Facebook’s ad model is the ultimate smoke screen for taking on the telcos

Since May 2012, over two years ago when Facebook finally filed for IPO their business has had an incredible amount of scrutiny cast over its business model. The main reason for this being a whopping $104 Billion valuation for a business that only managed to record less than 1% of that value in 2011 profit.

Facebook CEO, Mark Zuckerberg signs IPO
Facebook CEO, Mark Zuckerberg signs IPO

Given Facebook were already showing signs of audience saturation in 2012 founder Mark Zuckerberg would surely have a hard time keeping investors happy, yet he’s always remained very confident in his mission, often alluding to long term and only last year asking for patience from his trigger happy shareholders.

Facebook have gone toe to toe with many rivals in the past, from Myspace, Twitter, a constant battle with Google for a variety of reasons, and a flirtation with eCommerce. In the midst of their feuds they even managed to make a friend in Apple, bonding over their mutual concern for Google’s potential. However it’s increasingly looking like their long term goal is setting their sights on the telcos, to turn their gravy train upside down and transform our communication ecosystem, and here’s why:

There’s no money in advertising

Well… not enough to satisfy Facebook’s shareholders anyway. In 2013 the company beat its chest over the great growth made within the space of two years to increase the revenue per user from approx $1.00 per quarter to $2.00.

Facebook revenue per user
Facebook revenue per user. Source: Fast Company, April 2014

That’s a pretty impressive increase but it’s still from a very low base. It shows that despite the groans of users having advertising clogging up their news feeds, Facebook actually make very little off a service that has become such a staple media diet in everyday life.

At $2.00 per person and with 1.3 Billion users it’s going to take ten years until they generate enough ad revenue to match the company valuation. Not to mention the fact they’re highly saturated in North America where their most profitable user base is located, so increasing their userbase may increase overall revenue, but they’ll likely become even less efficient per user.

You’d be right to wonder if it’s just Facebook making a mess of the ad model, and maybe they’re not charging enough for their ads; but as Forbes reports, other media owners are working to the same figures, so they’re staying competitive in market. LinkedIn and Yahoo! are roughly the same as Facebook, and whilst Google sit on a search goldmine, thrashing everyone in sight for profitability, they still only make 10 bucks a user.

Revenue per user. Source: Forbes
Quarterly revenue per user. Source: Forbes August 2013

Is selling goods and software the way forward?

So who does actually make money off their audience? Well it seems Amazon have hit the jackpot, they’ve reported that on average they generate an eye watering $968 per customer per year from an active user base of 244 Million. With comparatively only 19% of the user base (Amazon customers vs FB users), Amazon are clearly making the most of their audience. Apple are operating in a similar trend, building value from iOS users through app downloads and iTunes sales at an annual rate of $48.00 per user.

Amazon's new Fire TV and Apple TV
Amazon’s new Fire TV and Apple’s successful Apple TV product

Both are currently battling to increase their user value by supplying their audience’s living room content consumption, creating TV set top boxes Amazon Fire TV and Apple TV.

Rather than selling off your audience engagement as ad space, selling products and services to them directly would seem a more profitable way to make money – That would make sense wouldn’t it? Since that’s what the majority of advertisers are trying to do with their purchased ad space it would effectively cut out the middleman.

Both Apple and Amazon show that size of audience doesn’t necessarily equate to profitability; you can have all the traffic in the world but if you’re not harvesting revenue from it then surely it’s nothing but a vanity metric – Unless of course you have bigger ideas.

I’m sure at some point so far you’ve asked yourself why Facebook don’t just follow the model of recently purchased WhatsApp and charge a subscription fee? Surely the majority of Facebook users will be happy to pay $1 a month for access for Facebook and to avoid ads? When you consider how much people depend on the platform on a daily basis it would still be a bargain for its users and would deliver a 50% increase on the $8.00 annual revenue they’re currently getting from each user.

If you haven’t considered that then surely you’ve wondered why they haven’t gone hard on becoming a supplier of goods and content. Given Apple and Amazon’s success in making their audience work so hard for them.

The telco revenue potential is worth too much to get distracted by short term gains 

The truth is selling goods and content would slow Facebook down in their overall mission,  which I believe is to take on the telecommunication services. To do that they must keep growing connections as fast as they can as they’re absolutely fundamental to the telco business.

Telstra - It's How We Connect

Take Telstra for example, the leading telco here in Australia. They recently announced $25.5 Billion in profit for 2013, that’s more than triple the global revenue Facebook made whilst they announced huge growth! Not bad for an Australian company based in Melbourne; in a country which holds only 1.7% of the worlds GDP

Maximising users and therefore connections are vital to Facebook, whereas by putting up a paywall to access the platform they would almost be guaranteed to drop traffic no matter how low the cost is.

Whilst eCommerce revenue would be great in the short term it would serve as an unwelcome distraction to go down that route when the likes of Telstra and Vodafone are in their sights.

