how will facebook make moneyThe Facebook IPO is the talk of the town right now, with their share offering already heavily oversubscribed.  When their shares hit the markets however their revenue will come under intense scrutiny as investors will look for the company to justify the $100bn+ valuation they’re likely to have when they float on Friday.

Where will the money come from though?

Here I’ll look at some of the challenges facing Facebook.

  1. Getting the advertising right – It was announced this week that GM are scrapping their Facebook ads after claims that they weren’t delivering results for the company.  Click through rates are notoriously low on Facebook and whilst research has suggested that they still deliver results subliminally marketers will want things they can actually measure.  Sheryl Sandberg said recently that Facebook ads work better in an awareness building capacity rather than in a converting sales capacity, but with Pages still free you do wonder how many will follow GM and just use Pages instead of ads.  They have launched sponsored stories recently to get ads into our timelines but it remains to be seen how effective that will be.
  2. Monetising mobile - Last week data revealed that Americans are using the site more often from their mobiles than they are from their computers.  That in itself isn’t a problem, except that the mobile version of the site has very few ads on it due to the smaller screen size.  Already 80% of UK Twitter users access the site via their phones and it seems highly likely that Facebook will experience a similar trend.  Their revenues will plummet unless they can figure out a way to make money from mobile users.
  3. Will they go into search? – If Sandberg is correct and Facebook benefits advertisers by building awareness then search does appear an avenue for them to persue further.  A Facebook search engine has been denied by the company, and a recent survey by Greenlight found that most Facebook users would be against the idea.

Whilst their revenue is more diverse than Google’s, with 80% coming from advertising vs 96% at Google, the above represent significant challenges if they are to continue growing their advertising revenue.

In the meantime they’ll no doubt continue investing in things like Facebook Credits and hope that Zynga and other social gaming companies continue to drive engagement and revenue for them in this growth area.  Revenue from non-advertising sources has grown from 2% of income in 2009 to 15% of income in 2011 and this growth will be vital if shareholders are going to be kept happy.

Given that the expected valuation is going to be around 20 times revenue, those shareholders will be having some pretty hefty demands of revenue growth in the coming years.  Hopefully Facebook will be able to meet them.