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Summary:

As we all know, one of the biggest stories in 2006 was about a deal that never happened. Despite multiple rumors of buyout offers from various suitors, Facebook rejected them all and decided to stay independent. Now, whether that was a smart decision, or a stupid […]

As we all know, one of the biggest stories in 2006 was about a deal that never happened. Despite multiple rumors of buyout offers from various suitors, Facebook rejected them all and decided to stay independent. Now, whether that was a smart decision, or a stupid one, is likely to be one of the big stories of 2007. In either case, the key-determining factor will rest on how well Facebook monetizes this year.

But before we get to the profit and loss statement, allow me to make a few observations about Facebook, and its relative position within the overall social networking space. Firstly, I thought Facebook made a very smart strategic decision last year when they opened up their network beyond the college (dot edu) market. From what I hear, their increased signup and overall traffic numbers are bearing that decision out.

Secondly, their approach to product planning and feature enhancements has always made certain of one thing… for Facebook users, it’s all about communications, and any new feature must enhance that core functionality and not distract from it. Too many competing social networks are moving away from that core, and those that continue to do so will end up suffering when the novelty factor of such “enhancements” inevitably wears off.

Lastly, the loyalty and usage stats (e.g. stickiness) of Facebook remain extraordinarily high, particularly for their original student users. The correlation between the last point and the second should not be lost, and as I often like to say, it’s what makes social media (and its reliance on user-based peer-to-peer production and consumption) somewhat like an Internet version of the hypothetical “perpetual motion machine.”

So given such positives, one might conclude that Facebook did in fact make the right decision not to sell… as momentum and value creation certainly seems to be in their favor. Unfortunately, that’s not the end of the story… let’s now get to the bad news.

On the surface, the bad news is simple. Like most social networks, Facebook is facing the monetization challenge. All their direct sales efforts and third-party alliances (e.g. deals with Microsoft and IPG) to sell advertising are yielding far less than expectations.

Word on the street, Madison Avenue that is, is that advertisers who have experimented and bought ads on Facebook are universally disappointed with the results. Consequently, getting these big brands to come back to the table and pony up again with significant ad-buys is going to be very difficult. In other words, Facebook is looking at a foggy fiscal future, and needs to make some tough decisions.

It seems its an opportune moment for potential suitors to take another look. Yahoo, how about making that call?

  1. The “monetiziation challenge”? Um, that’s just a euphemsim for, at present they have no business model that works… no?

    Why is GigaOm using such, well, sycophant-ish language? If it weren’t for Google (buying YouTube and subsidizing News’s purchase of MySpace) no social networking site has risen to the “monetization challenge.” Nor for that matter did any Web 1.0 social network sites do so — not GeoCities, not Tripod or AngelFire or any of them. It may be that junk media (meaning unsellable ad space) is just junk media, no matter how massive the inventory.

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  2. Facebook is stupid. I, along with many other recent graduates use Facebook every day. But that doesn’t mean I’d ever click on any of their ads, other than an occasional Papa Johns ad. Facebook’s a great concept, but they should have cashed out last year, they missed the boat.

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  3. Pride goeth before the fall.

    Facebook blew it.

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  4. I bought some ad space/news flyers on Facebook to promote releases of new products. The ads were well targeted to hit the type of people who would use the products. Despite that, the response rate was absolutely terrible. It would have been cheaper for me to pay people to hand out flyers on the street.

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  5. I advised two clients to place fairly significant (for them) ads on Facebook in 2005 when they were less hyped, but already had a lock on their market.

    The results were disastrous. It made me look like an idiot because I had mistakenly assumed that audience + impressions would yield results, the way advertising on more highly focused sites had such as Games sites or Entertainment or Auto media.

    The product in both cases was targeted specifically to college students. I could not have asked for a better venue.

    After tens of millions of impressions, the clients saw about two dozen clickthroughs and zero conversions.

    Facebook is an amazing communications platform. It’s the next level of email/IM/phone/addressbook/dayplanner/etc. But it’s not, in my experience, a viable marketing platform.

    They need to figure out some new ways to engage their users with advertisers.

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  6. sekretaguntmon Monday, February 5, 2007

    facebook, despite not selling, was the biggest sell out of ’06, hands down. Their deal with MSN generates them serious cash but only as the level of traffic grows. They are not aligned with advertisers needs but only with generating more pages. “enabling communication’ is code for ‘let’s see if we can double our pv’s.” soooo.. 2001 thinking. Real companies would be thinking of how we can reduce serving costs, these like seeing their name on top of the traffic lists, and with MSN deal, are getting paid for poor strategic choices. They are selling out.

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  7. Hold on a minute… the problem is the ad placement. If you’re selling your clients on below-the-fold ads, then the responsibility of poor response is your own.

    Two problems to fix:

    1) Get the ads where users will see them. In conjunction with that, you also need to dispel the click = performance myth, and remember that branding still counts for something.

    2) If they’re not doing so already, target the hell out of the ad delivery. While the user base is heavily 20-something now, consider that you know a ridiculous amount of things about every user. I’m a 33-year-old male looking for “random play” in Cleveland. Do you need to know more?

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  8. Did Facebook Blow It?…

    That’s the question GigaOM’s Robert Young is asking. And from a couple of the answers in the post’s comment section, the answer doesn’t sound good for the social-networking service’s chances of getting the $1 billion-plus buyout that had been wide…

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  9. Time will tell but if advertising results are as disastrous as the appear to be it would seem the whole value of marketing to this age group and below(where a fair amount of investment has been made over the last 24months) is not about transactions perse, but more about branding over time.

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  10. Perhaps poor advertising performance on Facebook is due to traditional marketers and their legacy ad agencies not really understanding this audience or the medium.

    All the research I’ve read indicates that this is the absolute toughest audience to engage, period. They hate the typical stuff that emanates from Madison Ave ‘creatives’ — it’s like oil and water. My point, success on Facebook might require something more than rehashing old ideas.

    That said, it’s worth investing the effort to break the code to connect with these young people now, while the going is easy.

    I predict that trying to connect with this skeptical demographic later, as they age, will be much harder than it is now. Clearly, this is no cakewalk.

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