Our standard in journalism school was The New York Times. Articles and long-time columnists at The Times were put on a pedestal that only the very best and brightest of my classes could even dream of reaching. For those on the print track, you wanted a byline in The Times and for those on the public relations track -- like me -- you wanted to be quoted about your client in The Times.
I purposely avoided the documentary "Page One" about The Times. I didn't want to consider the notion that such an institution was potentially on the precipice of collapse. When the documentary was added to Netflix streaming, I added it to my queue. I had avoided it long enough.
How This Relates to Facebook
Listening to editors and staff writers at The Times talking about the paper with the same reverence I had and interviewees listing off possible reasons for its demise, my mind wandered to Facebook.
Could the same reasons that The New York Times opted for a pay wall lead Facebook to start charging its users?
Here's why I think it will happen.
1. Ad Revenue Will Dry Up - Facebook is going to have to innovate to keep from facing the same problem The Times had -- ad revenue drying up.
For The Times, preferences changes and print circulation dwindled as their core readership aged and other sites like Craigslist came in to vulture the classifieds market right from under The Times' nose.
For Facebook, it is already trying to battle studies that find that younger web users flat out ignore the right side of webpages thanks to years of similar ad placement.
As ads are ignored and other social platforms like Twitter give advertisers access to more premium space - like promoted tweets in a user's tweet stream -- Facebook's ad platform just seems flat out ancient. Just as at The Times, Facebook needs to freshen up its ad platform or risk losing out to competitors stealing advertisers with cheaper rates or better placement.
If ad revenue dwindles advertising, charging users for a premium service or premium options -- asThe Times does, charging users to access the paper on their preferred channel -- might be in the cards.
2. A Rapidly Greying Audience - I just saw an infographic from JESS3 that blew my mind. In 2008, the average age of a Facebook user was 33. In 2010, it was 38. From a platform that just six years earlier was populated primarily by 18-to-24-year-olds, that is a heck of a leap.
This is a concern for two reasons.
The first being that Facebook used to be the best place to reach young people. Now it is a place to reach everyone. It's losing its exclusive youthful edge. To advertisers and marketers, if you are competing for the same mass group of users that you can get elsewhere, then you are going to start looking at other options -- maybe more niche or less expensive -- to reach your user.
The second being that generational habits will change. Just as the majority of my generation is more comfortable getting their news online -- an issue The Times faced before erecting a pay wall on their website recently -- future generations may not want to use Facebook.
Without an exclusive, youthful audience, advertisers may look elsewhere. And older users -- with more disposable income -- may be willing to pay to stay in touch on Facebook.
3. Facebook Has a Lot of Addicted Users - Entrepreneur Sean Parker said they went about the Spotify launch like a drug dealer. Give users a little bit for free and if your product is good, they'll be hooked and come back willing to pay. I am listening to ad-free music on Spotify Premium as I type this.
Right now, there are a lot of people who are painfully Facebook addicted.
They upload photos, share their location via check-ins, and comment and like posts on Facebook as if they literally have nothing else to do. They would find life drastically changed without access to the Facebook platform. And if Facebook doesn't innovate with this data quick enough, the ads will be ignored no matter how relevant.
Right now, Facebook's got you hooked. If it can't get advertisers to subsidize your addiction, it'll come right to your door with its hand out, looking for you to pay for access. Don't pay and Facebook will cut off your supply.
Why Facebook Can Charge
The one thing that The Times has that should endure as long as it doesn't drop its standards is a brand that represents great journalism, allowing it to lure the best and brightest journalists -- on any platform they want -- into its camp.
I will pay for that level of journalism because I can't get it elsewhere and The Times introduced a pay wall to take advantage of it.
What Facebook does is aggregate all of these great services -- from photos to videos and now video chat with Skype -- that you couldn't find elsewhere in one bucket before Google+ was introduced. The difference right now is Facebook has about 700 to 800 million more users.
The question is, when will Facebook take that "first mover" advantage and stop relying on advertisers? Or when will it be forced to?
COMMENTARY: Despite a viral wall post that circulated around Facebook claiming that it will soon be charging its users to be a member, a Facebook spokesperson has told members its just a rumor and nothing more.
This is the Facebook wall post in question:
“IT IS OFFICIAL IT WAS EVEN ON THE NEWS. FACEBOOK WILL START CHARGING DUE TO THE NEW PROFILE CHANGES. IF YOU COPY THIS ON YOUR WALL YOUR ICON WILL TURN BLUE AND FACEBOOK WILL BE FREE FOR YOU. PLEASE PASS THIS MESSAGE ON IF NOT YOUR ACCOUNT WILL BE DELETED IF YOU DO NOT PAY”
However, a Facebook spokesperson said.
