<nettime> Wolff: The Facebook Fallacy

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<http://www.technologyreview.com/web/40437/";>

The Facebook Fallacy

   For all its valuation, the social network is just another ad-supported
   site. Without an earth-changing idea, it will collapse and take down
   the Web.

     * Tuesday, May 22, 2012
     * By Michael Wolff

   Facebook is not only on course to go bust, but will take the rest of
   the ad-supported Web with it.

   Given its vast cash reserves and the glacial pace of business
   reckonings, that will sound hyperbolic. But that doesn't mean it isn't
   true.

   At the heart of the Internet business is one of the great business
   fallacies of our time: that the Web, with all its targeting abilities,
   can be a more efficient, and hence more profitable, advertising medium
   than traditional media. Facebook, with its 900 million users,
   valuation of around $100 billion, and the bulk of its business in
   traditional display advertising, is now at the heart of the heart of
   the fallacy.

   The daily and stubborn reality for everybody building businesses on the
   strength of Web advertising is that the value of digital ads decreases
   every quarter, a consequence of their simultaneous ineffectiveness and
   efficiency. The nature of people's behavior on the Web and of how they
   interact with advertising, as well as the character of those ads
   themselves and their inability to command real attention, has meant a
   marked decline in advertising's impact.
   Advertisement
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   At the same time, network technology allows advertisers to more
   precisely locate and assemble audiences outside of branded channels.
   Instead of having to go to CNN for your audience, a generic CNN-like
   audience can be assembled outside CNN's walls and without the CNN-brand
   markup. This has resulted in the now famous and cruelly accurate
   formulation that $10 of offline advertising becomes $1 online.

   I don't know anyone in the ad-Web business who isn't engaged in a
   relentless, demoralizing, no-exit operation to realign costs with
   falling per-user revenues, or who isn't manically inflating traffic to
   compensate for ever-lower per-user value.

   Facebook, however, has convinced large numbers of otherwise intelligent
   people that the magic of the medium will reinvent advertising in a
   heretofore unimaginably profitable way, or that the company will create
   something new that isn't advertising, which will produce even more
   wonderful profits. But at a forward profit-to-earnings ratio of 56 (as
   of the close of trading on May 21), these innovations will have to be
   something like alchemy to make the company worth its sticker price. For
   comparison, Google trades at a forward P/E ratio of 12. (To gauge how
   much faith investors have that Google, Facebook, and other Web
   companies will extract value from their users, see our recent
   chart.)

   Facebook currently derives 82 percent of its revenue from advertising.
   Most of that is the desultory ticky-tacky kind that litters the right
   side of people's Facebook profiles. Some is the kind of sponsorship
   that promises users further social relationships with companies: a kind
   of marketing that General Motors just announced it would no longer
   buy.

   Facebook's answer to its critics is: pay no attention to the carping.
   Sure, grunt-like advertising produces the overwhelming portion of our
   $4 billion in revenues; and, yes, on a per-user basis, these revenues
   are in pretty constant decline, but this stuff is really not what we
   have in mind. Just wait.

   It's quite a juxtaposition of realities. On the one hand, Facebook is
   mired in the same relentless downward pressure of falling per-user
   revenues as the rest of Web-based media. The company makes a pitiful
   and shrinking $5 per customer per year, which puts it somewhat ahead of
   the Huffington Post and somewhat behind the New York Times' digital
   business. (Here's the heartbreaking truth about the difference between
   new media and old: even in the New York Times' declining traditional
   business, a subscriber is still worth more than $1,000 a year.)
   Facebook's business only grows on the unsustainable basis that it can
   add new customers at a faster rate than the value of individual
   customers declines. It is peddling as fast as it can. And the present
   scenario gets much worse as its users increasingly interact with the
   social service on mobile devices, because it is vastly harder, on a
   small screen, to sell ads and profitably monetize users.

   On the other hand, Facebook is, everyone has come to agree, profoundly
   different from the Web. First of all, it exerts a new level of
   hegemonic control over users' experiences. And it has its vast scale:
   900 million, soon a billion, eventually two billion (one of the
   problems with the logic of constant growth at this scale and speed, of
   course, is that eventually it runs out of humans with computers or
   smart phones). And then it is social. Facebook has, in some
   yet-to-be-defined way, redefined something. Relationships? Media?
   Communications? Communities? Something big, anyway.

   The subtext--an overt subtext--of the popular account of Facebook is
   that the network has a proprietary claim and special insight into
   social behavior. For enterprises and advertising agencies, it is
   therefore the bridge to new modes of human connection.

