite easily, you just have to break out of the old mold of thinking in terms of direct interest -> product correlation. For example, you aren't really going to sell jeans to people that like "clothes".
Think broader - target people that like home improvement and give them ads that say "Toughest Jeans Ever / (pic of dirty as hell jeans) / Work in the garden or change a sink, it doesn't matter. Save $20 with coupon FB20OFF today only!"
These are the ways to succeed on FB, but you really have to be willing to put it on the line.
Another key point is that you have to be willing to dump what isn't working - or a targeting group that doesn't work.
You may find a group that likes the product a whole bunch, but they can't or won't spare the cash to buy it. You may also be reaching them at the wrong time and they aren't close enough to the buy cycle.
(Money quote from that link: "...according to a friend in retailing, the average Facebook woman updates her relationship status to 'Engaged' within two hours of the guy actually proposing…so Facebook sells that relationship status information to retailers who have bridal registries. As my pal told me, 'We’ve been looking for this for fifty years.'")
May have just been an inelegantly worded way of saying "we can target people for Facebook ads on this sort of variable". Facebook doesn't have to release the "so-and-so got married" information to the advertiser, they just have to show that demographic the ads.
...which consent most consumers will blindly give by clicking on whatever button they must click to get to their Facebook page... without ever reading such legal terms.
Doesn't sound too bad at all, frankly. Someone is just trying to add a little drama to what is otherwise a big success story.
It is certainly true that usage of Facebook is rapidly shifting towards mobile, and that currently Facebook doesn't have any ads on mobile. That has got to impact revenue growth somewhat. But ads coming to Facebook mobile sometime soon is about as obvious as can be - and I'd bet on them doing it in a way that takes advantage of that platform's strengths and makes their company even stronger.
>"Someone is just trying to add a little drama to what is otherwise a big success story"
It's a fallacy to conflate "success" with "hype".
Facebook is going to make money and be successful, barring some unforeseen craziness. They made a billion in net income last year! However, where it seems that the tech world and the investment world diverge is in the expectations. $1BB (or 2,3,4,5) isn't enough to buy in at the anticipated price.
Facebook's PE ratio is around 100 last time I checked. If a 'good' valuation is in the 10-15 range (e.g. Microsoft, Apple, Google), then either Facebook's profits earned needs to increase by 10x, or it's share price needs to fall by 10x.
If Facebook's percentage revenue increase is 'only' double-digits, and shrinking, it will take years and years of earnings growth before it becomes a 'good value'. It will take 5 years at a sustained 60% yearly earnings growth rate to reach the same PE ratio Apple has today.
Anybody who puts a column graph showing billions and overlays a downwards trend in red showing slowing growth is essentially lying.
It's irrelevant that they have a point with regards to high P/E ratiom slowing growth and missing targets. Anyone who makes a graph shaped and coloured like that is belittling their readers.
>"Expect more ads as Facebook tries to meet revenue projections."
As I've commented here before, I access Facebook in its own VM. The past couple of days, I have noticed a significant uptick in the number of ads displayed. However, the odds of my clicking one is no higher - just because I accepted a friend request this week from a politically conservative person who I went to high school with decades ago; it doesn't mean I want to buy a USS Ronald Regan hat.
I agree with PG that this is "fake news"
What few people realize is that Facebook does $3B in revenues while not monetizing two "real estates" that could add $3B each (or more) in the future:
- Mobile is still not monetized at all and we are talking about 400M MAU!!!!
- Facebook does not leverage the huge breadth of data it has garnered about users through their "like" actions on other publisher's website to create a much need competitor to AdSense.
These two opportunities are $B opportunities easily...
My only concern for Facebook would be that they focus too much on their short term earnings to justify their very bullish P/E multiple... and lost sight on consumer satisfaction. On the other hand, by doing so (like Google has in the past 4-5 years) would open the door to new startups that could start gaining some great momentum!
FB will always be able to monetize their users. It's just a question of what premium. Since most people on FB have no intent on buying anything, the amount they can net per user is very very small compared to Google. In a sense, it's just like a glorified TribalFusion, where eyeballs are worth .01 each.
This seems right. Users are much less valuable for companies on Facebook b/c of user intent. What Facebook needs to figure out is how to channel higher value users to ads. One fix might be to create a separate search tool that focuses on "stuff" since the main search navigation is useless for finding anything except your friends.
The graph in this article shows revenues continuing to go up over the next 3 years... Just at a slower rate. That doesn't sound like "things don't look good" but more like "things don't look as amazing as they did, but still look pretty good." Of course, I have no idea about the validity of the underlying data in that graph... But still, it totally doesn't match up with the analysis of the numbers presented in the text.
Not that I'm a facebook investor or anything... On the contrary... :)
When your P/E is greater than 100, people are expecting mad growth in the future. Growth slowing already? That's bad news for people looking at investing.
To be fair, even if I were an investor looking at the long term, the time to buy wouldn't be now with a PE that high and expecting slow and steady growth.
I would not be surprised if the government directly began to subsidize facebook, just for the incredible amount of personal information they could mine. Another scary thought is a company like equifax, buying into facebook.
1. You didn't provide any source for this (and I can't find anything online to back it up; granted I only searched for a few minutes). Facebook isn't listed in their portfolio, for example: http://www.carlyle.com/Portfolio/Alphabetically/item8774.htm.... And I couldn't find any mention of the Carlyle Group in the Facebook S-1 filing, either. You could be right, but I'd like to see the evidence.
2. The Carlyle Group is a huge private equity firm that owns all or part of hundreds of companies around the world. Suggesting (without any evidence) that they own these companies as some shadowy method to share private data across them is ridiculous. Your edit makes it even more clear that you're more interested in some kind of conspiracy theory than the obvious truth, which is that the Carlyle Group either didn't invest in Facebook or did so because they thought they'd make good money. And if they invested early, like you say, then they were right.
Thanks for the reply. I'll try to look up connections, but for right now it seems to be impossible with Google SERPs including Facebook mentions of Carlyles the world over. That is, search for anything "facebook" on Google and you'll get a million FB pages due to the word "Facebook" in every page title.
It's always amazed me that a company's outlook can look bad even though they're profit/revenue is growing, just because said growth isn't as big as it was in the past.
I can sort of see why from an economics perspective, the stock price is based on profit growth projections and if those projections don't hold up the price will naturally drop.
But it still seems crazy that we continually expect and pressure our public companies into growing their profit at a rate higher than it was previously growing, otherwise they aren't hitting performance expectations. I'm sure someone with more economics knowledge can explain it in a way that makes sense, but to me that seems like a logical fallacy. We expect what amounts to continual exponential growth.
The question you have to ask is how they are making money. If it costs 2 dollars to make a dollar in revenue, then you are actually losing money.
There's no guarantee that they will continue to make money if they tone down their spend (for example, reducing ad spend), which is why the revenue / profit quality matters.
This is exactly why Facebook should not do an IPO. Regardless of whether or not these rumors are true, hungry public investors will demand significant revenue and profit growth regardless of long term plans and prospects.
I'm afraid that this IPO is going to be a mess.
This might be where we see Zuckerburg get in over his head.
Free Fall? I have not seen any numbers to support that statement, they may not be growing as quickly which is understandable as they get closer to the cap of total internet users however their numbers are not negative (yet).
This amount of badness is background radiation. You could scrape together at least this much about any public company.