Disclaimer: This post is based off my own views and nothing to do with my employer's.
Hot off the legendary IPO and accompanying hackathon, the $100B question is where is Facebook going to find its revenue?
Currently Facebook's display ad business is like the yellow pages - cheap, but ineffective - something that doesn't bother the advertisers that much since its negligible spending. However it will be the investors who will be bothered with the relatively negligible revenue numbers (close to $1B in Q1 2012) as against a mammoth $100B valuation of Facebook. Couple that with mounting marketing and sales expenses plus growing advertiser discontent (GM killing its $10M Facebook advertising campaign), Facebook will need lots of good luck managing investor relations.
Or maybe not just good luck. Here's how Facebook can find its revenue.
Some hard wins:
Show relevant ads
Facebook seems to show ad units at 4 distinct places right now - user home page, news feed page, brand page and logout page. Also recently, the real estate for the ads was increased (see how bigger the ads on your news feed pages now look?). But, out of the several ads (or sponsored stories as they are called) I see on my home page or news feed page, less than 5% of them are relevant to me (they seem like keyword matching with my profile page info). Showing relevant ads is an entire subject matter of its own - something that Google was and is continuing to improve on. Ads quality matters. If you really need to pick up your click through rates without hurting user experience, you need to address the issue with ad relevancy and quality.
Launch an alternative ad network
Providing an ad inventory to advertisers and publishers (page owners) is valuable and unique for the same reason that most of the data used to build this inventory lies within the walled gardens of Facebook. Facebook can (and should) in fact establish an ad serving platform and distribution network with partners and large advertisers willing to pay a premium for ads that is ripe with information about real time user activities and interactions with their social circles.
Build social search
One of the toughest calls in advertising is how do you sell to your audience and how do you reach the right audience for your product/service? Google answers these questions for advertisers relatively easy because search is a direct confirmation of user intent. User searches for something and is more likely to click on a relevant ad and advertisers are able to match their products with users who search for them. However in a purely social world, users are less likely to look for ads and more likely to socialize.
The most important question then becomes - How do you establish user intent in a social world? Either it could be user search driven or content based (where user isn't necessarily searching but might be interested if there's a good deal/sale)
Lets take an ideal scenario where I want to purchase a camera.
I either go to search engines like Google or to e-commerce sites like Amazon to search for camera reviews. Instead of using a search engine, I might want Facebook to show me search results for a camera based off relevant websites coupled with my friends recommendations and camera brand page (I have liked) activities all at one place. If this isn't user driven, Facebook can show relevant ads in news feed perhaps (like the ones you see currently - daily offers that friends have procured). But this has already cluttered my news feed and to balance ads and stories in my feed is something that Facebook needs to strategize to protect user experience.
Build mobile/tablet strategy
This one is especially tricky. Firstly real estate on mobiles are dramatically less compared to desktops. Secondly, user experience on mobiles present a different set of challenges - ad placement, ad formats, ad relevance, context/location based ad choices etc. Mobile ads are still in nascent stages due to these challenges and no real innovation. This is a potential opportunity for Facebook to make some headway innovation. To monetize mobile traffic to Facebook requires thinking beyond ads. It can be as simple as showing a ticker of relevant ads, that look less like ads and more like stories. For e.g. walking by Macy's, Facebook can use my location data, activity on Macy's brand page and previous Macy's purchases to elicit a transaction or sale. To be able to do this, Facebook should not act just as an ad serving platform but also as a payments platform. There are probably several such ideas that can be effectively build an overall efficient mobile strategy.
Some easy wins:
Build engaging ads
Building engaging and creative ads will be more beneficial than traditional banner ads (Facebook needs to do more than just show yellow page ads). This will be a big win given that Facebook is the feeding ground for strong customer interactions with brands and social conversations that can be tracked and capitalized on. Hence your ads on Facebook cannot be just the conventional info type ads or rich media ads but instead stories and conversations that build on user participation.
Build advertiser tools
Data means nothing until you drive insights off it. Advertisers want to be in the know, always. They want to know not only the engagement rates, conversion rates and user reach but also user trends, activities and interactions relevant to the advertiser product/service. Analytics like these go a long way in establishing a trust and transparency with advertisers that not only inform them but also empower them to build better, relevant ads. Simple ad creation tools are not enough. Analytics and feedback are even more important for advertisers to fully justify their ad spending.
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