   Expressed so baldly, this account is hardly different from what was
   claimed for the most aggressively boosted companies during the dot-com
   boom. But there is, in fact, one company that created and harnessed a
   transformation in behavior and business: Google. Facebook could be, or
   in many people's eyes should be, something similar. Lost in such
   analysis is the failure to describe the application that will drive
   revenues.

   Google is an incredibly efficient system for placing ads. In a
   disintermediated advertising market, the company has turned itself into
   the last and ultimate middleman. On its own site, it controls the space
   where a buyer searches for a thing and where a seller hawks that thing
   (its keywords AdWords network). Google is also the cheapest, most
   efficient way to place ads anywhere on the Web (the AdSense network).
   It's not a media company in any traditional sense; it's a facilitator.
   It can forget the whole laborious, numbing process of selling
   advertising space: if a marketer wants to place an ad (that is, if it
   is already convinced it must advertise), the company calls Mr. Google.

   And that's Facebook's hope, too: like Google, it wants to be a
   facilitator, the inevitable conduit at the center of the world's
   commerce.

   Facebook has the scale, the platform, and the brand to be the new
   Google. It only lacks the big idea. Right now, it doesn't actually know
   how to embed its usefulness into world commerce (or even, really, what
   its usefulness is).

   But Google didn't have the big idea at the company's founding, either.
   The search engine borrowed the concept of AdWords from Yahoo's Overture
   network (with a lawsuit for patent infringement and settlement
   following). Now Google has all the money in the world to buy or license
   all the ideas that could makes its scale, platform, and brand pay off.

   What might Facebook's big idea look like? Well, it does have all this
   data. The company knows so much about so many people that its
   executives are sure that the knowledge must have value (see "You
   Are the Ad," by Robert D. Hof, May/June 2011).

   If you're inside the Facebook galaxy (a constellation that includes an
   ever-expanding cloud of associated ventures) there is endless chatter
   about a near-utopian (but often quasi-legal or demi-ethical) new medium
   of marketing. "If we just ... if only ... when we will ..." goes the
   conversation. If, for instance, frequent-flyer programs and travel
   destinations actually knew when you were thinking about planning a
   trip. Really we know what people are thinking about--sometimes before
   they know! If a marketer could identify the person who has the most
   influence on you ... If a marketer could introduce you to someone who
   would relay the marketer's message ... get it? No ads, just friends! My
   God!

   But so far, the sweeping, basic, transformative, and simple way to
   connect buyer to seller and then get out of the way eludes Facebook.

   So the social network is left in the same position as all other media
   companies. Instead of being inevitable and unavoidable, it has to sell
   the one-off virtue of its audience like every other humper on Madison
   Avenue.

   Here's another worrisome point: Facebook is a company of technologists,
   not marketers. If you wanted to bet on someone succeeding in the
   marketing business, you'd bet on technologists only if they could
   invent some new way to sell; you wouldn't bet on them to sell the way
   marketers have always sold.

   But that's what Facebook is doing, selling individual ads. From a
   revenue perspective, it's an ad-sales business, not a technology
   company. To meet expectations--the expectations that took it public at
   $100 billion, the ever-more-vigilant expectations needed to sustain it
   at that price--it has to sell at near hyperspeed.

   The growth of its user base and its ever-expanding  page views means an
   almost infinite inventory to sell. But the expanding supply, together
   with an equivocal demand, means ever-lowering costs. The math is
   sickeningly inevitable. Absent an earth-shaking idea, Facebook will
   look forward to slowing or declining growth in a tapped-out market, and
   ever-falling ad rates, both on the Web and (especially) in mobile.
   Facebook isn't Google; it's Yahoo or AOL.

   Oh, yes ... In its Herculean efforts to maintain its overall growth,
   Facebook will continue to lower its per-user revenues, which, given its
   vast inventory, will force the rest of the ad-driven Web to lower its
   costs. The low-level panic the owners of every mass-traffic website
   feel about the ever-downward movement of the cost of a thousand ad
   impressions (or CPM) is turning to dread, as some big sites observed as
   much as a 25 percent decrease in the last quarter, following Facebook's
   own attempt to book more revenue.

   You see where this is going. As Facebook gluts an already glutted
   market, the fallacy of the Web as a profitable ad medium can no longer
   be overlooked. The crash will come. And Facebook--that putative
   transformer of worlds, which is, in reality, only an ad-driven
   site--will fall with everybody else.


        Michael Wolff writes a column on media for the Guardian; is a
        contributing editor to Vanity Fair; founded Newser; and was,
        until October of last year, the editor of AdWeek.


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