Wednesday, May 16, 2012

Facebook will take-over ad networks

I am a strong believer in Facebook and believe they have years of great innovations to come.

A big part of the current debate over Facebook's IPO is whether or not they can hit the necessary financial milestones to justify their current $100b valuation.  The skeptics are looking at Facebook's revenue growth, which was unspectacular as an IPO candidate at 37% this past year.  The problem with this analysis is that it is a backward-looking valuation, using historical growth as an indication of future growth.

I believe Facebook will begin significantly accelerating its revenue growth as soon as it rolls out its publisher ad network--something akin to Google's AdSense product.

Chris Dixon just wrote a piece about the need for Facebook to innovate on its business model (http://cdixon.org/2012/05/15/facebooks-business-model/).  That innovation will come from Facebook's publisher ad network product for the following reasons:
  • Existing publisher ads are often irrelevant because they are based on contextual relevance (e.g. you are reading a news article about dangerous toys and the ads are for toy stores)
  • Recent improvements in display ad effectiveness have validated that contextual relevance is often not as important as user relevance; retargeting ads based on past user behavior and non-contextual relevance are often more than 2x more effective
  • With immense amounts of user activity on Facebook owned properties and web browsing activity through its ubiquitous Like button, Facebook is in the best position to determine user relevance
  • Publishers have low switching costs and are only loyal to the highest RPM ad network
Google is currently valued at 5x revenues ($200b market cap with about $40b in revenue).  Facebook is currently valued at 20x revenues ($100b market cap with about $5b in revenue).  To get to comparable multiples, Facebook needs to find another $15b in revenue.

Google currently generates about 30% of its revenues through AdSense ($12b).  The main issue with running an ad network are the substantially lower margins due to publisher revenue splits (Google currently pays most publishers 51%-68% of revenue generated from their sites).

My prediction is within 5 years, Facebook will have more than twice as much revenue generated from its publisher program as Google does today.  That would put Facebook at more than $24b in revenue.  If Facebook's user data can substantially improve targeting on publisher sites, Facebook would not need to pay as high revenue splits as Google to maintain publisher RPMs and would generate higher margins off its ad network than Google does today.

Facebook became the display ad market share leader with minimal effort.  Yahoo, Google, and Microsoft had sales teams with decades of relationships pounding doors for more dollars.  Yet they couldn't stop Facebook--with its team literally turning away dollars because they couldn't service them--from taking the #1 position.

The achilles heel for Facebook is user trust.  If users stop using Facebook, the flow of user data slows down and its ability to target ads greatly diminishes.

We'll see where things go, but I'm predicting an amazing ride for the next 5 years.

1 comment:

SofĂ­a Santucho said...


Adtomatik has been my predetermined ad network for a long time. Never tried anything better. Higher fill rates and the best ecpm.