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Facebook’s stock price has been in the news a lot over the last few months, and not for good reasons. As I write this, Facebook is valued at $19.05 a share, more than 50% off its IPO price just six months ago. And the pundits are already writing obituaries for Facebook as we know it. Here are just a few of the headlines I randomly grabbed from Google News:
The reason for Facebook’s demise is consistent across all articles: Facebook advertising simply isn’t gaining adoption from marketers, and as a result, Facebook isn’t generating enough revenue. Compared to Facebook’s rival, this argument appears correct: even at a 50% discount from its IPO price, Facebook is trading at a 106.35 Price to Earnings ratio (P/E), compared to Google’s P/E of 20.08 and Yahoo’s 16.95.
Of course, Google and Yahoo have both been public companies for 10+ years compared to Facebook’s six months. Indeed, Facebook wasn’t even a glint in Mark Zuckerberg’s eye when Google and Yahoo went public (Zuckerberg hadn’t even had his Bar Mitzvah when Yahoo IPO’d in the mid-’90s).
The Facebook Holy Trinity: FBX, Open Graph, and Facebook Connect
A large justification for Facebook’s big P/E is the expectation by investors that Facebook will develop future revenue streams. As a Facebook advertiser (and, for the record, a very bad stock investor), I believe future expectations of significant revenue growth are justified, for three key reasons: FBX, Facebook Connect, Open Graph. These three Facebook initiatives will merge forces to create an advertising platform that rivals Google’s highly successful – and highly profitable – AdSense/DoubleClick Ad Exchange platform.
Before you understand how these three technologies work together, you need to understand the significance of each individually.
Let’s start with Facebook’s Open Graph. Open Graph allows third-party websites to essentially create Facebook-like experiences, or – as described to me by Selchuk Atli of SocialWire – take advantage of the Semantic Web. For example, rather than just sharing a recipe from a cooking site, with Open Graph you can share the fact that you like to “cook roasted chicken” through a recipe you found on a particular site.
Over time, users who interact with the Open Graph build up a very accurate story of their life online; what they buy, listen to, read, agree with, love, hate, etc.
Facebook Connect (perhaps now called Facebook for Websites?) allows Web sites to closely integrate with Facebook, either through enabling registration with a user’s Facebook profile, social sharing, or personalization. Facebook Connect makes it easier for users to sign up quickly for Web sites, as well as share findings on these sites with their friends. This in turn leads to more registrations for the Web site owners and more social virality.
FBX (Facebook Exchange)
FBX is a beta advertising network pioneered by Facebook and several leading demand side platforms (DSPs). Currently, FBX allows advertisers to essentially retarget users back on to Facebook. In other words, if someone visits your Web site and fails to convert, you can show that user ads on Facebook through FBX.
Of course, it is widely speculated that FBX will eventually not only offer retargeting of users from other sites on Facebook, but also marketing to Facebook users across the Web. So, for example, a Facebook user who has expressed an interest in “cookies” via Facebook could be served ads for cookies as they surf other Web sites.
FBX is the Monetization Arm of Open Graph and Facebook Connect
Combine Open Graph (rich detail about the current likes and dislikes of users) with Facebook Connect (rich detail about where people are stopping across the Web and what they are doing on these sites) and Facebook’s internal data (rich demographic and psychographic data self-reported by users), and you’ve basically created an unprecedented gold mine of user data ripe for advertiser use (and hopefully not misuse). Imagine being able to access the following snippets of data (anonymized, of course) about a user:
– The user visited a scuba site and used Open Graph to say he “skin dives” in “Aruba”;
– The user registered with Facebook Connect on the Aruba Tourism Board Web site;
– The user has self-reported as “engaged” and living in “Los Angeles” on Facebook.
Now, it doesn’t take a rocket scientist to infer from all of this data that the user is probably taking a honeymoon to Aruba to go diving and that a travel company that offers scuba diving vacations to Aruba from LA for honeymooners might want to start advertising to this user. Of course, prior to FBX, no advertising platform could put all of these data points together and serve up an ad for this advertiser.
FBX Will Take on Google’s Display Network/Ad Exchange
There’s another company that has been very successful at monetizing users on and off their site that you might have heard of: Google! Google’s Ad Exchange/AdSense/Google Display Network has been wildly profitable for Google and amazingly effective for advertisers. Over the years, this contextual network has enabled advertisers to generate awesome ROI by layering on tons of advanced targeting features, including:
– Semantic targeting (not to be confused with the Semantic Web, rather, targeting the words in an article);
– URL targeting;
– Behavioral targeting;
– Category targeting;
– Combinations of any/all of the above.
What Google lacks – and what Facebook has – is the deep user data from Facebook registration, Facebook Connect, and Open Graph. Google has tried desperately to get some of this data through Google Plus, but so far the strategy hasn’t come close to the integration and data set that Facebook controls.
And ultimately, the ad network with the most accessible and comprehensive data has the best chance at providing advertisers with the best results; the network that gives advertisers the best results will get the highest payments for each ad; and the network with the highest payments will attract the most publishers. So if FBX offers better results for advertisers than Google, FBX will start to displace Google AdSense ads on publisher web sites.
How much is at stake here? Well, in 2011, 28% of Google’s advertising revenue (or 27% of Google’s entire revenue) came from “Google Network Member Sites,” a/k/a AdSense and Ad Exchange. In raw dollars, that resulted in over $10 billion in revenue to Google. To put this number in perspective further, Facebook’s current revenue run rate is slightly over $4 billion, so if Facebook could grab 40% of Google’s AdSense revenue via FBX, Facebook would double its revenue. Not too shabby!
Conclusion: Facebook to $1000!
For the record, everything I am suggesting above about the future of FBX is pure speculation – I have no insider knowledge of Facebook’s product road map, and Mark Zuckerberg hasn’t called me up to ask for strategy advice. But given the plethora of former Google execs at the highest levels of Facebook’s management, the overwhelming profitability of Google’s AdSense program, and the unrivaled behavioral data Facebook is collecting, this seems like quite the no-brainer.
Again, I am not a stock prognosticator (I bought Webvan at $6, just months before it went bankrupt!), but it strikes me that analysts deriding Facebook’s growth are simply evaluating the wrong Facebook advertising platform – the one that exists today. The future of Facebook – and perhaps the future of online advertising – starts with FBX, and we’re barely out of the gate!