[pg]

If the worst news you can find about Facebook is a few rumors that they might miss a revenue projection, a prediction that their ad revenue growth rate will decrease from its current 60% (note: ads are not the only way FB can make money), and a random class action lawsuit, then Facebook's prospects look about as good as any company's ever get.

This amount of badness is background radiation. You could scrape together at least this much about any public company.

[mmaunder]

It does raise the question "What is Facebook's Killer business model?". They have defaulted into ads because that's what Google did and that's what works for many other businesses. But I've never clicked on a Facebook ad and I don't know anyone who has unless it was research. I'm seeing highly targeted ads based on my interests and demographic and I just don't click because I'm too busy social networking. Whereas with Google my intent is "search" and so I occasionally click.

After recently starting to use them again I'm blown away at how useful and engaging the app is. But the revenue just seems to be hobbling along considering their scale.

They've tried so many models and none really stuck like AdWords for Google. Long term I just don't see the same kind of revenue growth that companies like Google and Amazon have had and continue to have. For any investor in public companies that's kind of terrifying when it's not clear how revenue will grow.

[chintan]

>But I've never clicked on a Facebook ad and I don't know anyone who has unless it was research.

I often hear this on HN and from other techies. I bet you've never ran a serious Facebook or any other Ad campaign and measured effectiveness (in terms of business ROI).

I used to think like you, but they do work (even 0.05% click thru rate is considered effective!) and hence these companies make billions of dollars. Please stop making such ignorant statements. $3 billion revenue is not a small number.

[RobPfeifer]

In my experience, click-through rates aren't that great and conversion is really pretty bad. I've worked at 2 decent size ecommerce companies and the CPO hasn't ever really been profitable for social media ads especially compared to Google and Bing ads. Their advertising is really more comparable to traditional display or remarketing ads at this point which are generally less efficient for marketing spend and hence less profitable for FB's customers.

[dchuk]

Their killer business model hasn't been released yet, but it will ultimately be a competitor to Google's Content Network Ads. Facebook is the ULTIMATE retargeting machine (hence why Google created Google+, it's not because they want everyone to be more social, they want your social data for ad targeting).

I bet within the next 24 months, Facebook launches their content network ad platform and it will be the first true competitor Google will need to deal with simply because of Facebook's massive scale.

[pron]

Yeah, but where will those ads appear? I have absolutely no data on this, but it seems people are spending less and less of their web time on "the open web", and more of it on medium-to-huge websites, and those usually sell their own ads directly. Facebook will succeed at what you're suggesting only if their targeting proves so effective that medium-sized websites (say the big blogs and online magazines/news sites) can make more money running Facebook ads (after giving Facebook its share) than from staying independent.

[dchuk]

They'll appear anywhere you see a site currently running adsense ads. There's tens of millions of sites running those ads, there is far from a shortage of publishers for a new advertising network.

[robryan]

Yeah, people are crying out for an alternative to adsense but can't get anything near it due to the amount of information Google has to target ads and the inventory size. Facebook is well placed to offer as good returns with even better targeting. Just look at the amount of targeting options you get on Facebook now, I'd take those any day to what adsense gives.

[alain94040]

Even "techies" click on Facebook ads. I can share my experience: how do you raise awareness for a startup conference, since obviously no one goes on Google to search for it. Facebook is great at telling you about things you may want to know, but are not currently looking for.

The reason it works for Facebook is because of the amazing (scary) imformatiom they have on their users. But it can be put to good use.

[netcan]

I work in online advertising and I would agree if it weren't for the number. But, Facebook are selling ads. They probably still have a lot of low hanging fruit to pick. Advertisers have probably been getting a decent bang for their buck because it hasn't been the kind of economic climate that's very friendly to frivolous ad spending.

The only "theory" I can think of that would explain Facebook ad revenue as a temporary phenomenon is businesses trying it out or trying to get in early in anticipation of the ad platform improving. I don't buy that though, not at this point. I wish I understand the economics of it better.

[stefanbech]

Netcan, I read and old comment of yours from 3 years ago regarding a startup idea someone had.

http://news.ycombinator.com/item?id=439302

I'm working on a project that has some similarities to what you guys were discussing. Could we connect via email? You can reach me on stefan-at-wantr.com. Cheers.

[doctoboggan]

I know I am just one example but I am the opposite of you. I have never clicked a google ad (purposefully at least) while I have clicked many facebook ads. Facebook's ads just seem more relevant.

