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Friday, October 31, 2008

Is Facebook the Next Geocities?

Much like last time around, the most valuable (in investor valuation terms) Internet startups are building user bases first, and businesses second. Now Techcrunch is looking at Facebook's burn rate and recent new forays into the capital markets and concluding that even the half a billion dollars they've raised to date might not be enough to see the company through to profitability.

The real question is, of course: what's the best business model for Facebook? If you look at the Google example, they hit on basically one monetization method. It's not a matter of packaging together a bunch of ideas and putting them all together and reaching profitability that way: it's about hitting on the superior idea that leads to liftoff.

Otherwise, you're just a big property with a lot of potential that loses a ton of money every quarter. You're just a place people enjoy hanging out, that needs to get itself sold pronto... certainly before your evident lack of profit potential becomes persistent to the point of chronic. Facebook: the next Geocities? The next Xoom?

Even the Geocities example is poor because Yahoo doesn't have $1 billion or more to acquire this behemoth at this time. Yahoo is not, itself, worth all that many billions. Part of the reason for that is they have made a lot of overpriced acquisitions over the years. Many of them were of the "eyeballs and we'll monetize with display, or something, we'll figure it out later," variety. Yahoo's whole should have been greater than the sum of the parts, but looking at revenue trends, it sadly has not been.

Leaving Google aside, the real potential acquirer out there (if Facebook is a long term strategic money-losing play that eventually turns into a solid asset) is Microsoft. They already have a stake and are looking to be a big player online. While it might be a disappointing acquisition for Microsoft, it certainly wouldn't be unexptected.

But assuming they'd want to be attractive to anybody else, or just run a business and even go public with it, what business model is best? Back to this, the real question. A lot of clever people are debating it, but let's go through the alternatives:

  • User profiling, the social graph, and other detailed consumer information somehow being sold to companies without users throwing a fit at the privacy intrusion. Yes, this has value, but it's hard to point to many businesses of this scale that make a business out of this. You would think that a large company might get a lot out of this by keeping that data internally and using it rather than selling it to outside businesses. Certainly data-centric financial companies like Amex and financial direct marketing whizzes like Capital One approach it this way. This again points away from Facebook being able to make a business out of this inside of 10 years, and towards them being an acquisition target for a firm like Microsoft.
  • Targeted display ads are now available on Facebook but it looks like they aren't doing the job revenue wise. Part of the reason is, you can only intrude so much into a personal communications medium - it's why we don't have to listen to ads in our phones and tolerate only light intrusion with text ads in GMail, etc. Advertisers won't get huge, measurable ROI like they get from high-intent areas like search, so the CPM's will remain low. To make this work Facebook needs to either (a) cut its costs dramatically, especially on their money-losing international operations, or (b) get the mother of all sales forces to really push the inventory to the largest corporations looking to move budgets from traditional (even less measurable) media. (b) has some promise, and top quality sales execs are no doubt available today as other companies downsize in this tough economy.
  • Fees. I don't see why this won't work. A structure that allows you to pay $0, $15, $30, or $99 per year for an account with different privileges would not kill the company and might be a solid performer. Personally I am paying for Basecamp, my j2 fax number, an online billing solution, and a number of other things because entry was relatively painless and the service for the premium versions is excellent. I am a huge believer in this (I thought Yahoo in the aggregate could have even diversified their revenues this way -- I wrote about this seven years ago!). If an unknown little telecommunications provider like j2 can run a solid ship and climb out of the economic doldrums to become a $1 billion company, what's stopping Facebook from doing something similar at a much larger scale?
To me, the only thing stopping Facebook from easing into a fee-based environment is a lack of guts. Come on Facebook, grow a pair. Your user base is humongous enough. Go ahead and get x% of them paying at least $15 a year to belong to the club, and get back to me with how much money you raised. (Hint: with 100 million users paying an average of $15/yr. you'll be garnering $1.5 billion in revenues. A good start. And no, you don't have to shut off the ads.)

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