Originally appeared on June 11th in the newsletter.
A lot of noise has been made leading up to and in the wake of the Facebook IPO. Things haven’t turned out too well for the stock’s price appreciation, which has given rise to a variety of criticism of the company’s COE, investment banks and other involved parties. While that circus might be entertaining to some, I think the future prospects of Facebook’s current business model and how it relates to the difficulties currently faced by network television provides is a more interesting area.
The revenue Facebook currently generates comes primarily from ad revenue generated from their online social networking site. Facebook is not a subscription site; it’s a free site that incorporates ads into the pages users see when they go onto the site. Clicking on an ad generates a charge to the person/business displaying the ad and this results in income for Facebook. When users don’t have interest in the ads (no clicks), then income is not generated.
In many ways Facebook’s business model is akin to that of the big network broadcasting companies (The Networks = ABC, NBC, CBS, Fox). Facebook, like the networks, is a free service anyone can access, as long as you have the right equipment. To access Facebook you need an Internet connection and a computer. To access the networks you need a television and an antenna. Neither one of these services has a specific cost for accessing content.
Facebook and the networks are able to forgo charging subscriptions for accessing content because of their scale. The amount of people these entities touch is enormous. Millions of people every day see a Facebook page and see programming from the networks. Advertisers, therefore, see value in using either medium to transmit their product and/or service messages.
The problem with the ad business model comes into play when you have an audience that totally tunes out the commercials that are being offered up. When this happens the perceived value of the millions of eyeballs disappears. The first hurdle that will always exist for both mediums is the fact that viewers are not going to the service (Facebook or a network station) to find out about a specific product or service. People do not go on Facebook or watch a program to find out about the latest heartburn drug. Secondly, more people are adopting technologies that block/skip ads and therefore make them even more irrelevant.
When browsing the web a number of web browser plug-ins exist that strip out embedded ads from websites, which causes visitors to not even realize ads exists on some pages. With television, digital video recorders are often used to fast forward through ads. Most recently Dish Network has introduced an ad-skipping service.
The challenge that both Facebook and the networks must deal with is how to add value in their advertisement areas, so that the ads are not seen as a distraction, but actually a beneficial part of the whole package. In Facebook’s case, the company has a huge amount of demographic and other data on its users that it has and hopes to further leverage to make the world’s most sophisticated target marketing machine. Technically, this venture is feasible, but to what limit will users accept such targeting until they’re scared off by the thought of personal privacy violations? For the networks, the task is even more difficult, since many alternatives exist through the Internet for video content. Their potential to target audiences by specific demographics is also much more limited than Facebook’s.
Things must change for both Facebook and the networks. As technologies and user expectations change so too does the service and performance that these companies must deliver. It’s a future filled with many challenges and opportunities for both realms. In this case, it’s truly a situation where past success is not a guarantee of future success.
I have to say I agree with you here, both Facebook and the networks need to change the way they advertise, or risk losing everything. Now, Facebook has more room to operate here, and they’re also much better situated to make the change. Facebook has been in a constant state of flux since its very inception, and changing the way it advertisers, which absolutely a challenge, really comes down to another set of algorithms. They can make little tweaks here and there, and then see how users react; then they can adjust, reassess, and repeat. With TV networks it’s a whole different animal. They’ve been using the exact same model for advertising since the beginning of television. Sure they all have websites and some interactive content, and then there are those annoying ads that pop up in the middle of your show, telling you to watch the next one, but for the most part, commercials really haven’t changed. The biggest obstacle for networks is themselves. They don’t think they need to change. Look, I work at a Dish call-center, and all I do all day long is talk to people about Auto Hop. The people that have it love how it skips commercials. The people that don’t have it want to know how to get it. This technology is not going anywhere. This is the massive climate shift that brought the dinosaurs to extinction, and if the networks can’t adapt, the same will happen to them.