“A rumor on the internet caught our attention. We have no plans to charge for Facebook. It’s free and always will be.”
Facebook has always been a "freemium" service, depending primarily on advertising as its chief source of revenue. I don't see this happening anytime soon, but in order for Facebook to justify its humongous $80 billion valuation when it files for an IPO sometime in late 2012, it will need to demonstrate a successful revenue model AND predictable growth in revenues in order to justify its price multiple of 20 times revenues or 40-45 times earnings.
In a blog post dated March 20, 2011, I felt that the ad-supported revenue model for Facebook was flawed and that the social media giant had reached a critical inflection point sometime in late 2010. I based this opinion on three key factors:
- Social Network Penetration Maximizes - The total number of social network subscribers is a finite number. As you near the inflection point, growth in social media pentration begins to dramatically slow down, and the total number of social media users eventually peaks as it reaches that finite number.
- Revenues-Per-User - According to Silicon Valley Insider, Facebook has one of the smallest revenues-per-user when compared to other technology leaders like Google ($24), Amazon ($189) and eBay ($39). Facebook's revenues-per-user was $3.10 at the end of 2010, and is trending at $5.00 for 2011.
- Facebook Reaches The Advertising Revenue Inflection Point - According to eMarketer, Facebook's U.S. advertising revenues have reached the inflection point, and growth will begin to decline, and will eventually peak.
Since early 2009, I came to the conclusion that advertising revenues for social networks are not linear (straight line), but are an elongated S-shaped curve, sloping upwards initially to form a concave curve, but eventually slopping downwards to form a convex curve over time--the classic case of diminishing returns. As Facebook reaches the saturation point in users (i.e. its finite number), the number of ad impressions becomes fixed. Advertisers pay for ad impressions or the number of eyeballs that will see its ads, placing a limit on its advertising revenues.
If you read my blog post of March 20, 2011 you will find Facebook's inflection point graph (below).
Click Image To Enlarge
The inflection point is the point in time when the gap between the ad revenues curve (upper curve) and no of users curve (lower curve) is at its widest. I refer to this as the "Ad Revenue-to-User Gap" or The Inflection Point. According to my calculations, "The Gap" was at its widest sometime in mid-to-late 2o10, and the Ad Revenues and No of User lines gradually transform from convex curves to a concave curves. Over time, The Gap gradually narrows until growth in users and advertising revenues finally peak.
Facebook surprised me and was able to churn out a lot more new members in 2011 than I had originally forecasted in March 2011. Most of Facebook's growth in new users was international, primarily from developing countries in Asia, Pacific Rim, Latin America, South America and India. However, I still believe that Facebook's inflection point gap will experience narrowing because growth in users is no longer exponential. Users in developed nations of North America, the U.K. and the EU have already reached or nearing saturation, and Facebook is forbidden from China so I don't see a second explosion of growth as in 2011. The Gap will begin to narrow at a faster rate beginning in 2012 as the saturation point is reached internationally.
It used to be that Facebook's ad revenues were derived predominantly from the U.S., but this is no longer the case. According to eMarketer (see graph below), Facebook's international ad revenues began to grow exponentially beginning in 2011, and will even match those in the U.S. by 2012.
According to BIA/Kelsey’s (see graph below) first forecast of geotargeted social media projects the local segment of U.S. social media advertising revenues will grow from $400 million in 2010 to $2.3 billion in 2015, representing a compound annual growth rate of 33.3 percent. During the same forecast period, the firm expects overall U.S. social media ad revenues to grow from $2.1 billion in 2010 to $8.3 billion in 2015 (CAGR: 25.7 percent).
According to eMarketer (see graph below), U.S. online ad spending for the year ending 2010 was $26 billion, and is projected to reach $31.3 billion by the end of 2011, but online advertising will experience an extended period of decline in growth beginning in the year 2012.
As you can see from comparing the BIA/Kelsey and eMarketer graphs for U.S. social media and online ad spending, social media ad spending as a percentage of U.S. online ad spending will nearly double from 8.07% in 2010 to 16.77% in 2015, but year-to-year growth in U.S. social media ad spending will decline from 34.%% in 2011 to 7.5% in 2015 (see table below). This is not good for U.S. social media ad spending if BIA/Kelsey and eMarket's numbers are anywhere correct. What this is saying that Facebook and other social networks must generate growth in advertising internationally.
