The Facebook Money Machine

An update to this column: According to the Wall Street Journal, any of Facebook’s most popular applications have been transmitting identifying information — in effect, providing access to people’s names and, in some cases, their friends’ names — to dozens of advertising and Internet tracking companies. See here(paywall).

This year, Facebook will make about $1.5bn in advertising revenue. On average, this is about three dollars per registered user, a figure that is significantly higher for the 50% of the social network’s population that logs in at least once a day. How does Facebook achieve such numbers? Last week, we looked at the architecture Facebook is building as a kind of internet overlay. Now, let’s take a closer look at the money side.

If Google is a one-cent-at-a-time advertising machine, Facebook is a one-user-at-a-time engine. The social network is putting the highest possible value on two things: a) user data, b) the social graph, e.g. the connections between users.

For a European or American media, one user in, say, Turkey (23m Facebook users) carries little or no value as far as advertising is concerned. To Facebook, this person’s connections will be the key metric of his/her value. Especially if she is connected to others living outside Turkey. According to Justin Smith from the research firm Inside Facebook, in any given new market, the social network’s membership really takes off once the number of connections to the outside world exceeds domestic-only connections. A Turkish person whose contacts are solely located within the country is less valuable than an educated individual chatting with people abroad; the latter is expected to travel, has a significant purchasing power and carries a serious consumer influence over her network. As a result, Facebook extracts much more value from a remote consumer than any other type of media does.

Advertisers rely on three main strategies on Facebook, as explained by Frederic Colas, chief strategic officer for FullSix Group, a Paris-based interactive agency. The first one is the fan page. The goal is to manage and optimize user engagement with a brand through community management. Numbers are impressive.

Here are the top 15 compiled by Facebakers:

Getting high traffic on a fan pages is still more art than science; interaction volume varies widely. In a recent study (here, in French), FullSix demonstrated that, within a same market segment such as fashion, the number of monthly interactions per 1000 fans will be 4 times more important for H&M (4.3m fans) than for Gap (0.75m fans) and 25 times higher for Victoria’s Secret (8m fans) than RayBan (1.4m fans).

The second approach uses social plugins (such as the “Like” button, recommendations, external login, etc.).

And the third strategy is more like classic advertising campaigns with an unparalleled degree of targeting: Facebook makes possible to combine precise parameters, ranging from location to company name and the precise timing of an ad with a high degree of precision (find the women above 40 who work for IBM, in northern New York state and deliver an ad every Friday between 18:00 and 22:00, for instance). This advertising resource is self-serve, totally automated, and accounts for half of Facebook’s commercial revenue.

“News media companies do not yet grasp the full potential of social plugins”, say Frederic Colas from FullSix as he explains the arithmetic of the “Like” button. Let’s take content that will get about 2000 “likes”. You might think that’s a lot. It’s not. Here is an example. Saturday morning, Paris time, just before the interview with the FullSix exec, I began watching this great profile of Steve Jobs produced by Bloomberg’sGame Changers program. Not the Huffington Post’s tiresome recycling of stale dregs, but truly original programming from one of the best news brand in the world. At 10:00am, this segment had 2000 recommendations. When I came back at 6:00pm, the segment had 3000 recommendations and on Sunday at 7:00, it has 4000 “likes”.

OK. So, let’s take our 2K “Likes”. Multiply it by, say, 150 persons, which is the conservative average of friends anyone has on Facebook. That’s a maximum potential exposure of 300,000. Apply to it a prudent depletion rate of 90% (recommendation not seen, no affinity with the subject, etc). The “liked” content’s exposure is down to 30,000 for people who will see the object. Now let’s assume that only 2 out of 10 will click on it to see the content. Again: two sounds a lot? Remember: you are in the most prescription-efficient environment available; this content is actually recommended to you by people you know (most probably), or who are part of some professional or interest-related circle. In the end, the “liked” content, might be clicked on 6,000 times. That’s three viewers for one single “Like” button. Needless to say, this is an approximation: only Facebook has a precise view of parameters such as the depth of the social graph you might address, the depletion rate between exposure and viewers, etc.

Evidently, in this equation, the key variable is the social recommendation factor. A content, a brand, recommended by a friend is 3 to 5 times more likely to induce an act of inquiring, adopting a service or buying a good than in a traditional marketing process. (Further details can be found in this study: Network-Based Marketing : Identifying Likely Adopters via Consumer Networks made by the Stern School of Business at NYU and AT&T Research; math freaks can look at this 62 pages study from Wharton about The social Contagion in New Product Diffusion; also, to get a vast catalog of studies on the dynamics of viral marketing follow this link.)

How does this connect back to the media equation we usually address in these Monday Notes? First of all, media as a whole is the most followed sector on Facebook. According to this study by the advertising agency DDB, media sector runs the Facebook show with 55% of the brands followed by users, versus 51% for causes, 46% for luxury goods, 32% for sports.

Second, Facebook is about to become one of largest referrer on the internet. In some cases, it sends back more traffic to news sites than Google does.

Third, organizing a presence on Facebook is not that complicated (see for instance, this study made by FullSix on community management). Or take the satiric newspaper the Onion for instance; its assiduous presence on Facebook, drew 1.2m fans, more than the 820,000 of the New York Times’ pages. The frequency of postings, and their relevance, made the difference.

More sophisticated devices are coming, such as subscription recruitment. Some e-commerce companies start developing applications dedicated to use members’ newsfeeds as a vehicle to promote subscriptions (see this article in AdAge).

Facebook may not be the ultimate advertising weapon, but it works. Building segmented fan pages (politics, sports, tech), buying highly targeted ads, requires actually more imagination and creativity than just loads of cash. Expect a great deal of trial and error in the process. But it is definitely worth more than a perfunctory try.

Source : mondaynote, 17/10/10