The Big Facebook Revenue Yawn.

Yeah. Facebook is IPOing. The words of one of my mentors sum it up best: "meh."

The stock will (initially) go up...
Morgan Stanley, Goldman Sachs and other Wall Street friends will undoubtedly have pre-sold enough shares (to quasi-informed dentists and doctors who want to be part of the "next big thing") to make sure that the stock goes up at IPO time (See a really interesting post on a related topic here: http://youarebeingmanipulated.com/pyramid-root-manipulation-part-3/). Today, I'm going to make a back-of-the-envelope case here that the revenue side of Facebook ain't anything to get anybody excited about. When reality sets in, I'll bet that the stock heads south.

Some pretty good margins and unrealistic expectations for growth

The Wall Street Journal reports that in 2011 Facebook had revenues of about $3.71 billion and profits of about $1 billion. That's about 26% margins. Not bad at all. But with a $75-100 billion dollar IPO valuation, Facebook would be priced at 75 times trailing earnings and about 20 times sales. In other words, there are massive expectations for revenue and profit growth. Where does this revenue come from?

There are predominantly 4 main streams:

1. Advertising
2. Marketplace
3. Sentiment analysis for companies.
4. Revenue shares from Zynga Farmville type applications.

Advertising:
Advertising constitutes the biggest chunk of Facebook revenue. But how much growth is in advertising for Facebook? Not a lot for two reasons. First the Facebook user base is not going to grow much more and secondly, there are much better vehicles out there for brand builders.

The audience size is already factored in
Let's go to the first point. Facebook has 850 million users. That's tremendous. But lion's share of global Facebook accounts has already been had and it is unlikely that high growth will come from new Facebook accounts. More certainly, the consumers with the most desirable income levels (which is important for advertisers) already have accounts. All of this to say, that advertisers have already absorbed/reflected on Facebook's audience size/desirability and have signaled how good Facebook is as an advertising/brand building vehicle. That amount is $1.9 billion. But, its hard to see how user growth factors can support the 8X or 10X ad revenues (and profits) that Facebook needs to support its proposed $75-100 billion valuation.

But wait a minute- perhaps Facebook users will spend more and more time on Facebook - giving advertisers better advertising opportunities. Evidence here suggests the opposite. Most users are most active when they first activate their accounts- adding friends, tagging pictures of themselves with their crush, or confirming Aunt Edna is their aunt. After that, the usage curve (for most) drops off and Facebook's functionality increasingly is geared towards messaging friends.

Facebook came in 2nd in a advertising beauty prize, here is $10.
Second, as Facebook heads more into the advertising world, it increasingly competes for advertising dollars with Google. But, what is a better venue for advertisers? If you were an advertiser selling wedding dresses in Idaho, where would would you rather target your ad:
A) On Facebook where a young woman who changes her status update from "in a relationship" to "engaged" or
B) On Google where the same young woman enters a key word search "wedding dresses in Boise"?

Google (and other online sites), simply has a better venue for targeted advertising- and that's what advertisers want. Facebook may have some excellent brand building opportunities via social networking (which is more viral but doesn't deliver advertising revenue) but it is clearly in a lower tier for generating ad revenues. Facebook's runner-up position in advertising reminds me of the old Community Chest Card on Monopoly.


Marketplace
Facebook's plans call for growing a classified sales in its Marketplace. This puts Facebook in Craig's List's domain. But here's the question: If I have an old table to sell, where do I have a better chance selling it - among my group of friends (or network of friends' friends) or via the site dedicated of bringing a much larger group of buyers and sellers together? For most items, Craig's List (or the online version of the local newspaper) gets the nod. There's revenue in the Marketplace for Facebook, but its not going to dominate the online classified section anytime soon.

Sentiment Analysis
One of my academic research involves how managers measure their brands. One of the findings is how managers are increasingly measuring their brands online- and how they should be (so many do it wrong). Some brand managers track how many Facebook users "like" their brand. Others perform Internet sentiment analysis. These are important additions to a manager's metric tool box. But, is there really a lot of revenue out there for Facebook in this domain when there are dozens of free sentiment analysis tools like Rankspeed, Twendz, and TwitterSentiment out there?

As an aside, I did some Twitter sentiment analysis on Facebook today. The online sentiments about Facebook are pretty much evenly split between positive and negatives. That ain't too good.

Revenue Shares
Farmville was a revenue bonanza for Facebook. According to the Facebook financials, revenue share from the game's transactions represented around 13% for Facebook. But will Facebook be able to replicate successes like this? So far no other application has been anywhere close to capturing the imagination of the maturing Facebook users like Farmville did. The fear is that the Farmville-type revenue stream may be closer to a one-hit wonder than a reliable ongoing revenue stream.

The point of this blog is not to trash Facebook. Facebook is a strong brand that has had amazing growth and a fascinating history. Even if a small percentage of 850 million users are lovers of the brand (Brand Mojo ratings on Facebook show that about 13% of respondents love the brand), Facebook will play a powerful role in shaping the online world in the foreseeable future. But when you break down the revenue side of Facebook's business, it doesn't look very exciting- certainly not at the level that deserves a market capitalization greater than Disney's or equivalent to McDonald's or Pepsi. When reality sets in, I'm betting most of the doctors and dentists will be wishing that they didn't buy the stock.

