A Practical Future for Facebook’s Business Model

Pre-read: I’ve made predictions before about how Facebook should evolve its business model and I still stand by them even if they may never come to fruition. Since the IPO, and the plunge that followed, we’ve all been forced to look at Facebook with a much more public and critical view. Facebook is in need of a very practical solution – one that doesn’t damage the trust of its users, but also delivers significant revenue growth for its investors. Do I have a new idea to pitch in? Of course I do!

Let’s start with a positive thought. Facebook has a community that stands at 900 million users and growing. Despite all the complaining about privacy policies, stock prices, and increased advertising that threatens the user experience, we’re not going anywhere. Not yet at least. In the coming year, Facebook is in perfect position to revolutionize the advertising industry and please its users at the same time.

The big question is where does it begin?

When the dust settles on the IPO, I believe Facebook will be forced to focus on growing its core advertising business. Why? Over 83 percent of its revenues currently come from advertising. Anything outside of that is playing in a territory where it will face stiff competition and invest heavily in R&D to create new profits (like building a smartphone).

And Facebook’s biggest competitive advantages to date play perfectly into expanding its advertising revenues:

– Audience size: 40 percent of the global Internet population is a Facebook user.
– Dwell time: The time spent on Facebook per month is 405 minutes, more than all other major social networks combined.
– Media dependency: Sites are starting to get more referral traffic from Facebook than Google Search.

Which leads me to this solution:

Facebook should be the world’s biggest advertising network.

GM quite famously pulled its Facebook advertising budget because it was ineffective inside of Facebook, and it may in fact be right. You could argue Facebook was never designed to be receptive to advertising, in the same way that Twitter isn’t ad-friendly. In fact, the biggest opportunity for Facebook advertising revenues lay outside of its walls.

Remember that GM still spends $1.8 billion in advertising per year and probably somewhere between 5-10 percent of that is in digital. How does Facebook factor into the bigger picture?

The answer is in us. If half of the Internet is roaming around with a Facebook profile, we are Facebook’s gigantic Trojan Horse.

Facebook’s product at the end of the day is you and I. A map of 900 million users openly navigating the Internet-connected world and leaving a data trail of our interests and actions everywhere we go. This is the beauty of the Open Graph.

Imagine a world in which every ad you see that’s delivered through the Internet (e.g., mobile, tablet, PC, or TV) is linked to your Facebook Open Graph data. It would be more relevant. It would be more efficient. It would be seamless.

If Facebook made a push to be the world’s largest ad network, the entire advertising industry could achieve levels of targeting that seemed impossible before. What ad networks have been trying to achieve for years through cookie-based behavioral or contextual targeting can finally be realized on a much larger scale.

The supply for ad space is unlimited outside of Facebook. And the demand for Facebook’s user-targeted ad network would only increase as its global penetration continues to grow.

Would advertisers want to buy this? Would media owners be willing to partner with Facebook?

Here’s how the deal would roughly work: If Yahoo sells run of site ads for a $10 CPM, it would charge advertisers a premium for Facebook-targeted ads at a $20 CPM. Advertisers get twice the efficiency by reducing half the waste on uninterested audiences. Facebook could get a $7 cut of that ad revenue and Yahoo gets an additional $3 on top of its $10. Who says no to that deal? (OK, maybe Google says no, but you get my point.)

Would users be opposed to this?

Surprisingly, I think people would feel comfortable with this. The privacy levels wouldn’t be that different than what we experience now in the Open Graph Action Spec – a system inside of Facebook that targets ads to use based on our actions and interests. The difference would be expanding this offering in partnership with other media channels, through the social sign-on credentials we already use on sites that we “like.”

Plus, it would be no additional clutter inside of your Facebook.com experience. In fact, it could mean a reduction of advertising inside the walls. No additional ads on your photos. No splashy roadblocks that take over the home page. All of a sudden Facebook is a clean social experience in exchange for an ad experience outside that’s connected to your interest data. It moves Facebook closer to the Google+ “ad-free” model, but with all the user momentum.

Is it good for Facebook?

What we must realize is that although we spend a lot of time on Facebook, the journey isn’t 100 percent inside of Facebook. We dip in and out as we click on various links and watch different videos.

Facebook has a legitimate claim and the necessary tools to take a bigger cut of the overall ad spending, outside of Facebook.com. If you consider that global advertising spending is $465 billion and 5 percent of that is spent online ($23 billion), the opportunity is quite big. Facebook.com alone pulled in about $872 million last year. A 1 percent incremental share of the global digital spend would equate to an additional $230 million in revenue. A 1 percent share of overall ad spend (think Internet-enabled TVs) could mean growth in the billions.

If the future of Facebook will have less advertising inside and enable a more relevant advertising experience outside, I’d consider staying on board. At the very least, it sounds better than buying a Facebook smartphone.

Home page photo from Shutterstock.

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