It seems nearly every day there’s a new headline out there about Facebook’s share price hitting a new low. This week it past the US$20 mark, representing an almost 50% decline since its listing nearly three months ago.
Now I’m not going to discuss the reasons for this decline, there’s nothing new I can really contribute to this discussion on top of the masses amount of news out there already. However in my attempt to put somewhat of a positive spin on things, I believe this decline in long term could very well prove to be the making of Facebook.
So you might already be thinking I’m nuts, nearly US$50bn gets wiped off of the company’s value and I’m saying this isn’t all bad!!
Well hear me out first and I might very well change your mind…
According to Facebook’s first earnings report, the company’s revenue surpassed US$1.18bn in Q2 of 2012, 84% of which came from revenue from advertising. So Facebook is already making money from advertising, maybe not to the extent that investors expected and hence the declining share price. Whilst this doesn’t compare with Google’s advertising revenue (Google’s search engine generated some US$7.54bn in Q2 of 2012)it represents a significant amount for a company that’s less than ten years old. Last month Facebook also reported that it had a daily average of 552 million users in June, which is a 32% increase from a year ago. That means roughly one in every fourteen people in the world are on Facebook every day and it’s grown significantly year on year.
Looking at the above from an investor’s point of view surely the two main components are there for an attractive investment, significant revenues coupled together with a captive user base that is seeing growth. However, as the declining share price demonstrates, investors are not confident in the business as an investment opportunity – if they did they would be holding on to their shares, not selling them.
The above then begs the question – did the investors who bought into Facebook originally, really know what the business was all about?
Facebook’s own mission statement clearly states it’s their “mission to give people the power to share and make the world more open and connected”. It doesn’t state anything, anywhere, about being the world’s premier online advertising platform – in fact I struggled to find anything about advertising anywhere on their own About Us page.
This then comes to my point, if Facebook is already making money from advertising and has a captive audience that’s growing as a social networking platform, then why try to reinvent yourself as an advertising platform? Why can’t you make a significant amount of money just being a social network? Why assume the only way you can make money with Facebook is by selling advertising? Why not capitalise on the unique nature of Facebook over Google? Instead of trying to compete for online ad spend with one of the world’s most successful online businesses, why not capitalise on the uniqueness of the world’s most successful social network?
What I think Facebook risks doing by pandering the short-termism of investors is risking the long term future of the network itself. If Facebook continually puts the needs of advertisers before users, with the aim of continually improving profits, I am sure users will eventually be put off and either use the platform less or in the worse case leave.
In Mark Zuckerberg’s own words “We don’t build services to make money, we make money to build better services.” If this is the case then I believe Facebook should be concentrating on developing its platform further not for advertisers, but for users. It should look to monetise itself not solely as an advertising platform, but by creating useful services that people will want to use and would be willing to pay a premium.
In essence this is what Facebook has always wanted to do – create a platform which people can use to stay connected.
How this ties into my original point about Facebook’s share price being an opportunity, is that clearly the current way Facebook is structured will not meet the expectations of its current investors. With perhaps the power of hindsight, what Facebook should of done from the start with investors is state that if you want to invest in an online advertising platform invest in Google – if you want to invest in a social networking platform, then invest in Facebook. I appreciate this is looking at it through rose tinted glasses, but I don’t think they would be under the pressure they are under now with headline after headline of a declining share price if they had been upfront from the start.
By trying to position itself not as a social network that makes money mainly from advertising, but as a social network that makes money from social networking coupled with advertising, I think Facebook would be more able to attract the right kind of investors who would be sold on the idea of how the business plans to make money in future.
Well that’s all very well in an ideal world, but how could Facebook possibly do this?
Well for a start I think they could seriously look at the freemium route, they wouldn’t alienate their current users but at the same time they could try and incentivise people to sign up to premium accounts with additional features – things like phone/tech support for your account, everyone knows someone who’s had an account hacked into or has lost it all together and the admin involved in trying to claim it back. Also think of the limitless amount of storage space for photos Facebook uses, why not charge users when their storage capacity reaches a certain point? How about ad free accounts – why not charge users for the privilege of not seeing ads?
If you do the math on this it doesn’t sound that ridiculous. Facebook is getting about 500 million daily users each month, 50% on average log in each day. If only 1% of the 250 million people logging each day upgraded to a premium account priced at US$9.99/month, which is roughly the same as a Spotify premium account, that’s just under US$300 million a year just in premium account fees alone.
Other avenues they could look at is the freemium route but for business accounts. For numerous businesses their Facebook account/page is a key part of their marketing and proves to be a real source of revenue. Why not look at providing premium accounts for businesses?
I appreciate that some of my suggestions might be a bit ambitious, also the fact on Facebook’s home page it states ‘It’s Free and always will be’ could make this null and void, but technically running a freemium model would still keep Facebook free with the option to upgrade. Also, now that Facebook has shareholders to answer to, who will be expectant of ever increasing profits, the freemium model could become a very tempting option to increase profits without growing the network.
Well thanks for reading my thoughts, I would love to hear back from anyone – do you think the above is realistic? Can you think of any other ways Facebook can monetise itself? Do you think I am completely unrealistic and Facebook should be looking to compete more aggressively with Google for online adspend?