Facebooks Ad-Supported Revenue Model Reaches A Critical Inflection Point


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Facebooks Ad-Supported Revenue Model Reaches A Critical Inflection Point

  1. 1. PBT Consulting Strategic Marketing, Business Planning, Research, Venture Capital and Financing Home Archives Profile Subscribe « AMERICA, EUROPE AND JAPANS AGING POPULATION TIME BOMB, BUT THE ABOUT MOST RECENT PHOTOS U.S. WILL FARE BETTER IN THE LONG RUN | Main | EMARKETER: THE DAYS OF DOUBLE-DIGIT GROWTH IN U.S. SOCIAL NETWORK USERS ARE OVER » 03/20/2011 FACEBOOKS AD-SUPPORTED REVENUE MODEL REACHES A CRITICAL INFLECTION POINT AS THE NO OF USERS AND AD REVENUES SLOW MY OTHER ONLINE SITES LinkedIn: turk5555 MySpace: tooshyniceguy Other...: The next time you hear about an online business that gives away its product or service away for free and monetize the eyeballs that result, consider this:   http://www.pointblankbusinesstechnology.com/BusinessPlanInquiry.htm Twitter: turk5555 l The Number of Users is Finite - Growth in the number of users or eyeballs YouTube: cabrone5555 eventually slows down as a sites users nears the saturation point, and eventually the total number of users peaks.  This is especially applicable to social networks  like Facebook, Twitter and Foursquare.       RECENT POSTS l Advertising Revenues Will Eventually Peak - Advertisers pay for ad impressions or the number of eyeballs that can see their ads.  Since the number of users is a  SECURITIES AND EXCHANGE finite number, social media revenues will grow in some proportion to total users. COMMISSION STUDYING RULE  Social media ad spending represents a fixed percentage of total advertising dollars  CHANGES FOR INTERNET STARTUPS TO RAISE CAPITAL in the U.S. and social medias share of total ad spending has shrunk 25% since its THROUGH CROWDFUNDING peak in 2007.     l Social Networks Eventually Reach A Critical Inflection Point - The number of WILLIAM TRUBRIDGE, WORLD NO-FIN FREE DIVING CHAMPION, Facebook users has already reached saturation in the U.S. and parts of Europe. SETS RECORD DIVE OF 101  As growth in users begins to decline ad revenues will also decline, and will  METERS OR 331 FEET WHILE eventually peak. The social network will eventually have to depend on other revenue HOLDING HIS BREATH streams to continue growing.  FORESEE RESULTS: LESS THAN According Rick Bullotta, a co-founder of ThingWorx, every online web business, including 1% OF WEBSITE TRAFFIC the major players like Google, Facebook, Twitter and Foursquare, play a constant game COMES FROM SOCIAL NETWORKS of stealing a share of the total ad revenue pie away from their competitors.  In other words,  theyre all locked in a sort of zero-sum game.   AMERICA: THE LAND OF THE PART-TIME JOB, PEOPLE WITH Technology innovations, including the growth of mobile devices like the iPhone and FULL-TIME JOBS AND BENEFITS Android smartphones and tablet computers like the iPad, has created entirely new media IS A DYING BREED channels that did not exist before, and advertisers have been quick to exploit these new THE MEDIA VIEWING AND channels in order to reach their target market.  This has created a shift from traditional  LISTENING HABITS OF TODAYS online display advertising to mobile display ads embedded in apps and social games.  The  GENERATION-YS OR shift in total dollars has not been proportional, as many advertisers are still experimenting MILLENNIALS, INCLUDING with mobile media and just beginning to understand how to measure their ROIs and LATEST TRENDS effectiveness of their social media ad spending.   13 STARTUP FIRMS PITCH ANGEL INVESTORS AT According to many startups Mr. Bullota has seen,"Most are built on an advertising STARTUP INCUBATOR model". Some are directly dependent on an ad-supported revenue model or indirectly ANGELPAD SECOND DEMO DAY dependent on web or marketing analytics, or make money through display ads that HOW STARTUPS CAN USE appear in their digital content. The latter is especially true of mobile apps, social games, SOCIAL MEDIA TO COURT music downloads, online video, internet radio and photo sites.   ANGEL INVESTORS, BUT BE CAREFUL WHAT YOU DISCLOSE The problem with all social networks is that there is a very low value-added GAMESTOP TEAMS UP WITH component.  The reason for this is because they dont make anything of real value  ADGREGATE TO LAUNCH THE that you can smell, touch or taste.  