Is the whole valley going crazy or has the mercury used to stiffen the top hats of the guys over at 24/7 Wall St. finally leeched into their brains? Facebook is not worth $0. It may also not be worth the Digg-baiting $6 billion Microsoft bid, but the company is far from worthless.
The most commonly used fact is the “0.04%” CTR from Reach Students Blog and the Wag. Click through rate (CTR) is the percentage of impressions that generate a click on an ad. In this case 0.04% means that 4 out of 10,000 views result in an ad getting clicked.
The problem isn’t that Facebook’s cadre of “poor-ass” college students aren’t interested in clicking links, it’s that the ads are frequently repeated and irrelevant to the user. I find the “poor student” argument to be bogus, since many of the ads don’t require the user to spend any money at all (i.e Ask or Career Builder).
Ads Ads Everywhere, But Not a Thing Worth Clicking
The ads on social networking sites are so crappy because these sites simply have TOO MUCH INVENTORY. Facebook is getting around 15 billion pageviews a month. I think MySpace has busted the Big Int entry on it’s traffic tracker or something by now (actually around 45 billion). 26 million visitors / 15 billion monthly page views = a lot of repeat advertising that people aren’t going to click on.
Is this a problem? Yes, in the short run. The online advertising market simply hasn’t caught up with the sheer volume ad inventory on these sites. This is causing the CTRs and CPMs to be low on the sites ($0.05 - $0.35 CPM). The online advertising market is estimated to be $19.5 billion this year with plenty of room to grow. The venerable TV ad market is a $74 billion ad market. The internet has even more potential. The combined MySpace and Facebook drive 60 billion pageviews. If we apply the 0.04% CTR, they push 25 million click throughs every month. People will pay for that traffic.
Facebook’s Ad Problems: Like Being the Shortest NBA Allstar
Facebook’s major problem is that they haven’t quite nailed down tying ads to the lead generating points of their service. Google’s done that with search through AdWords, which follows the simple logic that “hey, searching for something means I want something”. Ads are content in search. The same is true with Facebook. They’ve gotten part of the way there with inserting contextual ads in the newsfeed. They can be smarter, though. Send pizza deals to groups scheduling a meetup. Recommend books to people who frequently list new titles and sell prophylactics to people who frequently change their relationship status.
There’s a lot reasons to believe in Facebook’s value, not to mention the valuation estimates leaked from Yahoo’s Project Fraternity. That being said, like hell I know what they’re worth.
July 13th, 2007 at 9:56 pm
Speaking of Google, perhaps it’s time to admit that the emperor is buck naked? Google is no longer an asset to small business. It’s digressed into a black box designed to extract as much money as possible from small business while giving back as little value as possible. This piece explains why Adwords is something to be skeptical about: “Why Google Adwords is Not Helpful to Small Business” http://smartstartup.typepad.com/my_weblog/2007/07/a-fable-doing-b.html
July 14th, 2007 at 10:13 pm
I’ve heard a lot of crappiness about adsense, but people in startups said that adwords drove good traffic to their sites with decent conversion rates.
July 17th, 2007 at 1:35 pm
You make some great points here. How long until Dominos or Pizza Hut contact Facebook about offering pizza specials?
Frankly, I’m a bit surprised that more of the social networking sites don’t seem to be taking that much of an interest in targeting advertisements, given the huge volume of information about users that they could use for targeting and the huge increase in CPMs that they would receive by better targeting advertisments.
At the company that I work for, we’ve put a tremendous amount of effort into developing an ad targeting platform that actually provides our members with relevant ads based on a wide variety of factors (but of course, we still have some ROS campaigns).
There are so many possible ways to target advertisments, but I really believe that targeting advertisments based on user behavior, as you mentioned in your post, is the most exciting. For example, if someone is starting a business, they’ll probably need a phone system. However, if someone is just looking for opportunities to get involved in a company and isn’t themselves starting a business, a phone system would be completely irrelevent to them. How can we tell which of these two categories a user fits in? Simply by looking at whether they’re searching or posting opportunities.
There are literally thousands of other examples that I could give you where targeting is going to be make or break the effectiveness of ad campaigns, and hence the willingness of advertisers to continue spending their money. I’m thinking that it won’t be long before more of the social networks get really serious about ad targeting.
November 12th, 2008 at 12:57 pm
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