[tatsuke95]

>"You could scrape together at least this much about any public company"

Point to another public company that has a P/E ratio as high Facebook that is missing earnings estimates. Nobody is claiming the company is going to fall apart tomorrow, but if growth is slowing already then they certainly aren't worth $100BB, or anywhere close.

I don't know how bad this really is, and we are still in a shaky economic climate. But if we assume that the information being reported is true, this is pretty bad. As the article suggests, they're applying some "quick fixes" to crank up the ad spends. Is that the best they can do?

[scylla]

SalesForce is public and has P/E of 9500. http://finance.yahoo.com/q?s=CRM

The reason they don't miss earnings is that the expectation is so low. It doesn't matter, they're the 'cloud'.

[tatsuke95]

That number is wonky from today's earnings report.

According to GAAP rules, CRM's EPS was negative, so their P/E is undefined.

http://www.google.com/finance?q=NYSE:CRM

http://www.webpronews.com/salesforce-earnings-company-beats-...

Probably not the place for this, but I wouldn't touch CRM with a ten-foot pole. Read through the earnings report and look at all the fancy, non-GAAP accounting tricks they use, like booking deferred revenue. Remember when Zynga played those games? Pretty shady, in my opinion.

But, I'm no expert.

[pg]

Facebook hasn't missed any earnings estimates. This is just a rumor, reported by a company I've never heard of, that they might. You can presumably find rumors of that type about almost any company.

[tatsuke95]

And that's exactly what we're discussing: a rumour. You're right that this may prove to be completely out to lunch. If so, I'll eat my hat.

That said, Facebook is, for better or worse, the biggest thing this industry has seen in a while. So that fact these rumours are being discussed in earnest, rather than "Facebook is still on such an insane revenue growth path that anyone who claims otherwise is an idiot" is substantial.

[gojomo]

The fact that these rumors are being discussed... is substantial.

The statement is self-refuting.

[pron]

But the story here isn't about Facebook's success; it's about their valuation. And valuations matter a lot. The entire US economy collapsed when house prices simply failed to meet growth expectations. Banks loan money backed by (overvalued) equity, and so the entire economy is in effect backed by predictions of future earnings.

I've said it here before, but I think many of the tech and app companies are grossly overvalued simply because the market can be so easily upset. If newcomers can get such positive projections, then surely they must be perceived as a viable risk to the big companies.

Facebook specifically is grossly overvalued because as long as they are making all their money from ads, their revenue comes from the amount of time people spend staring at a Facebook page, and this might be at its peak. True, there are more ways to make money, but there are more risks as well. Please, let's spare ourselves another bubble.

[Eliezer]

Are you short these companies, then? Or are you buying puts?

[redmondbarry]

You appear to subscribe to the shotgun clause school of economics.

Do you not buy insurance? Do you buy lots of Powerball tickets when the jackpot gets large enough to make the average return exceed their cost?

[orangecat]

The utility of money is not linear across large ranges.

Do you not buy insurance?

I have insurance against catastrophic events, because incurring $100,000 in medical expenses is more than 100 times as bad as spending $1000 in premiums. I don't buy extended warranties.

Do you buy lots of Powerball tickets when the jackpot gets large enough to make the average return exceed their cost?

No, because winning $100 million isn't 100 times as good as winning $1 million.

[pron]

I'd short many of them if I had the cash.

[jonnathanson]

I tend to agree. Call me crazy, call me naive, call me idiotic, but I just don't see any actual problems for Facebook until/unless a serious competitor for its userbase emerges. Pinterest isn't (yet?) that competitor, inasmuch as it's not currently a substitute for Facebook; they seem to cohabitate pretty well. Other interest-based networks aren't competitors for the same reason. Google+ doesn't seem to be making much of a dent, probably because the switching costs of rebuilding a social network from scratch are more daunting for most users than anyone expected.

That's not to say a competitor won't emerge, and users won't switch to that competitor if Facebook really mucks up its UX in some unforgivable way. But we should bear in mind that Facebook users aren't just going to jump overboard into the ocean. If they're going to jump ship, it'll be because a better ship has pulled up alongside it.

Revenue challenges? Facebook's got plenty of time to figure those out, and meanwhile, Facebook Connect seems like a pretty powerful weapon of mass monetization in the making.

