Facebook, the social networking valuation bubble and the need for better marketing

jm_small_55.jpgI have heard that Facebook Click Through Rate is a meagre 0.27%…can you believe it?! At the same time, the site is valued in the range of +$15 billions…

“Boom…correction…boom…correction again…”
The more I hear about Facebook and billions in valuations for a social networking website, the more the .com bubble and its consequences come to my mind.

But why? Where is the relationship? Well, you see what happens…if you compare that CTR to average CTR in other parts of the industry, Facebook advertiser’s CTR is ridiculous. At the same time, Facebook management is working hard on figuring out ways to improve the advertising power of their platform. Will they succeed? I don’t think so.

In fact, no matter how much Facebook “thinks” about it, it is going to be difficult to monetize a website/social service like this to justify such high valuation. And as time goes by, more and more people will realize this.
And then -in a few months probably- we’ll see a huge correction that will not only affect Facebook’s valuation, but the perceived value of social networking sites in general.

When a startup shows an estimated $150 million in revenue, isn’t wildly profitable, and doesn’t have a clear revenue model, no company in its right mind would give it a $15 billion valuation — except, it seems, if we’re talking about Facebook.

Google has not yet found a way to properly monetize youTube, and Facebook looks like they won’t find a way to monetize their service (properly, big $) either.
Some of these social sites are working on the long tail theory (0.25 of XXX million of people is a lot of money!) and who can blame them?

However, as much as you can earn from so many potential “clickers”, it is not enough to justify today’s Facebook valuation. (And don’t forget the Google and others are after them too, but that’s another matter, and the low technical barriers to reproduction and improvement on their idea)

SO I think that in the coming months, investors will start asking Facebook to monetize better and fb won’t be able to do it. Then is when we’ll see the correction that we saw on the internet in general, but about social websites. And only later will emerge the real leaders, that may have a smaller audience, but higher profits than today’s companies.
Without thinking too much about it, I see at least (there are many more) two reasons why Facebook and similar are hard to monetize:

1) people go there for a reason, and it is not to click on ads. The more complete the platform, the more “interesting” things people can do, and the last thing in their mind is to click on an ad

2) Facebook is at the moment catered to the younger demographic (<35). This is a generation that is far less likely to click on ads than previous generations. They don’t click on ads almost out of principle. They know very well what ads are, they are highly skeptical about ads claims and they have developed an unconscious habit that let them not even notice the ads on websites. It is not that tehy don’t click on them…they don’t even see them!

But don’t get me wrong, I am not saying that CTR cannot be improved upon. Far from it.
However, as long as marketers try to attract this people without really knowing them, CTR will stay as low as it is today, and we are heading for a collapse of social network’s valuations.

The real problem here is not the audience, but the ads being served to this audience. If you want to attract them, play on their “weaknesses”

1) make ads look like they are not ads (some people are successfully already doing this through Facebook applications)

2) appeal to their core values: they NEED to feel important (much more than their parents), they are insecure, they are gossipy, they multitask and pay little attention to any individual thing for too long (+1 min!). They feel they have high ethics and are think of themselves as altruistic…

Now…read those two points carefully again, serve them ads that don’t look like ads and will appeal to them (create facebook campaigns that align with your company’s interests, reach them through their blogs and fb profiles, use Digg, post in forums, improve your PR efforts, publicly support charity…) and CTR will increase.

Marketing has changed, and marketers need to adapt. Mark Zuckerberg(?), from Facebook, is clever if we look at the VC capital he is funneling in right now - and although valuations are exaggerated, it is true that a lot of money can be made selling to the youth in the right way.

But is not really Facebook’s fault if we -marketers, consultants, strategic advisors- are not able monetize the medium properly. Facebook is bundling them all up in one place, in one homogeneous group, where is easy for us to target them. They are serving them to us in a silver plate.

And yet we are targeting them with pre-historic, adsense looking ads and banners?!
IN a few months, when the correction comes, people will blame Facebook as being overrated, and they’ll swing to the other extreme for some time, undervaluing future opportunities in the sector.

That would be a good moment -as it is today- to come to our senses and realise that what we need are not necessarily new and shiny platforms, but rather a deeper understading of the psychological motivations of our young potential buyers.

Once we have that and start to pump out better marketing to them (notice: marketing in general, yes, the four Ps…not only ads)…then we’ll be able to increase our CTR from a pitiful 0.27 to something more in line with the potential of the platform, and only in that moment we’ll be able to asses the REAL value of the company behind it.

Until then…it seems we have a lot to learn!

PS/ by the way Mark. Now it is a great moment to sell, unless you come up *soon* with great ways to improve CTR.
You may want to cash up and go before the bubble deflates! The clock is ticking fast.

November 6, 2007 · Filed Under Analysis, Business, E-business, Internet

Comments

Leave a Reply