As Facebook prepares to go public, they face some significant problems. Like most web-based businesses that don't sell anything, they need to find a way to monetize their user base -- in this case, a base that is both enormous and loyal.
They are obviously not the first to face this problem. The history of non-sales focused websites with large user bases achieving their assumed potential (as money earners) is not encouraging.
As I wrote a few weeks ago in Facebook And Advertisers, they are substantially underperforming Google in generating ad dollars per time spent with them. People spend almost four times more time with Facebook than Google, but it generates about 1/7 the percent of online ad revenue.
The problem has been that to businesses, the free part of Facebook -- a Facebook page -- is way more attractive than the paid part -- a Facebook ad.
The other problem is that a Facebook ad currently does not fit well into either of the traditional models for successful advertising. It does not fit the "interruption" model (like a tv spot that interrupts your viewing) because the ads are small and off to the side, where they verge on invisible. As a result, the click-through rate for Facebook ads is a dismal 2 to 5 clicks per 10,000 ads served.
Neither does it fit well into the "permission" model in which you give active permission for an advertiser to market to you -- like an opt-in -- or like search in which you give tacit permission by doing research from the site.
On the other hand, Facebook has an enormous amount of information about an enormous number of people. The problem here is to utilize the information in a prudent way that does not scare the shit out of their customers. Fortunately for them, while they have spooked a few users from time to time, most Facebook enthusiasts have shrugged off the privacy issue.
It is my belief that there are two ways for Facebook to grow revenue. The first is a value-added b2b or b2c product. The second is by making advertising on the page more intrusive.
The difficulties here are obvious. How do you charge businesses for what you used to give them for free? There's not a lot of precedent for doing this successfully on line. And second, how do you make ads more intrusive without turning off your loyal users?
Facebook has some significant obstacles to overcome to justify what is likely to be an enormous initial valuation.
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