Today is the day when Facebook comes to market. The demand for it has been incredibly strong, with the stock expecting to be sold for around about 38 per share. This price is derived due to the potential for advertising to each and every one of us, the humble Facebook member. To a Facebook investor you now have a value of around $115.
The data you've uploaded to your profile. All the interests you've volunteered to Facebook, the groups you've joined and Pages you've liked. They're worth $115.43 to investors because it's all of those things that Facebook is selling to advertisers. They're promised the ability to target adverts like nowhere else, because Facebook have all of this information about us so can send the ads precisely to the people that need them.
Just so we're clear here, this isn't how much revenue Facebook need to get out of every user to justify their value, it's how much profit. The worrying thing for Facebook is that right now, they're earning around $1 profit per user
GM have already announced that they're going to be scrapping their Facebook advertising because it wasn't generating enough revenue for them. They're going to focus instead on engaging with consumers via their Page. That's not to say they don't invest in social media. They spend around $30 million a year managing their Page, building apps and so on. Which is great for them. Facebook however don't earn a bean from that.
Right now I do none of the things that earn Facebook any money. I don't click on any ads (heck, I can't even remember any ads let alone clicked on any), I don't buy virtual goods in a Facebook game, and I don't use Facebook's virtual currency.
That isn't to say I'm not reasonably active on Facebook. I run several Pages, including a couple with over 100,000 fans, and engage with some brands via their own Pages, whilst have a few subscribers to my own profile. So I'm valuable in the sense that I'm contributing to the Facebook ecosystem. I'm valuable in the sense that I'm spending time on the site, sharing information about myself and interacting with brands – all of the things that have got investors salivating at the future riches the site will surely make.
Except I don't do any of the things that actually make Facebook any money, and whilst I'm just one person, if I represent anything like the majority of Facebook users I represent a major headache for Facebook management now that they have a horde of impatient investors to satisfy.
This was always the danger with social media – it offered a platform for 'free' exposure (call it a combination of PR; marketing; advertising and CRM) so the monetisation of the platform would then be very difficult in a grand scale.
I can understand them making small scale profit from things like banner advertising that the casual browser may occasionally click through to but they're limited in other options available to them.
Charging users will just scare the majority of them away and the plethora of other free SM platforms means there's little potential viability so all income must be generated through users paying for add-ons or convincing companies to buy advertising and when the platform already allows for high levels of B2C engagement, it can't be that attractive a prospect.
I actually wonder if the purchase of Instagram for $1bn was a tactical move by Facebook to suggest to the markets that there is potential for large scale investment and profit in the market ahead of their stock flotation rather than actually valuing the assets at such an incredible price.
There will always be value there as they have so many users, but I look at the likes of NewsCorp, who are valued at around $40 billion less than Facebook and I'm not sure it adds up.
Well they\’ve opened up at $42 a share so the sums are even more outlandish. Incredible.
Looks like the stock exchange thinks the same judging by how poorly their shares have done.