U.S. Social Media Ad Spending As A Percentage of Online Ad Spending and Annual Growth Rates in Social Media Ad Spending For The Years 2010 through 2015:
- 2010: 8.07%
- 2011: 10.86% +34.57%
- 2012: 12.50% +15.10%
- 2013: 14.07% +12.56%
- 2014: 15.60% +10.87%
- 2015: 16.77% +7.50%
Facebook and other social networks have no choice but to look internationally to increase their advertising revenues. In fact, we are already seeing a stampede of social networks of all types (Facebook, Twitter, foursquare, Groupon, Yelp, etc.) expanding overseas to maintain growth in ad revenues. However, even international social media ad spending will eventually decline in growth and eventually peak as the social media user penetration reaches the saturation point in developing countries with large internet user populations. Even eMarketer has seen what is coming in U.S. social media ad spending, and reduced its forecast of Facebook's ad revenues by about 7% from $4 billion to $3.7 billion.
Although Facebook's ad revenues are predominantly from national advertisers, it hopes for an even larger piece of the online ad pie, but has encountered resistance from large national TV advertisers who will spend $60 billion on TV ads in 2011, to shift some of their ad spending to the social giant. The problem for Facebook: It has been largely unable to build a strong enough case that will finally convince large national advertisers that it can match the ROI's of traditional advertising channels like television, radio and print. In fact, many national advertisers are quite content to maintain only a Facebook page or pages. With all the social media tools that are now available, natioinal brands have finally figured out how to grow their fan base, and are waiting for their fan base to reach an inflection point where WOM will automatically kickin, so they don't see a need to pay for Facebook display ads.
Facebook's second largest source of revenues is from Facebook Credits, the virtual currency used by Facebook users to pay for virtual goods and apps on its site. The largest Facebook Credits revenue generator by far is Zynga, the social gaming giant. Zynga filed its S-1 for an IPO on July 1, 2011, but put off the IPO due to volatility in the stock market until after Thanksgiving. Guess what, there's still volatility--lots of it. According to its SEC filings, Zynga generated YTD revenues of $859 million through Q3 2011, but its profits continue to slide, and has to be very worrisome to CEO Mark Pincus, whose company gives Facebook 30% of all virtual goods sales. If you do the math, this is works out to approximately $258 million in Facebook Credits revenues. Zynga is on pace to hit $1.2 to $1.3 million in revenues for the year 2011, which means that Facebook's cut will be between $360 million to $390 million.
According to InsideVirtualGoods.com, the U.S. virtual goods market will exceed $2 billion in 2011. Zynga represented nearly 55% or $820 million (booked) out of the $1.5 billion in total virtual goods revenues for 2010.
In October 11, 2011, Forbes revealed that Zynga is building its own stand-alone gaming site called "Project Z". Forbes says.
“'Project Z' that will bring Zynga games to consumers outside of Facebook. It’s the first step of a larger vision than just creating the next FarmVille. While the details are fuzzy at this point, Zynga is moving to create its own online community–even perhaps a social network–of gamers that it interacts with directly."
This appears to be a move by Zynga to finally free itself from its sole dependence on Facebook. Here's what Forbes goes on to say.
"While Facebook is named as a partner for the Project Z service, the new site–release date unknown–gives Zynga an independent place to connect with consumers outside of Facebook. Zynga has been rumored for years to be working on such a stand-alone gaming site. This would mean that Zynga would not be subject to Facebook’s terms and conditions, including its rules about promotional (“spammy”) game notifications, virality and the like, which have been sources of tension with Facebook over the years. It would also mean that Zynga could enable a separate form of payments outside of Facebook Credits, Facebook’s system, and therefore not have to pay a cut to Facebook."
Let's put it this way folks, if Zynga's IPO is successful, it will have an additional $1 billion to grow its business and invest in "Project Z" and eventually be in a stronger position to free itself from Facebook.
If Facebook's problems with Zynga were not enough, a study commissioned by virtual goods platform Viximo and conducted by SuperData Research and covered by me in a blog post dated October 11, 2011, predicts the social gaming market globally will grow to $8.6 billion by 2014, with $5.6 billion of that total generated by non-Facebook social sites outside the U.S.
Facebook once dominated worldwide social gaming, but now accounts for only about one-third of worldwide social gaming traffic. Here are a few numbers to make Mark Zuckerberg's blood boil:
- Asia remains the largest market for social games, with an expected $2 billion in total revenue this year.
