Wednesday, September 26, 2012

How Should Facebook Make Money? (Short Take)

FaceBook Knows Everything!
FaceBook Knows Everything! (Photo credit: adamjackson1984)
First off, if you have the time please read this article on how Facebook has been getting it all wrong when it comes to monetizing their business. It's not that long and it contains some interesting information and points.

The very short summary of the above linked article is that #Facebook has been screwing up for the past several years because they have essentially been focusing their advertising efforts on the old model of identifying prospective customers for their advertisers by using demographic or "meta" information such as where people live and what their interests are. It turns out that there may be much more money to be made by knowing what people are doing now and in the recent past and targeting ads based on those recent actions.

Maybe I read the article wrong but Facebook's approach seemed to be "Do it the old way with much better/more information". So they were focusing on meta information primarily rather than contextual information. The thing is, they own the meta information, they don't own a lot of the contextual information. So the meta route provides them with a lot more control and thus all of the revenue. It's easy to see why that would be attractive.

In the new system they don't have that control so they won't be keeping all the money. That won't be a big deal if they end up making more by going the contextual route rather than their previous meta route. If all this is true Facebook's share price just might be very low right now relative to their future earnings. Time will tell.

I think Facebook's best bet is to take both approaches. Sure, short term sales are driven by context but long term relationships with brands and companies are driven in large part by all that meta data Facebook gathers. So really the different approaches have different applications/sweet spots. One may be more profitable than the other but nobody does meta better than Facebook and there clearly is money to be made there as well since Zuckerberg and company haven't exactly been living under a bridge the past several years.
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