Perhaps Facebook is worth $100 billion...

Facebook’s advertising potential was what I considered at its flotation in May 2012. I thought the discussion focused too much on mobile ads and too little on what Facebook might build with its knowledge of users.

Facebook’s advertising potential beyond Facebook

I imagined an advertising network on other websites that could compete with Google AdSense. That was my expectation of a possible development.

I thought knowing the user’s interests could be an advantage over looking only at the content of the page they visited.

An opportunity for three different parties

I described a possible interaction between the advertiser, the website owner and the person seeing the ad. In my view, more relevant ads could provide value for all three.

My illustrative calculations about returns and higher earnings were examples. They weren’t results from a comparison of actual campaigns.

My own experiences with Google

I also described frustrations with advertising accounts and the responses I felt I received. At the same time, I said I was impressed by Google’s technology and used several of its services myself.

I co-owned businesses that used advertising, so I also saw the opportunities from that side of the table.

The video’s figures about valuation, profit and advertising revenue, and claims about the platforms’ data collection, are my information, guesses and interpretations from 2012. I didn’t establish that Facebook was worth a particular price. The story isn’t a current stock recommendation or evidence of how advertising platforms work today.

Why a high price made people sceptical

Facebook floated yesterday, and I think many people misunderstand the company. They see a social network and ask how it could ever be worth so much money. I can’t say whether the price is right, but I’ll try to put the possibilities in perspective.

In the video, I start with a value of just over $100 billion and annual profit of around $1 billion. Without changes, that would amount to just over a hundred years of profit. I call it a price/earnings ratio of around 100.

As a very rough rule of thumb, I use a grocery shop with DKK 1 million in annual profit that might cost DKK 10 million. A growing business or one in an exciting industry can cost more; a declining one less. I use booksellers as my polemical example of an industry I don’t think will remain as strong in the future.

So it’s understandable that people are sceptical about a very high multiple. I’m not establishing that Facebook is worth the price. I’m saying you also have to consider what the company could become.

Facebook’s advertising potential involves more than mobile ads

I think the debate about more mobile ads misses something bigger. In my assessment, Facebook’s unique asset is its knowledge of internet users. In the video, I assert very categorically that it knows more than Google and almost anyone else. I even make an exaggerated comparison with the security intelligence service.

That’s my interpretation of the potential in May 2012. The area I particularly imagine Facebook entering is what Google already has with AdSense: ads on other companies’ websites.

My simplified picture of Google AdSense

If you have a website with visitors, you can display Google ads and receive a share of the revenue. I use a website about banks as an example. If it contains words about money and loans, ads from banks such as Danske Bank or Nordea might appear.

I describe it very simply as ads matched to the page’s content. I also guess what share of revenue the website owner receives: Perhaps DKK 3 or DKK 5 when Google earns DKK 10, or something like 30–40 per cent. Those are my guesses and my experience of a lack of transparency back then, not an account of the actual payment terms.

My criticism is that the page’s topic doesn’t say enough about the individual visitor. I caricature it as a system seeing words about money and loans without necessarily knowing what else the user is interested in.

An interest in Ford could lead to an Opel ad

I imagine a similar network from Facebook with more knowledge about the person. Perhaps their age, whether they’re married, education and possibly income. And perhaps which other websites they’ve just visited.

In the video, I describe like buttons on newspapers, Amino and other websites as a Trojan horse that can provide knowledge about behaviour. That’s my description and assumption in 2012, not a technical verification of precisely what information was collected.

My hypothetical example is someone who’s looked at a new car at Ford and then visits a banking website. Opel might be interested in showing an ad there because the person is already looking for a car in a particular price range.

I imagine the advertiser could also select people over 30, with household income above DKK 1 million and living in Søllerød. It illustrates how much better a match I think more information could provide. It’s a hypothetical targeting scenario.

A better match can be valuable for three parties

If the match is better, the advertiser might get more for the money. I use an example where DKK 100 at Google brings DKK 200 back, while DKK 100 at Facebook brings DKK 300. Those aren’t campaigns I’ve measured; they’re my illustration of the idea.

I’m so optimistic I predict Facebook could take over Google AdSense completely and give Google serious problems. That’s a very confident expectation from the flotation.

As Amino’s owner, I’d be quick to switch if a Facebook network could provide 50 per cent more revenue from the same visitors. I even say five per cent more could be enough.

As a visitor, I could get a more relevant ad. As a website owner, I could get more clicks and more money. And as an advertiser, I could find visitors more likely to become customers. That’s the triangle I find interesting. Also read E-pusher about sales and marketing online.

I respect Google, but I’ve felt badly treated

There’s another reason I think many people might be ready for a competitor. I greatly respect Google’s technology, but don’t think it’s been particularly nice to its customers. I acknowledge it’s working to improve that.

I discuss my wife’s AdSense account, my own AdWords experiences and businesses I’m involved in where accounts have been closed. My frustration is that we didn’t feel we were told specifically what we’d done wrong. Instead, in my experience, we were told to read the rules and find the answer ourselves.

I compare it with being arrested and put in prison, then handed the constitution and left to work out what you’ve done. Have I pissed against a tree, or what? And when I can finally get out, I have to apologise for something I still don’t know what is. Of course it’s an illustration of my frustration.

I experienced the same lack of clarity about what share of advertising revenue you received. Those are my experiences and claims back then.

Big advertising purchases didn’t feel like an acknowledged customer relationship

I use Google’s search engine, AdSense and AdWords myself and love the technology. But professionally, I haven’t felt any particular appreciation.

In the video, I say SPAMfighter could spend DKK 5–6 million a year and that we’d put around DKK 60–70 million into Google’s coffers in total. Even so, I felt we were shut down time and again without a specific explanation. Those are my own figures and my experience of the relationship.

In my view, Facebook was more of an unknown quantity in that area. As a professional user, I didn’t have the same irritation towards it. So if it could deliver a better product, it had an interesting opportunity.

That’s how I see Google Plus too

I think that’s part of the explanation for Google’s work on Google Plus. Put simply, I don’t think the social network itself is what matters. I think it wants buttons and a presence in the same places as Facebook so it can learn more about how people browse.

I mention Google toolbars and the Google Plus buttons starting to appear. There are several possible sources of knowledge, but I think Facebook has a big head start.

It isn’t about which company I like best. It’s about thinking analysts overlook Facebook’s possibilities beyond Facebook itself. Advertising on the mobile platform can of course be exploited too, but it’s only part of what I see.

I can’t say on that basis that Facebook is worth $100 billion. But perhaps it explains why I find the company exciting. What else can it build with that knowledge of users? My imagination doesn’t stretch to all of it. Perhaps yours does, and I imagine Mark Zuckerberg and Facebook have ideas. Take care.

Also read about my earlier criticism of Google Plus’s positioning.

Best wishes, Martin