There is one thing missing in most of the hype over Facebook's massive IPO. Everyone knows the company is popular, with 845 million users, and successful, with a potential valuation of $100 billion dollars. (That's five times the size of Google's 2004 debut.) But what exactly makes Facebook so valuable?
You. Its users. Or more specifically, its users' stuff.
It is hard to measure how much of Facebook's value is derived by harvesting its user base. To be fair, most of its revenue today is from advertising, which is downright old fashioned. Some of the ads are personally targeted, others would presumably sell on any popular website. Another 15 percent of the company's revenue comes from financial payments for gaming and virtual items.
But Facebook's true value is about predicting, not counting. As many stock analysts have noted, today's annual revenues of $3 billion do not come close to justifying the company's valuation. The big money, down the road, will have to come from more aggressively monetizing the Facebook experience on a global basis whether that is browser or mobile based.
So the question is, can Facebook "justify a market capitalization of $100 billion"? If so, how?
In the weeks leading up to the IPO, Facebook and a myriad of pundits identified the challenges it will face around growing its user base of 900 million users, as well as monetizing its user base of over 425 million on mobile.
Facebook understands the need to sustain and continue its exponential revenue growth trajectory and has started to roll out changes to tee up incremental monetization opportunities over the next year(s). For example, Facebook hosted the fMC conference in New York City in February (an event for marketers). This event was focused around adding incremental ad units within the Facebook platform as well as a more integrated advertising experience for brands -- Facebook is focused around stories, not advertising. Most importantly, at fMC Facebook rolled out Sponsored Stories on mobile, which is its current solution to monetizing the rapidly growing user base of mobile newsfeeds on Facebook.
From our perspective, beyond the IPO, this may well be a watershed year for Facebook -- a time when the social network went from being an experimental medium to a medium that appeared on every major marketer's media plan.
There are two features of social marketing that give it a significant advantage over any other channel:
The social element
When a friend endorses a brand, product, or service there is a much higher propensity for others to buy or endorse it as well. However, we believe that brands utilizing their fan bases as "brand advocates" is still an underleveraged resource for marketers on Facebook. The challenge with Facebook's ad units and targeting parameters is that they are disruptive, and traditional marketing strategies or display creative cannot be applied to Facebook. This has resulted in a lag in Facebook advertising adoption as brands navigate redesigning their organizations more holistically around social to truly embrace the power of Facebook.
Sponsored Stories are incredibly powerful as this ad unit allows brands to tap their consumers as brand advocates and share the brand's message. We believe there is huge potential in making ads and apps even more inherently social so as to gain more free, earned media at scale through Sponsored Stories and page posts.
Facebook's massive data asset is relatively untapped
The company has one of the richest sources of consumer data on the planet, but for understandable privacy reasons, it has not enabled marketers to leverage it. Yet we believe that in due course innovation will emerge that balances privacy expectations and regulations with ways to provide marketers with rich data beneficial to the industry and consumers. The innovation will come in the form of new ad formats, segmenting capabilities, and advanced reporting.
Many have asked if Facebook budgets are eating into search and display budgets. Sure, some of the Facebook ad dollars come from search, but Facebook's budgets have and will continue to come primarily from TV and print.
One can also expect to see increased ad buying on the Facebook platform as more marketers look at social ROI through a broader, and in our opinion, more correct lens. Expect to see Facebook pulling TV dollars online, as well as a shift of media dollars away from TV and print to Facebook. Facebook has partnered with companies such as Nielsen to align to measurement such as reach, frequency, and engagement.
Finally, let's not overlook Facebook's $1 billion acquisition of Instagram. For Facebook, this move is not just about monetization, but rather about social sharing, of which photos are core functionality. Facebook's underlying premise/mission is as a social technology platform that powers the world's connectedness. Facebook will continue to focus on building and engaging communities and ultimately amplifying messaging through paid media, which is a close proxy to earned media through Sponsored Stories and page posts. In our opinion, the Instagram acquisition makes sense as photo sharing and mobile engagement have been essential to Facebook. The Instagram acquisition allows Facebook to further embrace mobile consumption and further engage users in this growing channel.
Facebook has been disruptive and innovative around its advertising and monetization model, redefining the way brands engage and have conversations with their target consumers. Facebook is not focused on advertising, it's centered on building active communities of fans who engage and share with brands that are most meaningful to them. This is the whole premise of "word-of-mouth marketing at scale."
Rob Jewell is founder and CEO of Spruce Media.
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