Ready for a good Google cry? Google's brand building ads.

A couple of years ago, my BrandMojo website picked up on how very loved the Google brand is. Last year, Interbrand’s annual global brand valuation showed how Google’s financial brand valuation was surging. (A key point of Brand Mojo is showing that the more loved a brand is, the bigger the brand growth. ) A lot of online brands are strong brands (e.g. Facebook, Twitter) but Google is in a league of its own. Google just “gets” branding better. I’ll give an example below.

Unlike other online powerhouse brands, Google does quite of bit of traditional media buys (e.g. Superbowl 2010 advertisement). Many folks will argue that Google doesn’t need to do this. Why bother? Google can advertise for “free” through its own properties. According to the bean-counters that keep track of this sort of thing, while Facebook is the site with the most online traffic, Google properties (by traffic) are ranked second (Google), third (Gmail), fourth, fifth, sixth and seventh. Those are world-wide stats and you can check it out here. (Click the image below to see the top 5 traffic sites.)

What this means is that Google has unprecedented contact points with consumers. These contact points are themselves opportunities for Google “self-advertisements” and brand building experiences. Think just how good the Google experience is. When was the last time that Google’s main search site had crashed on you? I’ll bet never. How blown away were you when you saw Google Earth for the first time? A lot. Google Translate? Amazing. Direct experience with Google builds its brand in a most powerful way.

So why would Google even bother to reach out to mass audiences when it can reach them directly online and super effectively already? And, what would a company with such a boring utilitarian search function even bother to communicate? The answer to the 2^nd question is contained in the two links below. Oh yeah, they are YouTube links.

http://www.youtube.com/watch?v=nnsSUqgkDwU

http://www.youtube.com/watch?v=R4vkVHijdQk

So now we have our answer to question 2. (By the way, how are the heart-strings? Don't be ashamed to say that you cried. I did too - along with most of my branding students. Hey, who needs to watch "the Notebook" for a good cry?)

These advertisements demonstrate that the folks at Google “get branding.” The Google marketing folks took the most utilitarian online product ("search" in and of itself is pretty boring) and emotionalized the Google brand. The campaign message: Google is part of your life. Google is your trusted friend to help you through your personal journey.

So what's the impact Google? The ads aren’t going to drive anymore traffic to the site or have site visitors stay longer at the site. It is even hard to expand the percentage of “lovers” of Google. The ad campaign doesn't have short term goals. The ads are designed to shape Google’s brand image for the long term. The campaign is building the brand- fortifying the Google lovers (maybe making a few more) and immunizing the brand against bad things that might happen in the future. For example, how could I bet upset at Google, my trusted BFF for some minor privacy violations? Google anti-trust, nah leave Google alone. (see http://www.vancouversun.com/Ganging+Google/5116751/story.html) A few mistakes by our best friends are easy to overlook.

One mistake Google is not making is traditional brand building.

The road to hell is paved with good intentions...

I remember my father saying, "the road to hell is paved with good intentions." Now my dad didn't make up the line (A Google search revealed that Saint Bernard of Clairvaux said something along those lines in the 1100's) but the wisdom of that line can not be overstated. The line captures the blow- or unintended consequences - of well intentioned government decisions.

Smoking before sex.
It's not that long ago when governments started restricting tobacco advertising. I am not making the case that this restriction is a bad thing. After all, we don't want kids picking up the habit. And, the restrictions make economic sense especially in countries where health care cost is "picked up by the government" (assuming the health care costs of treating the incremental diseases caused by tobacco exceed the incremental revenue from the tobacco taxes).

Originally, the anti-tobacco legislation stated that tobacco brands could not promote their brands in any place that a minor might be exposed to it. What was the result? Big Tobacco shifted their promotional budgets to adult industries. That's right. The legislation helped to subsidize the smut industry.

Remember luxury tax on Monopoly?
There's no tax that could be more popular than a luxury tax. After all, who could oppose a special tax on the consumption of extravagant luxury items like a 100 foot yacht or Gulfstream jet? When this happened in the 90s, rich folks shifted their spending away from the taxed items and the folks who made the yachts lost their jobs. (An additional 1% tax on a $50 million jet is still $500,000 and a rich man stupid enough to snag trophy wife #4, is smart enough to know that the 500k can cover some part of alimony.)

A real road to hell.
Here's a favorite of Reuven Brenner. When governments got in to the business of highways and roads, the idea was that road building would create a lot of jobs. More roads would further stimulate car sales as drivers would have more places to go. This makes sense. But the blow here is crazy. Prior to the widespread access to free roads, people lived close to where they worked, partied, worshiped, and shopped. When the highways out of town got built, the rich and middle classes drove their cars and moved to the 'burbs. So, as the inner city was gutted of the key property stakeholders, crime rates rose. As the highways extended, cities sprawled. Traffic congestion emerged contributing to pollution, driver stress, accidental deaths, and years of lives wasted on highways. The average Torontonian commutes just under 80 minutes a work day. That's about 550 days of life on the real road to hell of good intentions.

So what's the so what? Coming soon... :-)