The Real Problem with Facebook

The Facebook IPO went fine and dandy. Facebook raised 16 billion dollars. So the millon dollar qu… I mean the ONE HUNDRED BILLION DOLLAR question is what they are going to do with that treasure chest.

Facebook is a unique phenomenon in the history of humanity. Never before, a single service controlled by one company had close to a billion users. As impressive as that sounds, the question is what is means for a business.

So far, Facebook has defaulted to the laziest of all revenue models: ads. It is clear that Google is the king of ads, and this is because intention beats behavior. As someone who was sold search for many years, I can tell you one of my strongest selling arguments: when people search on your site, they are telling you exactly what they want at that time. For a large number of people on this planet researching purchases online has become routine, so there will be times when you know that a person is looking to buy stuff. If you can match a buyer and a seller, you’re golden. That’s eBay’s business, and it’s worth 50B. Google is bigger because of the sheer volume of queries it processes. Most of them are not about buying anything of course. However, Google ads really work for those precious “monetizable” queries.

The problem is that Facebook doesn’t have real search. So far they’ve bet the farm on guessing what people want, and not making them think about typing anything into a search box (I know this first hand). However, they haven’t cracked the code of behavioral ads; nobody has yet. Can it be cracked? Would it be enriched by adding spices? No one can say.

Fbads

Even if ads worked for Facebook, the potential for growth is very limited. Google has been trying to diversify their business and create another significant revenue stream for years. No dice so far. Twitter seems to have given up on that too, and they are betting on ads as well. So where does that leave Facebook in terms of justifying a 100B (or 90B, or whatever ultra-high) valuation? Will they start making hardware like Apple? Selling things like Amazon? BTW, Amazon is worth about the same as Facebook and they RULE E-COMMERCE (not to mention the growing contribution of their cloud infrastructure business).

Obviously Facebook’s asset are its billion or so users. The big bet is that some of those users (a tiny amount obviously) will some day pay a lot of money to Facebook. For what? Well, thanks to the hype generated by the IPO now they have 16 billion dollars to find out. I for one will stay out of this one, and watch from the sidelines. Welcome to the Popcorn Valley!

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2 thoughts on “The Real Problem with Facebook

  1. Search is a big problem on Facebook (so much content is hidden away, searching for interesting topics on Facebook often brings up those worthless Wikipedia harvested pages on Facebook as the first result, etc). It’s abysmal. This is something that will be addressed soon IMO. The reason that Facebook is valued so highly isn’t just because of their current market dominance in social networking, its their possibility for entering and dominating other fields like search, ecommerce, payments, entertainment, identity services, and others as well. Look at how much social data that Facebook has access to that nobody else in the world has access to. And if you think that Facebook can’t compete with somebody like Google in search, just look at how much attention they’ve captured from businesses already – big brands are promoting Facebook URLs in their television advertisements, there’s a plethora of companies listed at http://www.buyfacebookfansreviews.com that do nothing other than promote Facebook business pages, and Facebook is nearing a billion active users. This would not be happening if Facebook wasn’t completely dominant in what they are doing. As further proof of this, look at how much effort Google is putting into trying to get Google+ jumpstarted in a hurry. They know that this has to happen soon because if Facebook includes a real search feature within Facebook, then a big part of the reason to use Google search will be gone and that has to be a long-term problem for them. I think that despite some stories coming out recently where Facebook’s stock price dropped a bit, long-term they are drastically undervalued if they execute on their products.

  2. You make some good points, in particular I think payments is a promising space for Facebook. However, when it comes to search they have a problem: most users assume their content is somewhat private, and don’t expect it to be searchable. Furthermore, Twitter tried to monetize their content search (mostly public) and failed.As for big brands spending money on FB, the jury is still out on what kind of returns they get. For example, last week General Motors pulled their 10M campaign.http://techcrunch.com/2012/05/15/facebook-general-motors/

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