A lot of the anti-Facebook sentiment out there right now reads like wishful thinking.

[yoklov]

I might be wrong, but I don't think the question is "will Facebook be overturned by another social network?" so much as it is "are social networks even profitable?"

[andyakb]

facebook made $1B profit last year

[yoklov]

Right, but is that sustainable?

I don't claim to know nearly enough about economics to even have an opinion on this subject, I'm just saying that I thought the question the article was asking was more about the economic value of Facebook (and, by extension, social networks, though, this extension may be pushing it), than it was about whether or not some competitor would be able to "dethrone Facebook", as it were.

[robryan]

As long as they hold onto their user base, that would be on the low end of what you could expect from them in terms of revenue per user. They are trending towards better targeted somewhat more invasive ads. Virtual currency hasn't really got going yet and as mentioned above people expect them to eventually offer something similar to adsense which would have a high chance of being successful because I think they hold the edge of Google in targeting data.

Of course pushing for more profit could turn off users. Google+ though is showing how hard it is right now though to make a significant dent as an opposing social network.

As long as Facebook don't do anything stupid I find it hard to see how they will be beaten with a similar model. It is more likely that something else will be built which changes the whole social networking paradigm and makes Facebook less relevant.

[ChuckMcM]

That was my response as well, so they generate a slightly less ginomous net revenue and that is a problem how exactly.

Looking at worst case numbers it looks like Facebook will be close to 'accumulating cash' mode at the outset. That is a pretty good thing.

Now it would be nice to get some more visibility into their execution against advertising system changes but this reads more like a 'place' piece where the author hopes that if things go good people will forget they ever read it, and if they go really bad he'll be on record early 'predicting' it and will be able to demand huge consulting fees :-)

Of course I have no idea behind the motivations of the author, I just wondered how he can look at $5B in revenue and not be "well ok, their model is working at least."

[viscanti]

The biggest reason Facebook has a 100 Billion valuation is because people expect ad revenue to grow rapidly. If there are signs that's slowing down now, before they even go public, it has a huge impact on their valuation. 100 Billion is a very generous valuation, even if you expect Facebook to have tremendous growth, it's an outrageous valuation if you expect them to stay the same (or shrink).

[ChuckMcM]

Well if they do manage to do 5B$ revenue this year 100B would be a 20x multiplier on their revenue. Seems in line with other tech companies. But we'll have to wait until they start pushing out those quarterly reports to be sure.

[ajross]

Facebook isn't a public company though. They're pre-IPO. They need to look like a no-risk growth shot, not "just another successful tech company". If you want one of those, go buy GOOG or AAPL.

[sawyer]

I had the same thought, further, this quote from the article stood out to me as challenging the author's premise, rather than supporting it: "and the company still hasn't developed a mobile platform that supports advertisements." Surely this is evidence that they haven't even come close to fully developing all of their possible revenue streams.

> "note: ads are not the only way FB can make money"

Facebook still has at least one massive hand to play, and they tipped it in the documents outlining their agreements with Zynga. Those documents stated that if Zynga created a first party site to host their games, Facebook would be the ones to provide ads for the pages. If they were to roll out an AdSense competitor which uses personal data rather than contextual to place ads on publisher sites it could be a huge win.

[blantonl]

badness such as this IS background radiation, but for private companies. On the eve of a highly anticipated IPO, these types of rumors that strike at the core of Facebook's business could quickly blossom to full-on nuclear fusion - regardless of whether or not they are true.

I don't disagree that Facebook's prospects look extremely strong, but I do think that their decision to IPO now was wrong and potentially sets up a poisonous precedent for how they run and manage their business.

Facebook is still figuring out how to properly grow their revenue model, and now they'll be faced with the very public distractions of being a public company. Not only that, it opens up all kinds of intelligence for competitors.

I think that Mark and his team are in for one heck of a ride this year. And it isn't going to be fun.

[vamsee]

Et tu, Brutus?

[greek4all]

actually it is "Kai su teknon?" "and you child?"

[yoklov]

He's quoting Shakespeare.

As far as a historical account is concerned, you're more correct, but not entirely so. Suetonius mentions that some claim Julius Caesar uttered those words as he died, however his ultimate conclusion was that Caesar, in fact, uttered nothing in death. Plutarch, the other relavant historical account of what happened, came to the same conclusion.

I'd have to say that they're probably right, or are at least in a better position to say what happened than us ;)