No point in advertising to Facebook’s 350m users

It was announced last week that the population of Facebook now exceeds that of America. Since mid-September the social networking service has added 50-million users, which means it now finds itself with 350-million of them. I am sure that Mark Zuckerberg, the founder of Facebook, takes the same view of his subscribers as PG Wodehouse attributed to the male codfish — “which, suddenly finding itself the parent of three million five hundred thousand little codfish, cheerfully resolves to love them all”. But even Zuckerberg must be wondering how he can monetise the little darlings.

There they are, cavorting in the corner of cyberspace so thoughtfully (and expensively) provided by him, where they post photographs of themselves in embarrassing situations, write affectionate or silly messages on one another’s “walls”, become “fans” of obscure comedians, join witty “groups” to support the Tiger Woods driving school and do other cool things too numerous to list. And all without paying a cent!

It can’t go on like this, can it? The software-engineering and server-farm infrastructure needed to support 350-million users burns money, and so does the bandwidth they use. Zuckerberg is not a philanthropist, well, not yet, anyway — though if Facebook does eventually go public, he might be rich enough to give money away. At the moment he runs a private company ostensibly valued by its most recent investors at $10-billion. And yet, to date, its revenues (which might just stretch to $500-million this year) have not quite matched the expectations implicit in that colossal valuation.

Facebook is the most glaring example of an unsolved puzzle: how to convert social networking into a sustainable business. Twitter, the micro-blogging service that is now in a runaway growth phase, poses the same puzzle. In September it raised $100-million in investment funding at a price that valued it at nearly $1-billion. And yet, unlike Facebook, Twitter has not yet earned a cent. In 2008, Time Warner bought Bebo, another social networking site, for $850-million, which was 42,5 times its revenues at the time. In 2005, Rupert Murdoch paid $580-million for My Space, whose 2009 revenues have been “flat” according to a JP Morgan report, which adds that the site “continues to face challenges monetising its large audience. We see more headwinds ahead as remnant inventory pricing is declining and competition makes it more difficult to reach meaningful profitability.”

The truth is that investing in social networking represents the triumph of hope over experience. The optimism comes from a feeling that it’s impossible to gather, say, 350-million people in one place and not somehow make money. In the real world, one would charge them admission and sell them hot dogs and overpriced T-shirts. But that doesn’t work in cyberspace. If Facebook started to charge for membership, its population would dwindle to the number of people who think that its services are worth paying for — probably not that many.

The conventional wisdom used to be that the key to online revenues was advertising. That, after all, is how Google got to where it is. But it turns out that Google is a special case because it specialises in search, the only area where online advertising really works. The explanation is obvious: people searching for something are likely to be deeply interested in the results, and are therefore more likely to click through to an advertiser. But in other situations — say when browsing web pages — advertising is peripheral and we have become very good at ignoring it. In 2007, the market research firm ComScore reported that 32% of internet users clicked on banner ads in a given month. By 2009, that number had fallen to 16%. ComScore also concluded that a hard core of 8% of all internet users — christened “Natural Born Clickers” — are responsible for 85% of all banner clicks on the web.

Everyone who uses the web has experience of the ineffectiveness of online advertising. If it’s obtrusive, it’s an irritant that gets between you and the content you’re seeking and you hit the “Click here to skip this advertisement” button. If it’s unobtrusive, you ignore it. Either way, it’s ineffective. You can’t build an industry on Natural Born Clickers. The inescapable conclusion is that anyone who thinks advertising is the key to sustainable online businesses in any field other than search should think again. –

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