There’s a growing trend in the media to attack facebook. It started when their redesign got pretty bad reviews, continued when their CFO left, and now is gaining steam as mainstream outlets are questioning it’s core business proposition. There are three different things here and the media is pointing to them as an indication of Facebook‘s failure. I disagree. Here’s why:
Product enhancements. One thing i’ve admired about Facebook is their ability to keep pushing their product forward. They introduced a great photo experience before any of their competitors (and have grown to be #1 on the web). Even as they were experience phenomenal growth (they hit 8 million student readers), they completely redid their home page when they introduced the News Feed. While initially hated by their users (FB blog) and the media (Time article), it set the standard for how social networks should display user activity and is now seen as a stroke of genius. And growth climbed even higher. At 70 million users they then completely redid the profile page to be a feed-based page as this is the best way for users to continuously portray themselves (see Tumblr for an example). This was hated at first too. Now, they redone the Facebook Home page to better showcase conversations and user activity. Is it like Twitter? Yes. Is it hated by their users? Yes. But it is also an improvement. More than any other company i know of, Facebook is constantly pushing to get better in all areas and doing it fearlessly. Even if they misstep, I applaud them for it. From my experience at AOL i’ve seen that when yoy have a large user base it’s very easy to become tentative and second-guess every move. Not changing becomes the easiest path. It also means you start dying. This latest change is more an indication that they’re not dying but moving forward.
Valuation. Facebook got an absurd $15 billion valuation from Microsoft when it sold them some equity. That deal was more than just equity sales but it also solidified Microsoft’s relationship with them as their exclusive third-party ad provider (story). That valuation has become a problem as every new raise that happens in the industry (Twitter, FriendFeed) is evaluated against it. Facebook is now raising at a more reasonable level at a $5 billion valuation. I don’t think this is an indication of failure of FB but rather a reflection (a) that these raises are straight equity and not part of an ad sales agreement, and (b) the market is the worst it’s ever been. I think it’s ridiculous to think that the environment is the same as it was in October 2007.
Business Model. The media talks about Facebook’s failure to make an ad business out of their inventory. Time’s article this past week was called, “Facebook Takes a Dive: Why Social Networks Are Bad Businesses.” This is completely ridiculous. First of all, MySpace is making money. Let me repeat. MySpace is making money. They were bought by Fox for $580 million and they then immediately did a deal with Google to sell ads on their search page from 2006 to 2010 for $900 million dollars (details here). That’s a quick profit of $320 million. Everything else on top of that year-in and year-out seems to be gravy. The article in Time continues to say:
What is true is that social network sites have had trouble making money. MySpace was supposed to be a big part of the revenue growth at News Corp. Wall St. thought Murdoch was a genius to buy it. Last year, News Corp had to admit that MySpace would not hit its revenue targets. That is usually not the hallmark of a property that is going to take over the Internet. Analysts believe that MySpace rival Facebook had revenue of $265 million last year. That is astonishingly low for a company that had 57 million unique visitors in the U.S. last month. And, Facebook also has a very large international user base.
So let me get this straight, even though MySpace is profitable at $500-800 million dollars a year in revenues and even though it’s generated hundreds of millions of dollars for News Corp it’s a bad business becuase they missed their revenue target last year? That is completely ridiculous. Facebook is a differnt issue. They have repeatedly said that they are deprioritizing ad revenue and instead focusing on growth and user engagement. Since they started saying this (starting in late 2007), they have grown from 50 to 200 million users. I’d say that’s pretty good execution. Facebook makes about $275 million a year. Could they make another 100-200 million if they started selling more ads on search pages and profile pages? Absolutely.
All of these reasons above are why sensationalist articles discussing the demise of the social network drive me nuts. Nobody knows what the future holds, but one thing that we can pretty much be sure of is that sites that have great user engagement and activity – and facebook has over 20 million users update their status at least once a day – will get the ad dollars. Nick O’Neil has a good post on AllFacebook today on why he’s willing to pay a $34 CPM on facebook. It’s not the silver bullet but it shows that there is a profitable end in sight for the company and it’s not necessarily the horrible business the media would like it to be.