How Facebook Becomes the Biggest Player In Advertising's $540 Billion World
Facebook will replace online display advertising as we know it. It will save digital media by reversing the commodity pricing trend. And it will become the highest grossing media property in history.
Believe me? If you're one of the investors who was burned by Facebook's disappointing IPO, you might not be so bullish. At a multiple of 28X last year's earnings, Facebook's offering price presumed fast-growing and scalable revenue streams. But the reality of Facebook's advertising trajectory has been lagging, and continued percentage growth isn't going to make it up.
Facebook needs a huge discontinuity in its advertising revenues to make that math go round.
Fortunately, I think we're about to see a huge discontinuity. Facebook's great opportunity is to create an advertising product that the world has never seen. And it can be done.
The key is in a single idea, and Facebook is singularly able to deliver on it: SELL RELATIONSHIPS, NOT IMPRESSIONS.
The first 100 years of brand advertising was built on the paradigm of a captive audience with interruption advertising in TV, radio, print, and online. That created a $540 billion market to reach a mostly-right audience at the mostly-right time, with a sometimes-right message delivered via occasionally-great creative. The basic idea being that if you reach those people with enough frequency and decent creative, they'll eventually hear your message.
But never, ever, ever has any brand had an advertising platform that could create a relationship with a consumer before she makes a purchase.
A relationship is worth a hundred or a thousand times an impression – or more – depending on how you monetize it.
The ability to sell relationships puts Facebook in a completely different business than every other media company – and their product is orders of magnitude more valuable. To undermine that premium would be absolute folly. That's why Facebook should never, ever sell impressions.
But with no proven model for selling relationships, how will Facebook make relationships a reality? Here are five unwritten rules that should guide them, memorialized here so we will all know what to expect:
1. Create an offering that can't be price-shopped or commoditized
Facebook has the commodities of digital media in abundance: 900 million users, 1 in 7 minutes of our online attention, and 500 billion pageviews per month.
But they won't – and shouldn't – open the banner ad floodgates, because they saw this movie back in 2007: MySpace flooded the market with banner ad inventory and watched their value plummet to pennies per thousand views. There's no scarcity of ways to reach a target demographic with a banner ad, and anything remotely similar to a banner ad will be price-compared to a banner ad.
By creating truly original ad products that have no comparables in the market, Facebook will be able to create and sustain its own price point. And because Facebook is the only game in town when it comes to selling consumer relationships at full scale, they have a lock on that market. Scarcity of sources with huge reach and a product that cements relationship for life could be a killer combination. (Sidenote to Adam Bain: shouldn't you sell Promoted Follows for 100X the value of Promoted Tweets?)
2. Create an offering that can't be measured in one-time conversions
Back when she was at Google, Sheryl Sandberg designed AdWords and AdSense to do something nobody had ever done before at scale: form a direct link between the cost and value of an ad. She had pretty good results – today Google owns more than 60% of the market for direct response advertising.
Now that she's with Facebook, Sheryl knows better than to fight Google for the same pie – especially when Facebook's opportunity is so much larger. As a medium of connection rather than transaction, social is perfectly suited to brand advertising. And the market for brand advertising happens to be 9 times the size of the direct response advertising universe that Google has increasingly dominated.
What's more, advertisers have been pent up, waiting to invest in brand advertising on the web. To date, they've allocated only 40% of their online ad spend to branding, even though more broadly brand advertising garners 90%. As a relationship broker, Facebook is the one who can convince them to spend. Just as Google proved the value of direct marketing online, Facebook can prove that brand relationships can be built more effectively on social media than through any magazine spread.
3. Create an offering that enhances rather than compromises the user experience
The holy grail of media is advertising that actually adds to the value of the content. You can see it today in the print editions of magazines like GQ and Vogue – the advertising spreads are so gorgeous and smart that readers think of them as content.
Facebook is poised for this challenge. Zuckerberg has always put the user experience forever ahead of revenue today. He knows better than to devalue the audience's experience with advertising products that serve advertisers while frustrating users. No doubt advertisers – not to mention Wall Street investors – will continue to be annoyed by their second-class status in the short term, but Facebook's unyielding focus on user experience will serve all their constituencies well in the end.
4. Create an offering that closely guards the data
Facebook's greatest competitive advantage is the incomparably rich dataset it owns about each and every one of its 900 million users. That data is scarce and tremendously valuable for targeting – which means that Facebook will be able to charge a premium for every advertising offering it puts forth using it.
Much to the chagrin of advertisers and publishers alike, there is overwhelming strategic value in keeping that data limited rather than selling it wholesale. Facebook will never give advertisers the data. They could sell access to the list of people predisposed to buy your product, or they could make all user data available and let anyone analyze it. The former preserves scarcity and the other destroys it.
And that 's also why Facebook will lend its data sparingly. Even in the most recent FBX announcement (an enhancement to its least valuable form of advertising), Facebook kept their own dataset out of it completely, allowing use of third-party data only. When it comes time to sell, or more realistically, lease, that data, Facebook will do it with tight controls and at a huge premium.
Remember: the media industry was once robust and profitable. What was different then? The targets were the same, but the ways to reach them were fewer.
5. Create a supernetwork that has no borders
If Facebook plays by the four rules above, they will create the killer ad offering that will finally bring the big brand advertising dollars online. But Facebook ads on Facebook will be only the beginning. Just a few days ago, Facebook took its first step in the direction of the bigger opportunity: extending those services to other publishers on the web.
I'm not talking about AdSense – I'm talking about creating a far more intelligent programmatic relationship between users, their interests, and branded content. Every publisher would be better off if they were using Facebook's comprehensive and lifelong relationship with users to inform their advertising – and if they themselves had a way to sell relationships, not impressions. Ultimately, exporting the offering to the rest of the web (86% of user attention is spent elsewhere, after all) will send more value right back to Facebook in the form of a larger dataset. Not to mention a nice cut of the revenues that Facebook would be entitled to.
This is a huge opportunity for the entire digital media industry. Online advertising has become a commodity (thanks, Google!). Facebook is digital media's one best hope to reverse that trend and make online advertising more valuable than offline advertising by tenfold. Google took direct marketing and made it extremely efficient, allowing advertisers to spend less. Facebook has something to sell that might actually make advertisers open their wallets more: a magic brand relationship machine that far exceeds the value of transactional clicks.
Wall Street would much rather that Facebook ignored the five rules above, because Wall Street wants profits now. Facebook wants profits forever. May the latter prevail.