May 24, 2012

What The Facebook Fanboys Never Understood

The Facebook melt down continues to be the best show in town.

Now all the lemmings who blew their money on this charade (something like $20 billion in value has disappeared so far this week) are pointing fingers at each other and blaming everybody but themselves for their venality and stupidity.

From Yahoo! Finance yesterday:
As I write, shareholder suits have already been filed in New York and California. The State of Massachusetts has subpoenaed Morgan Stanley following reports that it allegedly only told a few of its best clients that its analyst was cutting his revenue outlook for the company. The entire underwriting syndicate is being sued, as is Facebook's newlywed CEO and several board members. In addition, the Nasdaq has also been sued, and the SEC and FINRA are launching investigations. Congressional hearings and probes can't be far off.
Had they read The Ad Contrarian last week -- or for the last two years for that matter -- they would have appreciated the pile of crap that Facebook value is built on (by the way, it's really fun being smug.)

Here's what the market didn't understand -- and still doesn't understand -- about Facebook.

Facebook, and all online media, are not TV.

Watching TV essentially creates forced exposure to advertising messages. People who watch a TV show also overwhelmingly watch the spots. Contrary to legend and self-reported BS, people are no more likely to get off their asses during a commercial break than they are two minutes before or two minutes after a commercial break.

On the other hand, no one pays any attention to the ads on Facebook. Like tiny little newspaper or magazine ads, they are virtually invisible.

There are people who don't even know there are ads on their Facebook page. They just know there is a column of stupid crap on the right that they never bother looking at. (This is true, by the way, of an enormous amount of web pages. Including this one.)

This is why the click-through rate on Facebook ads is so astoundingly low (so low, in fact, that they refuse to publish it.)

Ads that have no impact are worthless. It's really that simple. And Facebook ads are as close to having no impact as it gets. It doesn't matter if they have a billion subscribers. A billion people ignoring your ad are no more valuable than a dozen people ignoring it..

For a more esoteric explanation, I suggest this article from the former publisher of Adweek.

Until Facebook finds a way to make paid advertising work in their "ecosystem" this problem will not go away. And until investors understand this simple fact, Facebook shares will remain overvalued, despite the beating they've already taken.


Dennis said...

IMHO they have gone about monetising the site the wrong way. Charge $1 per month - see what happens. IF people are not prepared to pay for it, it has no value. Ditto Google.

gave Trott said...

If you haven't seen it, George Tannenbaum makes the same point as you in a very funny way here:

Brubin said...

I don't understand why they don't just charge companies for using the (currently) free profile functionality. Surely it can't be that difficult?

Jim said...

Dennis, how very dare you.

Paul Benjou said...

Becasue it's simply not worth the trouble trying to intercept a personal conversation with a social communication .... it never works to the marketer's benefit ...and never will

Bob Knorpp said...

I'll say it again: $12 is my price, Bob. Then I'm all-in on this stock. ;)

georgiecasey said...

Bob you've never answered my numerous comments here! I used to run Facebook campaigns to dating sites where 

Chris Seiger said...

Facebook's only value is its data. As I've said before. They know everything about a lot of people stupid enough to share everything about themselves, and there are more of those than I dare imagine.

Mark these words: Facebook will update its corporate policy to allow them to more freely shop and use information. Marketers will choose to use that information in ways other than ads on Facebook. Spam filters will be forced to unionize. Facebook will be bought by Rupert Murdoch and then proceed to tank in its entirety.

Okay, everything after the first sentence of that paragraph is more hoping than speculating. Can't blame a guy for dreaming.

Omair said...

John Dvorak once wrote in PC Week: "The stock market goes nuts over any company that so much as mentions the word "Internet". All this proves to me is that the boneheads on Wall Street are as dumb as they were in college when they had to switch their majors to business to keep from flunking out."Replace 'internet' with 'facebook', and... it's all exactly the same. Damn.

Tim Orr said...

I'm no underwriter, but it is often the case that IPOs lose value in early days. The amazing thing about it is if this happened to any other IPO, nobody would find it remarkable. Remember the sequence in "Citizen Kane" where Kane's affair is revealed right before the election? He loses, which surprises no one except his paper, which carries the headline, "Fraud at Polls!"

Greg Satell said...

Sorry Bob, You're way off on this one because you're mistaking expectations for reality:  Facebook was expected to be worth over $100 billion, now it's actually worth somewhat less, so you can easily find people online who will trash it.

The reality is that, anyway you slice it, this company is worth a shitload of money because it makes a shitload of money and has fantastic margins (it made $2 billion EBITDA last year on $4 billion in revenues - what TV companies have 50% margins?).

So take away any expectations on what they are worth (presently $87 billion) they are bigger than most media companies on financials alone.

More specifically on points raised:

CTR rates: yes they're low and amazingly shitty.  No one really cares, the shittiness is priced in and you can still build traffic because the audience is so amazingly large.

Free profiles: Most of the Facebook paid advertising goes to seed promotions on brand pages.  So saying they don't monetize their brand pages misses the point.

Monetization:  I would argue that they are going about monetization exactly right.  They are constantly experimenting and trying to come up with innovative ways to make money.  When something doesn't work, they drop it and try something else.  That's how you innovate.

So cut out the bullshit and pick something intelligent to bitch about (like what low CTR rates on Facebook say about the value of all that data they are collecting).

Say what you want about, like any company, they make plenty of mistakes, but give credit where credit is due, they've built an amazing business in a very short time.

- Greg


Yeah, tell that to the investors.