In my opinion, social networks dont even solve  FIRST GAME-CHANGING SOCIAL a real problem in the marketplace.  Zuck created Facebook as a way to meet chicks.  COMMERCE FACEBOOK STORE  This may have been a problem for Zuck and his geek friends, but I doubt it is a problem in  IDC FORECAST: ANDROID the real world. Truth be told, Zuck knew he was on to something when he reached 1 SMARTPHONES MARKET SHARE million users, then it became 10 million, but he still didnt know any way to make money TO GROW TO 49.2% BY END OF off of Facebook except advertising, because if he started charging, he knew userss would 2015 leave the site. Today, if you go to Facebooks homepage, it says, "Facebook helps you FACEBOOK RELEASES MAJOR connect and share with the people in your life".  Thats a whole lot better than saying,  UPGRADE TO STANDARDIZE "Facebook helps you connect with chicks". THEIR MOBILE INTERACE Because it is difficult to place an intrinsic value on Facebook, or Twitter for that matter,  social networks have decided not to charge, but to position themselves as a new media http://tommytoy.typepad.com/tommy-toy-pbt-consultin/2011/03/why-the-ad-supported-revenue-model-for-social-networks-could-result-in-another-dotcom-bubble-.html 1 / 5 Page
  2. 2. channel for advertisers.  Facebook presently has about 600 million users, Twitter is  RECENT COMMENTS approaching 200 million users.  Those are real numbers that advertisers can relate to, in  Tommy on DISCOVERY: 70 much the same way that the Super Bowl pulls a worldwide viewing audience of 100 LITTLE ANCIENT BOOKS WITH million+ houeholds, the Grammys can pull 26 million households or the Academy Awards LEAD PAGES BOUND IN WIRE can pull 37 million households. COULD REVEAL THE REAL TRUTH ABOUT CHRISTIANITY Whereas e-commerce was an enhancement of existing brick-and-mortar retail stores, the Bible Girl on DISCOVERY: 70 ad-supported revenue model is merely a way to steal market share from traditional LITTLE ANCIENT BOOKS WITH media. Nothing much is created in the process other than a new level of human LEAD PAGES BOUND IN WIRE interaction and connection which has some benefits, but hard to quantify in dollars COULD REVEAL THE REAL and cents like you can a new Apple iPad or Ferrari sportscar.    TRUTH ABOUT CHRISTIANITY One of the problems with the ad-supported revenue model is that, other than a few what is water pollution on INFOGRAPHIC: THE WORLDS commercial online business sites like SalesForce.com, eBay, Zappos.com, DRINKING WATER CRISIS, Amazon.com, to name a few, theres no exchange of goods between the site and the POLLUTION AND WATER user.  This is the conumdrum of social networks, and the key reason why they have  SCARCITY REACHING EPIDEMIC had difficulty charging for their services and have earned the label of "freemium" PROPORTIONS businesses.  In the real world of brick-and-mortar economy, entrepreneurs find a need and what are the effects of global fill it.  Small businesses create actual products and services to fill that need.  A market  warming on INFOGRAPHIC: A quickly develops and an economy is born. This is the basis of Capitalism.   GLOBAL WARMING MAP THAT SHOWS HOW COUNTRIES ARE In this article I hope to demonstrate that all social networks are competing for a finite BEING AFFECTED IN 2010 AND number of users and their ad-supported revenue model can no longer create exponential WILL BE BY 2030 ad revenue growth over the long-term.  As a consequence, social networks are rapidly  Charles on IMAGE OF WHAT reaching a critical inflection point where user penetration ultimately reaches the APPEARS TO BE JESUS CHRIST saturation point and advertising revenues stop growing and eventually peak.  The limits on  APPEARS ON LEAD BOOK social network growth are explained below:  COVER, VATICAN REFUTES AUTHENTICITY 1.  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  Besigner bag on MILAN DESIGNER MAKIO HASUIKES pentration begins to dramatically slow down, and the total number of social media users INGENIUS LEATHER BRIEFCASE eventually peaks.  In the case of Facebook, I put this number at about 1 billion members.  WITH A ZIP-ZAG ZIPPER AND  This is Zucks number, not mine, just so we are clear about that.   