SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Facebook’s Next Business Model

Posted by Bob Warfield on May 16, 2012

Chillin with my PeepsVC Chris Dixon muses in a recent post that Facebook has yet to uncover a business model that will support its IPO valuation and drive future growth in that valuation.  As he puts it:

Facebook relies on an old internet business model: display ads. Display ads generally hurt the user experience, and are also not very efficient at producing revenues. Facebook makes about 1/10th of Google’s revenues even though they have 2x the pageviews. Some estimates put Google’s search revenues per pageviews at 100-200x Facebook’s.

The good news for Facebook is there is a lot of room to target ads more effectively and put ads in more places. The bad news is that, if there is one consistent theme in both online and offline advertising, it’s that ads work dramatically better when consumers have purchasing intent.

I think he’s right about the ad model.  Google has uniquely cornered the market in delivering an ad at precisely the moment the user is searching for something to buy, hence the remarks about purchasing intent.  A banner ad, on the other hand, lurks in hopes that someone with purchasing intent will happen to see it at exactly the right time and place to make a difference.  Given the odds, it’s no wonder the ads make 1/10 the revenue despite 2x the pageviews.  Unless Facebook can engage the timing and content properly to capture purchasing intent, that isn’t likely to change.

So what’s a poor Facebook to do?

Let’s get back to basics: what exactly is Facebook?  If Google, from a monetization standpoint, is the place you go to find something when you want to buy, what is the analogous elevator pitch for Facebook?  It’s pretty simple, really:

Facebook is a platform for chilling with your friends.

Doesn’t that really capture in a nutshell what people do with Facebook?  Put aside what marketers wish they were doing (yeah, we all go there to worship the sugary soft drinks that use those adorable polar bear cartoons as mascots), this is what’s really going on with Facebook.  And guess what, isn’t owning the world’s leading platform for chilling with your friends apt to be extremely valuable?  It’s got to be.  If for no other reason, look at how big a part of the economy entertainment is.  In 2010, Arts, Entertainment, Recreation, Accomodation, and Food Services amounted to 3.6% of the nation’s GDP.  That’s the platform Facebook has available to tap into.  It’s not as good as say the 5.9% that is the retail trade Amazon and Google tap into, but heck, it’s still not bad at all.  It is a sufficient market on which to base a huge business.  Look at what Apple has been able to do with music alone, for example.

The key for Facebook is to get focused with laser-like precision on how to monetize their Chillin’ Platform before the opportunity seeps away.  Eyeballs and leisure time are fickle as those old enough to remember things like pet rocks and CB radios will tell you.  Right now, Facebook is focused on advertising revenue, but they could get a lot more creative and, given all the capital they’re raising and the opportunity available to them, they should be getting very creative and testing everything under the sun.

What are some potential ways to monetize a platform for chillin’?

-  Social games are an obvious first choice.  Facebook has to relentlessly build this platform and creates as many barriers around it as possible.

-  Making Dates:  Dinner anyone?  They should own Open Table.  Movie Times?  Why am I going to Google to figure that out.  Hook me up.  Make it easy for me to plan and coordinate a date.

-  Music:  Gotta be part of any chillin’ for me.  While we’re at it, plug in media of all kinds.  If Google is gonna do hangouts, Facebook needs to up the ante in some chillin’ fool kinda way.

-  Vacation and Travel:  The ultimate chillin’ game and big bucks involved too.

-  Party Time:  Coordination, invitation, planning, decorations, photos (oops!), eats and drinks.

-  Devices:  What devices do we have around when chillin’?  What facilitates communicating the vicarious virtual thrill of chillin’?  Video, phones, cameras, yada, yada.  But what else, and how does Facebook uniquely home in on all that?

Being successful with all of this will require Facebook to think BIG.  I mean Steve Jobs kinda BIG.  They have to seriously simplify and amplify the act of chillin’ in ways that only a platform can accomplish.  If they do that.  If they can reinvent chillin’ the way Apple reinvented music and the phone, they’ll be here for a long time and folks buying in at today’s market caps will stand to make a lot of money going forward.

This is a big time innovation and UX problem: reinventing the art of chillin’ with your peeps.

About these ads

2 Responses to “Facebook’s Next Business Model”

  1. Good stuff here Bob. Love the ideas for Facebook to turn their “chillin with friends” model into something bigger and better. Open table, ways to make party planning easier and travel are the three that look like winners to me.

  2. [...] its IPO a few days ago and the stock has not fared very well. Chris Dixon of Business Insider, Bob Warfeld of Smoothspan Blog, John Wasik of Forbes, and Mathew Ingram of GigaOm all make very good and valid points regarding [...]

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
Follow

Get every new post delivered to your Inbox.

Join 322 other followers

%d bloggers like this: