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August 8, 2010

One-Third of All US on Facebook, Yet Users are Worthless?

First of all, I don’t hate Facebook anymore than I dislike any internet fad. One of my 30,000 readers asked me why I always write negative things about Facebook. First of all this isn’t quite true, since I’ve written a few articles about how to make money on Facebook and the top ads on Facebook. I just like to question what is going on, look beyond the headlines and the spin.

So, in that light, I want to examine the numbers: According to Comscore, in June, over 130 Million people within the US used Facebook. This is about one third of the population of the US that uses Facebook – some of them day after day, many times a day, making it one of the most popular media sources ever in the history of the world. However, despite this, Facebook may only make $1 Billion this next year, even with expected growth. This may seem like a lot money, but it’s actually not – and I know why.

The Superbowl gets around 100 million viewers each year. While the number goes up and down, it’s a good round number for this post and makes it easier for me to do the math. According to my research (Google) there was last year 62 ad slots sold at between $2.5M and $2.8M. That’s at least $155M in revenue, perhaps even as much as $175M in revenue for whichever network broadcasts the Superbowl. That means each viewer is worth at least $1.50 for the Superbowl.

In contrast, the number $1 Billion estimated in Facebook revenue is for their 500 Million (and growing) users throughout the world. While I can’t find any numbers that say how much revenue is generated in the US and how much is generated internationally, I’m going to make a conservative guess that at least 90% of the revenue is US based, meaning that next year $900 million dollars is expected to be made from Facebook. That means that each US user, over the period of the year is only worth about $7.00 for the entire year.

That is a ridiculously low number if you think about it. Viewers watching a several hour football game are worth 21% of the value of a Facebook user who may use the site 365 times plus a year, spend hundreds of hours a year talking to their friends and family, and more importantly interact with people of similar interests, communicate their needs, buying habits and much more. If you translate the value into hours of use of a Facebook user compared to a Superbowl watcher, an hour of a Facebook user is insignificant – I can’t even do the math, but you are talking about hundredths of a cent per hour for each Facebook user compared to around 50 cents per hour per Superbowl watcher.

The value comparison here is hard to believe, in light of all the media coverage about Facebook. This raises two possible sets of questions.

The first set of questions asks what the real value of an internet user is. The second set of questions would ask why we can’t monetize those users. If we concentrate on the first set of questions, we would come to conclusion that internet users, especially those on Facebook have little value financially per user. That the only reason that Facebook has any value is because of press coverage of the substantial size of the user without comparing the users actually value. When you look over the value of broadcasting corporations in comparison to their revenue, the inflated difference is great.

The second set of questions interests me a great deal more, because it might have two subsets. The first question to ask is, is it easy to acquire users for a social networking site (and then lose them like MySpace) and how relatively cheap is their value. We are estimating the value of Facebook at 12 billion, although the majority of those users have only been on the site for less than a year. They have no loyalty, they have no value beyond that time. Any significant change in Facebook, or the rise of another more interesting social networking site could immediately doom the value of Facebook. Their value when it comes to advertising is clear. I’ve pointed out, that so far, their value is insignificant per user.

So, now the important question: why are these users so useless, and why can’t we monetize them? Why hasn’t interactive advertising advanced far enough that it can actively engage users and create both branding and direct response experiences for social users that equates to actual value? This is a very significant question for anyone who is looking at the development of advertising on the internet and the value of social networking to advertisers.

We can believe that either we haven’t learned how to monetize these users and we will very soon, or we can believe that the value of a social networking user is useless. This is probably the most important question of our time when it comes to the economy and its relation to advertising on the internet.

I believe the issue is simple: we need to be considerably more creative (as does Facebook) about advertising on the internet.

After 10 years of substantial growth, we still depend too much on display advertising in the form of 728×90 banners. I remember in 2000 being introduced to some of the rich-media expendables that are still in place.

Facebook, on the other hand, still depends completely on CPC text advertising for its revenue. Here is the good part: this means whoever finds a way to be creative can monetize these users significantly. I am of the opinion that the Facebook user’s current value is less than 1/100th of what it could be – that for every dollar made now, within the next few years someone can figure how to make $100.

Whatever this might be, I’m not sure – but it does mean that monetization of users needs to be beyond the CPM, beyond the CPC, and start to use possible metrics and systems that we haven’t even thought of.

In perhaps the fastest growing industry ever, one person has made a name for himself as a leader and innovator. Pace Lattin, the publisher of the top newsletters in new media and online advertising, is one of the inventors of many of the technologies and methods that have become standards in the industry. He has been called many things, including a rabble-rouser, a guru, an innovator and a watchdog — but one thing stays the same: he is one of the most interesting leaders and commentators in the online advertising industry. Marketing Sherpa, a leading marketing research publication called him the most influential journalist in online media for a reason.

19 Responses to “One-Third of All US on Facebook, Yet Users are Worthless?

    avatar Tee Jay says:

    Well perhaps the cost per person for facebook ads are their ANTICIPATED amount. This is given the fact facebook ads aren’t TARGETED like the beer, car and food commercials during the super bowl. On facebook the demographic is a little more sparse and doesn’t have geographic and census info to help advertisers target. So FB users don’t seem useless too me. They seem 2 be performing at a high rate given the info.

    avatar Alpaca Breeder says:

    Not really a very impressive article, many of the numbers are dead off and poor guesses. While I don’t work for Facebook, I did join several years ago, it is a fad for sure, and for some it is a waste of time, 90% of their revenue is U.S. Based?!? Their user base is loaded with users from China & India.

    Facebook is going to be a leader in targeted marketing, once enough advertisers figure out that facebook has loads of data on their users (all over the world)

    avatar Lucian S. says:

    The big problem is that we don’t understand yet what are the real interests of a SM user. Pleasure? Business? Just spending some time? Flirting? Playing social games? etc. Or what is his real profile, in _real world_ (where the money come from). Let’s take an unemployed real estate broker, he will say in his profile that he is “real estate broker” – which is true!… but _in reality_ he is simply an unemployed person, which is also true! This are the real problems of SM and that’s why the money are still reluctant to come in. I’ve spent some money on Adwords and on Facebook ads and Adwords ads’ results simply outclassed FB ads. Because with the search engines I know for clear: user searches for this and that, so he has a real interest in this or that. But we have no such clues on FB. We are like in the beginning of search engines era, when web pages were assesed based on what the pages themselves were telling in meta tags. Then it came Google who reinvented the assesment and search engines’ world, based on what other pages (through hyperlinks) are saying about the target page. We lack such neutral self-message validation mechanism in SM, at least on Facebook. Maybe the future is for targeted, niche SM networks where at least the advertiser will know for clear who is who and what is what.

    avatar THomas says:

    If You compare SuperBowl Watchers and Facebook Member Count You are wrong – You had to compare number of sold TVs and Facebook Members. Half the Facebook Accounts are dead anyway… And dont forget that superbowl is also screened in other countries where it is far less a revenue source…( No way they make $7 per German watching it ) Take the global number for superbowl too and it is not impressive anymore. If You would be fair You would compare SuperBowl against the absolute hottest Facebook Profile.

    90% US Revenue ? I dont think so. Might be a conservative guess in the 90s of the last century.

    What’s the Point?

    Any one reading a newspaper once a year knows that online advertising is not making the revenue of old fashioned Print and TV Ads. That’s why everyone thinks about ways to charge their users for content and why the newspapers cannot refinance their online versions.
    And why TV is free when its ad supported, but Hulu.Com cant finance that way and needs a $10 per month subscription plan.

    Sorry, but all I got from the article is:
    Maybe we can do better advertising on Facebook. I dont know how, but time will tell….

    avatar MP says:

    Apples and Oranges… The Superbowl is once a year and limited to 62 ads while Facebook has an unlimited number of ad slots available 24/7/365. An ad in the Superbowl carries a bit of exclusivity, and exclusivity comes at a cost. If you can remember those rich media formats from 2000, perhaps you can also remember the original premise of internet advertising: it’s supposed to be cheap and plentiful.

    avatar THomas says:

    Just googled a little too…
    Facebook makes $800 millions a Year with their ads, SuperBowl makes a biilion. But Facebook willl only have to recover their server costs and some staff….
    NFL is getting 3.7 Billion a Year from the TV Stations for Football Rights.

    Revenue per User compared to Cost per User could be dramatically better at Facebook…

    avatar Michael says:

    Pace, how blasphemous. An American success story about a company that gives real pleasure for the byte and fills a hole in our growing Internet social lives without trying to pull every last cent out of our pockets. How palling! Really, does every company need to screw their customers to feel successful?

    avatar Nigel says:

    Facebook is great for non direct selling. Just don’t trust them with a list.

    I think the thing that is most correct in this article is that facebook as with most social trends is a fad and will come and go according to how atractive it can be to users. The day one seems more atractive it will die. Users are not very faithfull.

    avatar Rita Perdue says:

    It’s not always about the money. Sometimes it’s just good to make connections with friends and not have to worry about someone trying to make a buck off it. What’s wrong with a social meeting place for actual ‘socializing’ – once upon a time it used to be a ‘coctail parties’ that we passed on what we heard about, bought, saw, experienced, etc. People asking ‘where did you get that item’ and the like – THAT was the advertising it’s called ‘word of mouth’ and it still works. Now we get to share in photos and descriptions – we don’t need additional advertisers in Facebook placing more links and banners and videos that we are not interested in – we like it being the ‘social’ meeting place, not marketplace.

    avatar Neva says:

    Why can’t we monetize them? Seems to be the question burning a hole in your mind. It’s an energetic principle that what you dwell on increases so I suspect the longterm answer will keep eluding you til you shift your focus to
    “What can we offer that a facebook user will find valuable enough to part with money to buy?”

    Also, users would like to feel that the person is important and not just something to monetize.

    avatar Pace Lattin says:

    90% of the revenue is generated from the US for facebook. Unfortunately, most monetization of advertising is still US based.

    avatar Frank says:

    First and foremost a Billion is a Billion. The question is how much of that do they pocket?

    avatar Tyler says:

    To say 90% percent of the revenue is gained in the US, where only 130 million of the 500 million users exist is pretty ridiculous.

    Even if Americans do use Facebook more often, that still does not total 90% of total revenue gain.

    I agree that Facebook advertising can be and needs to be better. But you seem to leave out the costs of running each.

    Teams have to pay their players hundreds of thousands, and millions of dollars to play. Where do they get this money? From ticket sales and stadium advertising, but a lot from the NFL.

    The NFL has plenty of costs, Facebook has very few. Keep that in mind in terms of profit as well.

    avatar thierry kauffmann says:

    The answer lies in the complete irrelevance of facebook ads. Compared with those appearing in gmail when you read or type an email, and which nine times out of ten are right on target, facebook’s ads are generic, unrelated, and make no use of the specifics of the user. With such a poor incentive for users to click, these ads perform poorly.

    avatar justin bryan says:

    Still marketers understand that google search is the only source of earning money online that is why they do not target facebook but so many small business are getting benefits of it.

    avatar Siskiyou Web Design says:

    Wow, I think it matter more what the users get out of Facebook more than what the company gets out of it. Value to the company vs. value to the user. In addition, value to the advertiser vs. value to the Media owner. It cost a lot less to advertise on Facebook and it can be more regionally directed providing for a lot more advertisers. Then look at the purpose of the user, is it to be captured for a couple of hours, no, they socialize or play silly games. Capturing the market here may be more difficult, but definitely less expensive.

    avatar Algis says:

    Forget FB and it’s 500M users, that’s time wasting. 86% of all posts on hundreds of walls of Fb are of commercial nature and those are the least shared and read ones. FB it’s just some virtual exhibition where everyone want to be some star/hero there. Many users look me like kids: “hey, take a look I at my gadget/pic/video, nice”. (I’m often surrounded by kids and HAVE time to observe them and compare to FB users). But that’s OK, it’s human nature, it’s positive, because the more we sink down into destructive virtual reality the more we need some attention and Fb is one of the kind, though illusion. I did run ads on FB: clicks I got, sales – not. On adwords I got clicks and got sales.

    Apples and oranges – while the NFL and TV Network control the advertising and take in all the revenue, social networks such as Facebook have no such control. Businesses can setup a site to develop a customer base and service that base as they desire. Facebook gets no revenue from that. Individuals have setup sites to talk about products they are paid to promote. Facebook doesn’t get revenue from that.

    If you want the value per user, use a number that reflects all the business generated by Facebook, not just their income.

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