In a blog dated  FOLDS FLAT February 5, 2011 titled,  "Facebook Will capture 67% of Global Social Media Itsken8 on DISCOUNT COUPON Revenues in 2011, But Can It Reach 1 billion Members?", I provided evidence that USAGE CONTINUES TO GROW, Facebooks North American penetration has already peaked and growing in low single $2.5 BILLION THROUGH digits.   This has also been confirmed by several social media experts. Most of  SEPTEMBER, SHOULD EASILY Facebooks user growth will be international, namely fromAsia, Europe, Latin and South TOP 2009S $3.2 BILLION America.  Carpet tiles on DUTCH DESIGNER WOUTER SCHEUBLEIN INVENTS Facebook has not earned much traction from India, Japan, South Korea and Russia, A WALKING TABLE THAT where its market shares are in the low single digits.  Facebook is also banned in China MOVES LIKE A SPIDER where it has only 700,000 members and even if it were allowed to operate there would be Queens carpet cleaning on facing some formidable competition from several Chinese social networks.  So I dare  MODULAR CARPET RECYCLING ask, "Can Facebook reach 1 billion users?"   DEVELOPS METHOD FOR RECYCLING USED CARPETING Zuck was counting on China in order to grow to 1 billion users, but the number could be a INTO OIL AND RECYCLED lot less than this, somewhere between 850-900 million users is my guess, but I also NYLON thought the iPad would flop.  Clearly, Zuck is very concerned about being banned in  China, necessitating a goodwill trip to Beijing in December 2010, which proved to be not Queens carpet cleaning on MODULAR CARPET RECYCLING very fruitful.  DEVELOPS METHOD FOR 2.  Revenues-Per-User - According to Silicon Valley Insider, Facebook has one of the RECYCLING USED CARPETING INTO OIL AND RECYCLED smallest revenues-per-user when compared to other technology leaders: NYLON ARCHIVES April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 More... CATEGORIES Advertising Aeronautics and Space Agriculture Apparel and Accessories Facebook had reported revenues of $1.860 billing for the year 2010.  If you do the  Archaeology math, Facebooks revenue-per-user is $3.10  ($1.860 divided by 600 million users).   Twitter ended the year 2010 with revenues of $45 million.   Twitters revenue per user Architecture and Construction was an abysmal $0.2368  (45 million divided by 190 million users).   However, Twitter did  Art and Design not officially rollout its Promoted advertising platform until October 2010, and then it was Automobiles and Transportation to only 35 and 40 national brands on a test basis, so this average is not for a full year.   Beauty and Hairhttp://tommytoy.typepad.com/tommy-toy-pbt-consultin/2011/03/why-the-ad-supported-revenue-model-for-social-networks-could-result-in-another-dotcom-bubble-.html 2 / 5 Page
  3. 3. Bicycles Bioscience Blogs Books Childrens Social Development Computers and Accessories Consumer Packaged Goods Consumers Crime crowdfunding and crowdsourcing Current Affairs Demographics and Lifestyle Segmentation Digital and Video Content Sharing Earth and Environment eCommerce Economy Education and Information Energy and Green Technology Entertainment According to eMarketer (see above), Twitter and Facebook are projected to generate Espionage $4.o50 billion and $150 million in revenues respectively in 2011.  The average revenues per  Fashion and Style user will depend on the number of users they will have by the end of 2011.  If you  Film hypothesize that Facebook and Twitter will increase their user base to 850 million and 250 Finance million respectively, then their average revenues per user will be  $4.74 and $0.60  respectively.  The above assumes that Facebook and Twitter will increase the number of  Firearms and Armaments users for 2011 by 59% and 76% respectively.   Facebooks revenues-per-user for 2011 will Food and Drink only increase by 27.4%.  There is no comparable measurement for Twitter, because their  Foodservice revenues in 2010 were for less than a third of a full year.  In any event, the growth in  revenues per user do not correlate with the increase in the number Facebooks users.  In Franchising short, advertising revenues for social network are not linear (straight line), but are Furniture an elongated S-shaped curve, sloping upwards initially to form a concave curve, but Games eventually slopping downwards to form a convex curve over time--the classic case of diminishing returns.  