Top 5 enhancements Facebook must do to deliver Google style returns for first 3 years post IPO

22 May, 2012

Facebook is so far the biggest attempt by any Internet giants to bring the largest portion of $500bn+ global brand ad dollars industry online (global ad industry is at $800bn annual market and 65% of it is brand advertising). And the targeting is based on social graphs vs. just limited to demographic, geo, contextual, or behavioral. So the company’s addressable opportunities are huge and with almost 900mm users, the reach is unmatchable. But, most importantly, Facebook commands the mindshare, eyeball share and coolness factor that no other company on the planet currently has (perhaps except Apple).

I am not going to do valuation analysis and future revenue and cash flow projections or highlight regulatory risks such as privacy concerns. But I am going to highlight five areas primarily focused on Facebook’s advertising programs that need attention for Facebook not only to justify its current valuation but also deliver 5x growth in stock price in first 3 years, similar to what Google delivered post its IPO.

Here are five things Facebook must address to justify it $100bn valuation and Google style stock appreciation for next three years post IPO:

1) Longevity of ads efficacy: I can sign-up with Google or Yahoo! and deploy hundreds of thousands of dollars per hour using search or banner advertising. The cost per click may be expensive and at times even unaffordable but as long as I am willing to spend my ad dollars, Google or Yahoo! Will continue to drive traffic to my Site. Unfortunately, that is not possible with Facebook. The advertising programs at Facebook have some choppy behavior. The ads campaigns at Facebook work for a few days and then they completely die down. That means, you constantly have to come up with new ads. Coming up with new ads is still manageable but you do not know how to overlay your different ad campaigns so that some ads are always working. While, these phenomena can be handled a bit better by Ad Age Top 100 advertisers given their level of sophistication and amount of service providers on their disposal but what about the 60mm SMBs who can and want to embrace Facebook but longevity of ad campaigns at Facebook is a big hurdle.

2) Better measurement and reporting. In addition to ads campaigns longevity, Facebook currently provide very limited measurement and reporting tools. These tools are not even comparable with the offerings of a medium size standard ad network with less than $50mm in valuation. This is a big drawback for Facebook but is fixable. However, marketers are very data driven and Facebook is not giving them enough data and reporting to measure marketing efforts. Google does an amazing job for this and to make things even better, they have Google Analytics, that gives all sort of metrics and reporting for the marketers.

3) Automation. Majority of Facebook ads are approved manually or at least not instantaneously. That means, the time sensitive type of ads are less likely to flow into Facebook fishnet. Also, less automation means, less scale for Facebook. This can be fixed easily but the side effects will be less control on Facebook’s privacy, content and other policy enforcement.

4) Advertisers support. Facebook will have to hire thousands of people for advertisers’ support. The current self-service ad platform offering is good but going forward advertisers will demand customer support and account management services. On one hand, this will increase adoption of Facebook ad platform by those marketers who require handholding but cannot afford to hire expensive services providers but on other hand, this will take a toll on Facebook’s operating margin.

5) More ad revenue sources e.g. international, mobile etc. Facebook will have to think about more revenue ad sources at some point of time. While, in my view, Facebook should first make their core ad platform more robust i.e. longevity of ad campaigns, more and robust reporting and measurement tools, and higher level of automation. However, Facebook must think about new but adjacent ad revenue sources fairly quickly because it will be in deep investment mode with large fixed cost structure for next a few years. Hence, increasing operating leverage will go long way. Some of these adjacent revenue sources could be — to come up with Google Ad Sense type of programs, localization of ad platform across geographies/currencies, and monetization of mobile Internet.

To conclude, with a reach of 900mm Internet users, innovative targeting approach via social, the current inertia/coolness factor, and given that brand ad dollars spend continues to be under represented online, Facebook offers immense long-term potential. Its viral business model has reached all part of the world at very low cost and the incremental revenue from all these geographies is highly scalable and profitable. Not sure, if Facebook can delivery 5x appreciation in its stock price in 3 years post its IPO, similar to Google, but to increase the likelihood of that event, it must strengthen its ad platform materially within 2012.

(Sandeep Aggarwal is the founder and CEO of “ShopClues.com”. He is counted amongst leading Internet experts globally, and has regularly appeared on CNBC, Fox, ABC News and regularly quoted by Wall Street Journal, Fortune, Forbes and other prominent media outlets.)


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Top 5 enhancements Facebook must do to deliver Google style returns for first 3 years post IPO

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