Facebook is considered a success story. It started as a single social media networking site. But today it is a massive enterprise that includes multiple social portals (Instagram, WhatsApp), a developer platform, plugin tools for other websites, and even a hardware division (Oculus VR). The divisions vary in product and, therefore, business models. This post will focus on the business surrounding the company’s first asset, the social networking tool Facebook. I believe this division is not particularly effective at driving alignment between its business and operating models.
Facebook creates value through building a destination for consumers, and then allowing companies to advertise at that destination. The business model is similar to those of many other media businesses such as radio, TV, and newspapers. The key difference between those media businesses and Facebook is that Facebook also allows advertisers to target their advertisements to users based on narrow user demographic information, expressed preferences, and past activity. Facebook charges advertisers based on a few different metrics, most notably Click Through Rate (CTR) and Cost per (thousand) Impression (CPM).
The reason consumers flock to Facebook is that it offers a free, high quality, and easily accessible social networking. The reason advertisers flock to Facebook is that users spend an incredible about of time at the website. Facilitating that connection between those users and advertisers, for a fee, is Facebook’s business model.
Facebook’s operating model is based on targeting highly relevant content to its users. Its biggest assets are its users and their data. Additionally it has the IP and data management capabilities to understand user preferences, interests, and likely behaviors. In order to effectively target the right ads to the right people, Facebook has build a complex, predictive content targeting engine that can feed users the text and visual media that is of interest to them. They give users media that users want to consume. Facebook finds the media relevant to individual users through encouraging users to express themselves in an online personal identity. Then, Facebook repackages those bits of expression and targets them to other users, most often targeting those who are self-defined by transitive connections to other users (also known as “Facebook friends”). Facebook simultaneously targets peer and advertiser content to users.
However, Facebook is not particularly effective at doing this for its advertisers. While Facebook does not formally publish numbers for CTR, many parties active in the advertising ecosystem report that their rates have always lagged behind those of Google by a magnitude of five to 10 (1, 2). One estimate believes that Facebook’s display ad CTR, at 0.04% less about 51 times less than that of Google AdWords (3). While these vary by a number of factors, such as ad type or advertiser industry, it is clear their performance is not highly effective (4). In other metrics by which one may assess advertisement performance, such as traffic attribution or CPM, Facebook also does not fare well as compared to its counterparts.
One reason Facebook ads may perform more poorly than those on other online media portals is user intent. While users visit Google’s website in order to find something (and subsequently leave Google), people visit Facebook in order to specifically engage with content on Facebook. This makes it particularly difficult for advertisers on Facebook to lure users away to their own websites. While Facebook has made attempts to mitigate this, by for example introducing Facebook Pages for Business, much of the value provided by these assets is not monetizable because Pages are a free service. Facebook could extract more value from users and advertisers through focusing on initiatives around engagement with advertised content, brand building and CPM over CTR. However they seems to largely focus on downstream funnel conversion metrics instead.
By mimicking the business models of their competitors and comparable companies, Facebook is misaligning their business model with an operating model that has much higher potential.