This is definitely a cause for concern, and it is my belief that  Geography Facebook and Twitter know this, and are moving rapidly to develop other revenue streams. Government and Regulatory Facebook has already done this by adding social games, virtual goods, location-based Health and Medical check-in services and is now testing a daily deals program similar to Groupon and LivingSocial.  Twitter is sticking to its Promoted marketing program. History Hospitality 3. Facebook Reaches The Advertising Revenue Inflection Point - According to eMarketer (see graph below), Facebooks U.S. advertising revenues have reached the  Household Consumer Items inflection point, and growth will begin to decline, and will eventually peak.   As a  Information Technology consequence, Facebook will become more dependant on foreign advertising to generate Insurance continued ad revenue growth. Foreign advertising revenues began to grow exponentially beginning in 2010, and this trend will continue through 2012 and a few more years beyond, International but will eventually reach an inflection point, and begin to slowdown and convex. Internet Inventions IPOs and Investments Legal Luxury Goods Magazines, Newspaper and Publications Management and Human Resources Manufacturing and Prototypes Marketing Mental Health and Psychology Military and Wars Mining, Metals and Minerals Mobile Music Natural Catastrophes and To my knowledge, several social media experts have mentioned the inflection point, but Events nobody has ever made an attempt to visually graph the inflection point or explain how it News and Information works.  In order to accomplish this, I played a series of "what ifs" and had to make several  Nuclear Energy and Radiation assumptions and series of calculateed guesses about Facebooks future user counts beginning with the year 2011, and the affect this will have on future advertising revenue Oil growth.   This is what Facebooks Inflection Point curve might look like: Outdoor Products   Parenting Pet Products and Health Care   Pharmaceuticals   Photography   Politics   Product Design and Development  http://tommytoy.typepad.com/tommy-toy-pbt-consultin/2011/03/why-the-ad-supported-revenue-model-for-social-networks-could-result-in-another-dotcom-bubble-.html 3 / 5 Page
  4. 4. Public Relations   Radio Frequency Identification   RFID Real Estate Relationships and Marriage Religion Restaurants Retailing Robotics Science Search Engines Security Systems and Devices Sex and Mature Content Social Causes Social Networks Software Sports Technology Telecommunications Okay, heres my definition of the inflection point:  The inflection point is the point  Television 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 Textiles Gap" or The Inflection Point.  According to my calculations, The Gap was at its  Toys widest sometime in mid-to-late 2o10, and the Ad Revenues and No of User lines Transportation gradually transform from convex curves to a concave curves.   Over time, The Gap  gradually narrows until growth in users and advertising revenues finally peak. Travel UFOs and Extra-Terrestrial Facebooks Inflection Point is not carved in stone, and a lot of things can happen to Beings prolong The Gap from narrowing.  In Facebooks Inflection Point graph, I made reference to  Utilities several Exceptions which can prolong growth in the number of users and advertising revenues.  The biggest "if" is China.  If China ends its ban of Facebook (and other social  Venture Capital and networks) this changes the entire ball game, but the point in time when the inflection point Entrepreneuring occurs is only extended into the future.  In short, the Inflection Point theory remains  Weather intact--user growth finally peaks, growth in advertising revenue begin to decline, and Web/Tech eventually peak. Weblogs There will probably be some pessimists among you, who hold to the "Holy Grail" theory, World Affairs which is not really any kind of quantitative theory, but mostly "Facebook Love".   I  welcome your criticism.  If you can make valid points, I will be only too happy to include  World Records your recommendations into the formulation of an Inflection Point theory.    4.  