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Facebook – Smart or Stupid?

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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?

45 Responses to “Facebook – Smart or Stupid?”

  1. Facebook sold out the day it went public. Although traffic numbers and membership grew at a geometric rate, the developers failed to place any strong safeguards to prevent cyber stalking, harassment, or rampant trolling from multiple dummy accounts.

    There are many users who felt the quality deteriorated after facebook allowed users who were not affiliated with a university, school or company network since there was no way to prevent any cybercrimes or allow for any accountability among the users.

  2. Any way you slice it, its hard to call them smart. These guys could have walked away with a $1B+ buyout and moved on to build the next great thing. Instead, they are faced with figuring out monetization, an exercise that will inevitably take the site from the land of endless potential to one grounded in reality and affected by execution, both of which are likely to reduce its value.

  3. Aaron Choi, and half the people commenting here, hit the nail on the head. Facebook caters especially to college and university students, and recently spread to everyone else. From what I can tell, it has caught on big in highschools, and does okay in the 20-something crowd. The problem is, people aged 14-29 have grown up using the internet. Internet advertising doesn’t work with us. In my entire life, I’ve never once clicked on an ad and followed it through to a purchase. If your advertising goal is to get random (or targeted) people to purchase your product/service because of the ad you post on facebook, your advertising campaign is going to fail. Advertisers who buy facebook flyers should hope to gain a little bit of brand recognition. Nothing more.

  4. Yeah Erin, they did a good job of getting you to their website. Figuring out how to cash in big time, they have yet to even come close. And judging from this post, it looks like they are heading in the wrong direction. Lots of great comments in this thread too by the way.

  5. Please don’t mention the monitazation problem – many wake up with one idea “ads bring money.” I guess, if you say it often enough, ads will indeed make money! :)

    But really, here in China we need investments flowing in, so keep these thoughts to yourself (at least for another few years).

  6. regardless of direction in 2007, my opinion is that it will be difficult for facebook to sit down again with yahoo, at least while semel is at the company. press leaks from their negotiations have not cast semel in a positive light, and i presume its common sense that such information leaked out from the other side of the table.

    this is what happens when a 22 year old handles negotiations. next time send adults.

    in any case the writing is already on the wall – pure social is a nightclub business. i don’t think you can forecast out five years for facebook, it could sustain or just as easily get the “uncool” stink on it and suffer a massive and rapid die-off…the core college crowd is ultra-fickle.

  7. VanillaChin

    Wow. There are a lot of armchair quarterbacks here.

    If Facebook wants to be an independent company, good for them. It’s their call.

    Was Google thought of as insane when they didn’t have a business model (pre-Adwords) and they didn’t sell to eBay or Yahoo?

    Leave Facebook alone.

  8. Aaron Choi

    I think that the users of Facebook (mostly college students) are just too smart to click on ads. We’ve all grown up learning that clicking on ads is a deathtrap for your computer waiting to happen.

    myspace on the other hand seems to target a more diverse group (young, old, college and non-college), hence they would have a user base more inclined to click on anything that interests them.

  9. I wrote about a monetization idea for FB back in september. They’re missing a very simple model – monetize their search. Two things are going on: 1 – users search, and the results only return profiles, groups, and events. 2 – users are sharing external links via the share on facebook feature.

    So why doesn’t the FB search return those externally shared sites? Basically, a college student built search engine community. They then simply monetize the search by selling keywords/search inventory spots (or maybe returning flyers, etc in the search) Simple. So instantly, FB grows from just a social network to having a tangible web use for college students, and adds more value to advertisers.

  10. It might be very true that Myspace is where all the action is, but Facebook has a number of features which do not exist on Myspace. But the importance of the features is dependent on the the users demands and needs.

    Different users, different needs.

    As for me, I’ve just launched my own social networking company and website called

    And for me Fannect shall cater to the the users who love using myspace, but realize that they could be making money out of their profile they have worked soo hard on. Call it user profile monetization.