Connections monopoly

Facebook have a monopoly in connections, a currency which has so much potential yet so misunderstood by many. As stated in Metcalfe’s law the value of a network increases exponentially the bigger it grows; this is why in the 80’s mobile phones were seen as a yuppie luxury but in the 90’s as their popularity grew they became a necessity in everyday life.

Zuckerberg has repeatedly said his ‘mission’ is to connect the world, and whilst this sounds sentimental he’s deadly serious.

Metcalfe's Law
Metcalfe’s Law

As the graph shows the value of a network increases the more connected devices you have, which means whilst buying WhatsApp for $19 Billion may seem excessive, but it was highly worthwhile to Facebook’s mission. Adding those incremental connections to Facebook’s connected ecosystem was far more valuable to Facebook than it would be to anyone else due to the size of their pre-existing audience base; and I doubt they’ll stop there on buying connections.

Mark Zuckerberg -“We’ve made some long term bets on the future while staying focused on executing and improving our core products and business. We’re in great position to continue making progress towards our mission.”

As the diagram below shows, WhatsApp is very popular in Europe especially, far more common than Facebook Messenger. When it came to WhatsApp, Facebook had a choice: do they compete for connections using their messenger service or do they bite the bullet and just buy their connections?

Messenger service usage across the globe. Source: Techcrunch
Messenger service usage across the globe. Source: Techcrunch
Facebook's brand portfolio reach
Facebook’s brand portfolio reach Source: Fast Company

It seems Facebook are not looking to wait anymore, the outlay of $19 Billion to bring those connections in was deemed very worthwhile as they’re fully aware just how powerful a connections monopoly is.

Adding the acquisition of Instagram we can see Facebook don’t need to force everyone to use Facebook, they just need to build a portfolio of communities to maximise their connections’ reach.

What’s so important about connections?!

Let’s breakdown what a telecommunications company offers. It provides the ability to connect people and organisations with ease and importantly… at scale. Sounds pretty crucial, doesn’t it? Well, telcos know that already, and they know they can charge substantial fees for their services because of the lack of competition.

Telcos provide the ability to connect people and organisations. We can break this down into two attributes:

  1. Connections – A network, such as a social network
  2. Connectability – Infrastructure which facilitates communication

Connections – I hope by now we can tick off connections within Facebook’s plan, with their monopoly they’re probably the only business at the moment who have the potential to cover this. Google are a contender, but as personal email decays in usage their Gmail database is lagging the Facebook personal data source.

Google have incredible data on everyone, but they don’t hold personal connections since Google+ hasn’t worked out they way they wanted. Android penetration may open this up in the future.

Connectability – This is where the door has been blown wide open by the Internet, Mobile_phone_mastopen for businesses to infiltrate the profit margin of the telcos. Infrastructure has always been the telco’s ace card. They invested in telephone masts across the globe to carry data, and tapped into a universal phone number system shared between all the telcos to deliver the missing connection element.

As internet access becomes so important to society (again due to Metcalfe’s law) governments and tech developments will render internet access ubiquitous. Once internet access becomes a commodity, we will see connection costs drop rapidly.

The internet is eating away at the telco infrastructure with Skype providing a perfect example of their vulnerability. It comes as no surprise that WhatsApp announced Voice Over IP within weeks of being bought by Facebook, sharpening their teeth over the growing wireless revenue source highlighted by AT&T.

By leveraging the Internet, all it takes is for Facebook to grow their connections. Then their mission is underpinned by how fast the internet becomes a global commodity.

Surely it’s time they invested in growing the world’s access to the Internet? Oh wait…. Mark Zuckerberg has began spearheading Internet.org! A joint venture between tech companies to deliver greater internet access across the globe.

Internet.org have plans to deliver internet access in a variety of ways dependant on environment, incuding flying wifi routers, hovering in the sky! They’re not alone on this, Google are currently working on the same, naming it ‘Project Loon’, giving the world internet access with hot air balloons.

What’s holding Facebook back from competing with the telcos? 

The challenge for Facebook is twofold, firstly they need to maximise connections in order to make clunky phone numbers irrelevant. A user intuitive, pre populated phonebook with robust security access settings without the need to associate phone numbers is clearly a more user friendly solution. Until Facebook’s limited reach is addressed there’s still going to be a need for a 100% compatible and far reaching connections service to streamline business and personal communications.

Secondly, they need to drive ubiquitous internet access to devices as fast as they can through an alternative source, once this is done the power of telcos will be potentially matched, leaving Facebook to monetise the greatest network of people in the world, competing against the telco’s connection technology.

Facebook will be able to restructure the whole industry of communication access, whilst making the required profits to keep investors happy.

I live in hope that Zuckerberg will have a positive effect on the world’s communication structure, and that he keeps to his mission of connecting the world rather than shackling it with extortionate fees.

@martynshaw

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Author: Martyn Shaw

Senior Product Marketing Specialist for Telstra in Singapore. Previously working in Sydney, originating from the UK and recently relocated to Singapore. Interested in marketing tech developments, media landscape changes and the effect both have on measurable outcomes.

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