- South America and Europe are growing at a rapid clip.
- Germany accounts for the most revenue, with over $173 million. That amount is projected to reach $250 million by 2014.
- Russia's social gaming audience is now 35 million users.
- Brazil's social gaming audience is now 32.6 million users.
The study found regionally-focused social networks like Hyves in the Netherlands and Tuenti in Spain provide additional distribution with strong monetization and lower customer acquisition costs. Other social networks target a distinct market within certain regions, such as students with StudiVZ (Germany) or people visiting dating sites such as Badoo in the U.K.
The Viximo study argues Zynga’s role as the leading game developer on Facebook makes it harder for smaller firms with modest marketing budgets to break through. On Monday, Zynga launched “Mafia Wars 2," the sequel to its popular game in 16 languages including Italian, French and German.
Plus, Facebook’s requirement since July that developers use Facebook Credits--its virtual currency--in all apps and pay a 30% commission on purchases has limited pricing flexibility for game publishers, according to Viximo. It also pointed to efforts by Facebook to curb spam from apps or shut down some apps altogether has decreased the potential for viral growth on the site.
If Facebook loses Zynga, the hit to its revenues, and especially its bottom line, will be tremendous, and I don't have to tell you what this will do to its stock price now trading in the secondary market.
On August 26, 2011, Facebook announced that it was shutting down Facebook Places, its location-based check-in service, effectively surrendering that market to foursquare. On August 29, 2011, only four days after it announced the shutdown of Facebook Places, Facebook announced that it was shutting down Facebook Deals, effectively conceding the deals market to Groupon and LivingSocial. Whatever happened to those social media experts predictions that Places and Deals were going to generate billions in revenues?
So where else can Facebook go to grow its revenues? In a blog post dated November 11, 2011, I commented on the ongoing war between Google and Facebook for Web supremacy. Well, the answer to where Facebook may go next maybe hidden in the graph below:
Click Image To Enlarge
A lot has been written about that fact that Facebook's monthly unique visitors are gaining on and may even surpass those of Google, the search engine giant in 2011. Facebook already leads Google in the number of minutes spent online on its site, but when you compare Facebook's revenues per user (see graph below), Google dominates $24.00 to $4.00 (2010), but that gap, now 6-to-1 will narrow a bit in 2011 when Facebook's revenues per user are $5.00. Still the ratio is about 5-to-1 in Google's favor.
Click Image To Enlarge
When you combine the above graph with the graph and table below, a clearer picture emerges as to the direction where Facebook may go to increase its advertising revenues--search ad revenues.
Click Image To Enlarge
U.S. search ad revenues for 2010 were $12 billion, expected to grow to $14.38 billion in 2011 and hit $21.53% by 2015. Google commands roughly two-thirds of that total. But, can Facebook make that huge pivot from being a dominant social network to competing head-on with the dominant search giant Google? Google made search what it is today, and its search algorithms are legends ahead of anything Facebook has. Facebook searchs are special purpose, limited to searching for content posted by its Facebook users. It's obvious that it will need to develop a general purpose search engine, and I am not sure that it has the technical know-how to do that, and if it does, it might find it very difficult to crack into the general search ad market.
In spite of the huge burst in Facebook's users from 600 million at the end of 2010 to 800 million in June 2011, Facebook has not been able to fully capitalize on that growth when it comes to increasing advertising revenues. Selling "bigness" is not working with large national TV advertisers and about 50% of small businesses who still have not used Facebook much, if at all. It now appears that Facebook is not "The Holy Grail" that many social media experts claim it is.
Having said all of the above, the easiest option Facebook has to quickly increase its revenues is by charging its users. It probably won't be able to charge all of them, because that might result in an all-out user revolt, so it has to be very careful what it charges, who it charges and when it will begin to charging users. If you read my blog post dated November 23, 2011 about the infamous Netflix fiasco, you know what I am talking about.
I have to believe that Zuck has at least contemplated the thought of charging some of its users, especially those with large fan bases (50,000+) and brands with a large fan following that do very little advertising on Facebook, but that benefit by creating a lot of traffic to their sites. All of them eat up Facebook's bandwidth and keep its technicians and data center very busy. It's a form of "freeriding" and there is a real cost associated with providing a freemium service, and Facebook may not be able to absorb those costs forever.
What do you think? Would you be willing to pay a minimum fee, let's say $10.00 per year to keep your Facebook page? Comments greatly appreciated, especially from social media experts.
Courtesy of an article dated November 22, 2011 appearing in MediaPost Publications Marketing Daily
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