  11. Let me offer a thought. When you look at the roll of comments, all are male, including myself. Someone will invariably respond with, “so what”? Well, here’s the so-what: Facebook is like going to your favorite bar on Friday in May, lot’s to look at but nobody’s buying. In other words, you might get a few numbers, but nobody’s taking you home or they will not remember you the next day.

    There in lies the business challenge with Facebook and MySpace to be sure. Both sites have the same response of members when asked why they use them. The response is: to keep in touch with friends, aka people I already know, in most cases. So, how does an advertiser convert in this arena? Well, you don’t. In fact, Yahoo Answers possesses more value than checking out someone’s new pics.

    And to be sure, MySpace called it right, because their conversion rates are likely as dismal if not worse. Besides, if you have children, and you were Disney, would you advertise on MySpace. The same goes for Facebook. For answers to these interesting questions, let’s continue the conversation.

  12. Are there any social networking/community-based sites that have successfully monetized…barring of course selling to a multinational? Even with hyper-targeting, is it just a poor marketing medium because users are there to communicate/meet friends and are not seeking information/entertainment, like television or search? It seems that display or even contextual advertising on community-based sites just goes too far against the grain of what the user is attempting to accomplish.

  13. I wonder if my Facebook story is atypical. I signed up for Facebook back in 2004, when it was only in about 10 schools. Right after I graduated, I basically logged into Facebook once every 3-6 months until late 2006, when I got a new job, with a lot of recent graduates.

    Now, 3 years after I’ve graduated, I find myself using Facebook more than ever and I seem to brining along all of my friends who graduated with me. In addition, Facebook is the bible for many of my colleagues who graduated college in 2006, but as someone pointed out earlier, their ad targeting is pretty bad and I don’t ever remember clicking on a single ad in about 3 years.

    They’ve got the eyeballs, they just really need to figure out what to do with them.

  14. Unless you are tracking overall user interest in a product or service, how do you know if the ad campaign on Facebook was effective. If you define failure as “not enough click throughs” and “no conversion from click throughs” you will find all old media ad campaigns are failures.

  15. I can echo the statements made here about facebook flyers yielding absolutely horrible results. I thought that perhaps a product absolutely targeted at the Facebook crowd would convert fairly well, or at least well enough to warrant further spending and optimization. It did not. The results were horrible.

    I can see how branding could be a good use of ad money on something like Facebook, but if you’re looking to get something out of your campaign (purchases, email addresses, recurring visitors/users) as most internet marketers are these days, then Facebook flyers are not worth a cent.

    They definitely should have sold.

  16. Patrick L.

    It’s real simple. Social Networks are the white pages. Search engines are the Yellow Pages. When I use the Yellow Pages looking for a plumber, I notice (and choose to notice) paid display plumbing advertisements. When I am on a social network looking up a friend, it’s like the white page experience. I’m only thinking about the correct spelling of my friend’s name. I just want to get her page or her photos. I notice nothing (and choose to notice nothing) on the way.

  17. I would say there’s a little bit of both here. Facebook’s advertising opportunities are so restrictive, both in terms of a minimum and the placements themselves that they really force marketers inside a very small bubble.

    It’s extremely difficult to reach any audience when you make them look in hard to find places, and marketers can’t take the chance of doing something “outside of the box” when the minimum spend is $50K+, and they’re given two or three options.

    Combine all of this with the clickclickclicklclick nature of many social networking sites and you’ve got frustrated, disappointed clients.

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

    Not really. Facebook recognizes that they have something of value, and the question is how earn some cash from that thing of value without changing it so much that it evaporates. A business model is more than how you make money, it’s also about how you engage with people and the kind of value you want to provide. Facebook seems very successful in creating value, and now the challenge is to turn that value into enough cash to survive and thrive. That’s how I see the monetization challenge.

  19. 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.

  20. 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.

  21. 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?

  22. sekretaguntmon

    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.

  23. 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.

  24. 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.

  25. 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.

  26. Grand Egress

    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.