August 1, 2012

One-Third of All US on Facebook, Yet Users are Worthless?


One of my  readers asked me why I always write negative things about Facebook. First of all this isn’t quite true, since I’ve written a few articles about how to make money on Facebook and the top ads on Facebook. I just like to question what is going on, look beyond the headlines and the spin.

So, in that light, I want to examine the numbers: According to Comscore, in June, over 130 Million people within the US used Facebook. This is about one third of the population of the US that uses Facebook – some of them day after day, many times a day, making it one of the most popular media sources ever in the history of the world. However, despite this, Facebook may only bring in $1 Billion this next year, even with expected growth. This may seem like a lot money, but it’s actually not – and I know why.

The Superbowl gets around 100 million viewers each year. While the number goes up and down, it’s a good round number for this post and makes it easier for me to do the math. According to my research (Google) there was last year 62 ad slots sold at between $2.5M and $2.8M. That’s at least $155M in revenue, perhaps even as much as $175M in revenue for whichever network broadcasts the Superbowl. That means each viewer is worth at least $1.50 for the Superbowl.

In contrast, the number $1 Billion estimated in Facebook revenue is for their 500 Million (and growing) users throughout the world. While I can’t find any numbers that say how much revenue is generated in the US and how much is generated internationally, I’m going to make a conservative guess that at least 90% of the revenue is US based, meaning that next year $900 million dollars is expected to be made from Facebook. That means that each US user, over the period of the year is only worth about $7.00 for the entire year.

That is a ridiculously low number if you think about it. Viewers watching a several hour football game are worth 21% of the value of a Facebook user who may use the site 365 times plus a year, spend hundreds of hours a year talking to their friends and family, and more importantly interact with people of similar interests, communicate their needs, buying habits and much more. If you translate the value into hours of use of a Facebook user compared to a Superbowl watcher, an hour of a Facebook user is insignificant – I can’t even do the math, but you are talking about hundredths of a cent per hour for each Facebook user compared to around 50 cents per hour per Superbowl watcher.

The value comparison here is hard to believe, in light of all the media coverage about Facebook. This raises two possible sets of questions.

The first set of questions asks what the real value of an internet user is. The second set of questions would ask why we can’t monetize those users. If we concentrate on the first set of questions, we would come to conclusion that internet users, especially those on Facebook have little value financially per user. That the only reason that Facebook has any value is because of press coverage of the substantial size of the user without comparing the users actually value. When you look over the value of broadcasting corporations in comparison to their revenue, the inflated difference is great.

The second set of questions interests me a great deal more, because it might have two subsets. The first question to ask is, is it easy to acquire users for a social networking site (and then lose them like MySpace) and how relatively cheap is their value. We are estimating the value of Facebook at 12 billion, although the majority of those users have only been on the site for less than a year. They have no loyalty, they have no value beyond that time. Any significant change in Facebook, or the rise of another more interesting social networking site could immediately doom the value of Facebook. Their value when it comes to advertising is clear. I’ve pointed out, that so far, their value is insignificant per user.

So, now the important question: why are these users so useless, and why can’t we monetize them? Why hasn’t interactive advertising advanced far enough that it can actively engage users and create both branding and direct response experiences for social users that equates to actual value? This is a very significant question for anyone who is looking at the development of advertising on the internet and the value of social networking to advertisers.

We can believe that either we haven’t learned how to monetize these users and we will very soon, or we can believe that the value of a social networking user is useless. This is probably the most important question of our time when it comes to the economy and its relation to advertising on the internet.

I believe the issue is simple: we need to be considerably more creative (as does Facebook) about advertising on the internet.

After 10 years of substantial growth, we still depend too much on display advertising in the form of 728×90 banners. I remember in 2000 being introduced to some of the rich-media expendables that are still in place.

Facebook, on the other hand, still depends completely on CPC text advertising for its revenue. Here is the good part: this means whoever finds a way to be creative can monetize these users significantly. I am of the opinion that the Facebook user’s current value is less than 1/100th of what it could be – that for every dollar made now, within the next few years someone can figure how to bring in $100.

Whatever this might be, I’m not sure – but it does mean that monetization of users needs to be beyond the CPM, beyond the CPC, and start to use possible metrics and systems that we haven’t even thought of.

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