Social Media Advertising Effectiveness  - In a number of blog posts about Add me to your TypePad People Facebook, I have raised serious doubts about Facebooks effectiveness as an advertising list platform for the following reasons: l Marketers still not certain about social Media. Subscribe to this blogs feed l A study showing that Facebook does not drive traffic to retailers websites. l A WebTrends survey that Facebook ad-performance in 2009 and 2010 was abysmal when compared to other media channels. Blog powered by TypePad l Less than half of marketers like Facebook, with the general concensus that Facebook ROIs suck.   Blog powered by TypePad 5.  Social Media Fatigue -  Anyone who believes that interest in social networks will  Member since 09/2010 continue unabated are in for a surprise.  A few social media experts have mentioned that  some social network users will eventually reach a state of boredom or burnout.  "Facebook Fatigue" has already begun to set in, especially among teens, who began to leave Facebook in droves beginning in 2007/2008. I talked about teen fatigue in a previous blog post dated March 9, 2011.     The same fate that MySpace experienced can eventually happen to Facebook.  Several  startups, bored with Facebook, have created niche-driven social networks.  Twitter,  YouTube, Cafemoms, Beebo and Groupon are a few such examples. This trend could have a profound affect on Facebooks user and advertising revenue growth, as users begin to switch from one social network site to another, or spread usage between social sites, and advertisers try to decide where to allocate their advertising dollars--Facebook, Twitter or both.     In Facebook Inflection Point curve I assumed 760 million users by the end of 2011, and wouldnt you know it, this appears to be right on track, but China remains the wildcard, and one needs to keep this in the back of their mind.        Once again, remember my Inflection Point theory:   l The number of social network users is a finite number.   l As the growth in the number of users begins to slow down, advertising revenues reach a critical inflection point, revenue growth slows down and eventually peaks. l Growth in total revenues can only be sustained by adding additional revenue streams.   I know that I have not been very kind to Facebook (or Twitter for that matter), or share the same enthusiasm of other social media gurus, who praise the site as a social media "holy grail".  I wont go that far, in fact, I am a bit pessimistic that it can reach the $4.050  billion in advertising revenues for 2011, without a major new source of revenue besides advertising.  Facebook Places was supposed to be the major revenue generator, but so far  has been mostly a dud, not only for Facebook Places, but Foursquare and Gowalla.http://tommytoy.typepad.com/tommy-toy-pbt-consultin/2011/03/why-the-ad-supported-revenue-model-for-social-networks-could-result-in-another-dotcom-bubble-.html 4 / 5 Page
  5. 5.  Impressive user numbers, but not much in revenues. Facebooks experimentation with daily deals appears to be a desperate attempt to capitalize on the growth in group buying and popularity of daily deals.  Google has made a  similar move, and Facebook, with over 600 million users, definitely wants to exploit this opportunity.  Again, all this does is shift advertising market share from one site to another. Although some businesses appear to be interested in location-based check-ins to drive  traffic to their front door, adoption remains a serious problem, with only 4% of internet users using it regularly. There is also a significant gender gap, as only one-third of users are female.  There are also a lot of concerns over privacy and a fear of being stalked,  especially among females.  The verdict is still out on location-based check-in services.  I  have been one of the biggest critics and remain somewhat pessimistic.      Courtesy of Tommy Toy, PBT Consulting  By TwitterButtons.com   Posted at 04:27 PM in Advertising, Marketing, Mobile, Social Networks | Permalink Technorati Tags: ad-supported revenue model, facebook, foursquare, groupon, inflection point, law of diminishing returns, online social networks, revenue inflection point, revenue models, social networks, twitter Favorite Reblog (0) Comments You can follow this conversation by subscribing to the comment feed for this post. Post a comment Name: Email address: URL: Comment: 5 6 Submit PBT Consulting Powered by TypePadhttp://tommytoy.typepad.com/tommy-toy-pbt-consultin/2011/03/why-the-ad-supported-revenue-model-for-social-networks-could-result-in-another-dotcom-bubble-.html 5 / 5 Page