Facebook Could Be Worth $100 Billion, But Not For Display Advertising

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Facebook Could Be Worth $100 Billion, But Not For Display Advertising

Everyone in finance is talking about Facebook: the amount of stock that it sold and the price of that stock. Everyone in technology is talking about Facebook too: the number of users it has, the time each user spends on its site, the power of Facebook’s development platform. The first group tends to think Facebook is over-priced and the second that it isn’t. Not many people are focusing on how Facebook makes money.

Of course, both the financiers and engineers are right: the financiers have noted that Facebook’s revenues have been slowing, with display advertising revenue growing only 37% year over year; the company is trading at 70 times its likely 2013 earnings per share, where as Google is trading at 12 times its likely earnings per share, and growing ad-display revenue faster. At current overall growth rates, Facebook not surpass Google in revenue until 2036, yet is worth today half what Google is.

But the engineers know that Facebook has become a personalization and distribution platform for almost every major new web application. For example, when you use Facebook to log-in to Redfin, Redfin gets an enormous amount of information about who you are, so we can tailor our website to your needs. Redfin on Facebook is much better than Redfin by itself.

Facebook is thus the most valuable user network in the world, the most valuable database, and the most valuable developer platform. It is run by the best entrepreneur in the world. But Facebook makes money today from display advertising. The question is how large can a display advertising business be, and when will Facebook develop other ways to make money?

The largest display-advertising business that I can think of is a good but not great business: Yahoo has revenues only slightly larger than Facebook’s. Could Facebook’s display advertising revenue be ten times what Yahoo’s are today? One hundred times? Could Facebook ever make more money from display advertising than Google?

I don’t think so.

We think of Google and Facebook as both being in the advertising business, and Facebook as being the next Google. But users often come to Google with an intention of buying something, be it a cappuccino or a car; the ads Google shows are, for many users, indistinguishable from the search results and nearly as helpful. Facebook users on the other hand come to see photos and links from their friends, so the ads to the right of your Facebook feed are beside the point, and mostly just as lame as what I see when I visit Yahoo.

To reach $10 billion or $50 billion in revenues, Facebook will have to make money in other ways. We have always believed that the easiest way to make an enormous amount of money is the Steve Jobs way: build a beautiful product and, at some point, ask the people who love it to pay for it. For example, this is what we wrote in 2009 about Facebook:

I’ve often wondered why Facebook doesn’t just charge people to stay on its site, since that’s clearly the intent of their web development, and it’s clearly what their users want to do too. A Flickr-style fee for storing additional photos or messages could perhaps generate more than $1 billion in revenue, in a way far less intrusive to its users than Facebook’s past ad-related blunders. Maybe that will happen soon, too.

For now, I am glad that Facebook has focused on growing the cow, not getting more milk. The main reason Facebook has grown among users and developers alike is that it’s free, and the main reason people are excited about Facebook is because of its user and developer growth.

But when the financiers wonder where $100 billion worth of milk will ever come from, my guess is that it will come directly from Facebook’s most ardent users and developers, not just from its advertisers. Facebook just has to ask the people who love it the most for a little money.

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