This blog post is an extract from the Huffington Post’s article “A Different View: Why Facebook Is Worth More & Wall Street Is Wrong“ written by Peter Friedman
Facebook is bringing new and greater value for consumers and marketers through innovative models of engagement brand building. Critics, ranging from the advertising to tech to Wall Street completely misunderstand the Facebook business model — and to some extent, the entire nature of the social media market.
The most important dimension to understand is that the Facebook business model is an ecosystem delivering deep usage patterns that are driving new value streams in marketing (brand building), insight, service & support, ecommerce, and entertainment.
The critical analysis usually goes like this: Facebook has limited value because:
- It’s a traditional advertising impressions business model in a company that is maxing out its potential with slowing growth (users and therefore ad inventory) and a dependency on displaying ads to social network users who don’t want to see them.
- 40%+ of their usage is mobile and they haven’t figured out how to monetize it.
- Last but not least, Facebook is controlled by an arrogant, confident young founder-CEO who has blatantly declared he will not listen to or be driven by his critics’ failure to understand his business.
A different view…
In fact Facebook has a different, powerful, high-value business model:
- Facebook is an ecosystem business model, dominant in social media, and innovating new relationship marketing, insight, support, ecommerce, and entertainment value streams. The Facebook usage pattern is deep and strong, with tremendous upside to get deeper and stronger — and to be monetized.
- The largest brands in the world are finding substantial value in Facebook’s ecosystem, are increasing their spend on Facebook, and are already finding success in the company’s new marketing venues.
- 40% of their usage is mobile, which they have yet to monetize. This is a tremendous upside as the US Internet industry (including Facebook) catches up to mobile advanced countries such as Finland and South Korea.
- Last but not least, Facebook is controlled by an arrogant, confident young founder-CEO who has blatantly declared he will not listen to or be driven by his critics’ failure to understand his business
Ecosystem Business Models & Usage Patterns
Most companies operate primarily in the context of their industry business model. Auto-makers make cars in the context of the auto industry business model; TV Networks and most Internet sites work in the context of an advertising impressions model.
But a few companies, such as IBM, Microsoft, Apple, Nintendo, AOL for a while, and now Facebook, actually become the business context by establishing an ecosystem in which customers, developers, and other third parties (resellers, advertisers, etc.) all participate and build a massive asset infrastructure and series of value streams. The ecosystem becomes an economy itself, leveraging all the players, usually with the ecosystem company reaping the greater competitive barriers, the most revenue, and the largest capital value.
Let’s look at Apple as today’s most popular ecosystem reference example. The IOS operating system, combined with the iTunes channel and nifty hardware design, sets the context for an ecosystem that goes far beyond Apple’s own products, to hundreds of thousands of applications, services, peripherals, resellers, repair centers, training, publishers, and advertisers.
If we valued Apple as just a device company, or even a combination of device & operating system, we might look at declining hardware share with a proprietary OS as a losing proposition. But Apple has built an industry around itself, and commands a massive dominant share in actual usage of smart phones with apps and the web, all supported by that ecosystem.
That dominant usage pattern drives high margin annuity revenue streams — apps today, with advertising, ecommerce, and entertainment to be increasingly added over time.
Facebook has also built a unique ecosystem with a powerful annuity usage pattern, with hundreds of thousands of third party applications, devices, games, entertainment offering, publishers and advertisers. Facebook has even extended beyond it’s own ecosystem with a distributed model in which Facebook engagement (likes), dialogue (comments) and even registration features are used by tens of thousands of other web sites.
Many companies, including Microsoft, have tried to create a universal registration/sign on system and reap the resulting competitive advantages. Facebook has done it. Much has been made of Facebook’s 900 million+ users and the slowing growth in that number. But the important number is the usage pattern, not the total number of users.
Over 90% of Facebook’s 1 Billion + members use it every month. That’s a previously unheard metric. Over half (now 500 million+) users are active every day. (Source: Facebook.) That is even more phenomenal in absolute and percent terms. It has never happened before in any media venue, online or off.
Overall engagement and time on Facebook have been rising over the last few years, and continues to rise each time Facebook advances the service with innovations such as Timeline. This number will ebb and flow; the important metric to understand is the upside in average user hours per month.
Today Facebook averages about 6 hours per month per user (source: Facebook). What is the upside? TV time, currently at about 100 hours per month per user (source: New York Times) is shifting to social media — in particular, to Facebook.
There’s a wide range of views on this; mine is that over half of TV time will shift to social media. If Facebook’s average usage per month only grows to 36 hours (just over one hour per day and only to about one third of TV’s pattern), that’s a 6x growth in usage time. Facebook’s usage pattern is also much deeper, and more personal, social, and engaging than television, which brings us to the richness of the new value streams.
Value Streams & Market Opportunities
Social media overall is displacing television as the primary venue for companies to build brands. By brand building, I mean awareness, positioning, product education, loyalty, and word of mouth. Study after study (as well as our direct experience) shows that television has for the most part become ineffective in brand building, even as social media is on the rise. Social media is on the rise as it becomes the primary engagement venue for consumers.
Consumers get three core primary benefits from social media:
1) Self-expression and sharing themselves,
Secondary values exist as well; but it is these three fundamental human relationship values that drive the engagement, enabling brands to connect with customers in a way never before possible with scale. This is why the number of corporations using social media and Facebook is rising.
CMOs are universally planning to increase their social media spend while they decrease traditional media spend, and Facebook has the lion’s share of this spend (sources: Society of New Communication Research, eMarketer, CMO Survey). Critics looking at ad impressions are missing the brand-building model, but CMOs are not.
The critics likely mistake Facebook’s brand-building value for an ad impressions model because they don’t see or understand the new innovative marketing venues.
For example, Facebook has eschewed traditional web ad models such as banners, ad words, and display ads, in favor of marketing venues that are consistent with its conversational, storytelling, and relationship ecosystem context — most recently Sponsored Stories. With our Fortune 500 client base, we are seeing great success with Sponsored Stories in terms of generating reach (overall impressions), engagement (actions), and word of mouth (organic impressions or users commenting on the brand and it’s stories.)
Business Insider recently reported, “Sponsored Stories are way more effective than display ads.” Our clients are increasing their spend on Facebook marketing venues, with plans to increase even more in 2013. Another way to look at this is to consider Facebook as a venue for brands to build relationships with customers, not ad impressions. As any marketer will tell you, a customer relationship is more valuable than a lifetime of ad impressions.
Additional Value Streams:
While the Facebook case can be made just on brand building (versus ad impressions), this is only one of the high value streams brands are leveraging in the Facebook ecosystem. Insight, service & support and commerce each represent multi-billion dollar markets for Facebook.
If we examine and properly understand Facebook on the basis of its ecosystem model, strong usage pattern, growth of the social media market, value derived by Fortune 500 brands, and the intent and actions by CMOs to increase spend, we get a very different picture than the critics paint.
Instead, we see a company that delivers high value to consumers and brands, and in turn, will command a high valuation for itself.