Making a billion Facebook users pay off

Is a billion users cool? As Facebook tries to convince the world that it is still an exciting growth business with appearances on the NBC “Today” show and a BusinessWeek cover story, CEO Mark Zuckerberg announced the social network had achieved that impressive milestone. Can Facebook do things with a billion users that it couldn’t do with half that number? Zuckerberg is dropping hints, but so far, they’re just hints.

Eighty plus percent of Facebook’s revenue comes from advertising, yet 80-plus percent of its billion users are from markets outside North America. Besides Japan and a few European countries, most regions don’t spend nearly as much on advertising per capita as the U.S. does. So, regardless of whether Facebook can solve its mobile problem, the company is “stuck” with 150-200 million users that it can monetize relatively easily via advertising.

I say “relatively easily” because Facebook is still living off advertising that, even though it is potentially highly targetable, currently commands only remnant-inventory style CPMs. That, or relatively low-priced cost-per-click prices from direct marketers. Facebook has been conservative in offering higher-value traditional formats like large units, takeovers, interstitials, or video. Instead, it has focused on incorporating users into the ads to make them truly social, and to tap into viral pass-along. That’s all very admirable, but it requires Facebook to prove the value of such marketing to conservative brand advertisers.

More clouds on the horizon

Meanwhile, some of those advertisers’ agencies are grumbling. Ignore the ageing story about General Motors cutting back its ad spending. Rather, pay attention to this post from an exec at WPP’s Team Detroit, one of Facebook defender Ford’s agencies, who appears miffed at Facebook’s news feed algorithm. Facebook regularly tinkers with its news feed to try to ensure users get relevant and engaging content. Some of its recent tweaks seem to cut back the amount of company page posts that get through. Critics interpret that as a way for Facebook to force companies to buy more ads to drive traffic to their pages, possibly resulting in an overall worse user experience.

That’s one interpretation, but it’s also likely that Facebook is more concerned with developing its relevancy targeting. That would pay off for ad-targeting – including targeting on a network off of Facebook’s own site – as well as content discovery, a key part of Facebook’s monetization strategy, if an indirect one. Content discovery and consumption is a user lock-in and habitual usage scheme that will pay off in whatever revenue model Facebook adopts.

Other options?

That kind of ranking also sounds a lot like search. Although Facebook is less prone to spam and “black hat” SEO-gaming than Google, it also keeps its EdgeRank algorithm’s sauce almost as secret as Google’s PageRank. Both companies have to work hard to balance first-screen results for clutter and user relevance that will ultimately pay off in sustainable revenues, rather than overpriced, easy scores. In a post about how it promotes apps to users, Facebook describes a ranking process approach that’s probably pretty similar to the one it uses for the news feed. Facebook’s apps recommendation engine uses demographics, friend connection data – including user ratings – and behavioral data (Likes, interactions) in selecting which apps it features to any individual. I’m still skeptical that Facebook will try to deliver general-purpose search results – that would require indexing the web and building out product information databases – but the approach will suit entertainment and content recommendations well.

Facebook has ambitions beyond advertising, apps promotion, and content discovery. Om Malik points out that Zuckerberg understands that Facebook is a core infrastructure technology provider – particularly for identity management and authentication services. Besides further user lock-in, Om speculates that those kinds of services could play out in a variety of transactions, social and commerce-oriented. And identity is relevant in any region, even where ad spending is light.