Facebook is going public on the stock market but what does it mean to you and me, the people that use facebook?
Up until now, Facebook seems to have been doing OK in making money but do you know where that money comes from?
It is the advertising you see in the margins. But how do those ads make so much money? Facebook rakes in a lot of revenue and those ads are nothing special. They are tiny right? How could anyone make so much money on such a tiny part of a screen?
They key is in showing the right advertising to the right people. Ever notice how most of the ads seem to be related to the things you like or the things you are talking about? Ever wonder how the facebook machine seems to know what you like? Facebook has access to your personal information that you share with your friends, family and aquaintances and uses it to make sure you see ads that could mean the most to you.
Imagine that I want to sell something and I want to advertise it on facebook. As a business owner I know what my most valuable customer will look like. I know what age range, gender, location and interests my best customers have and I want to get more of those ideal customers.
When I advertise on facebook, I specify which people I want to show my ads to. I don’t pay for my ads to be shown to people that do not fit my demographic. My advertising campaign instantly becomes more valuable to me because it is efficient and as a result I will pay a little extra to be exposed to the people that matter to me.
That is how Facebook manages to make more money per view or “impression” than other websites that do not target their advertising slots as tightly as facebook does.
Now, we see facebook go public. Facebook now has a new set of owners it has to keep happy to maintain it’s value. Surely it will have to charge us to keep making money. What would you do if facebook started charging a monthly rate or a couple of cents every time we made a status update. Would you stick around? I know I wouldn’t.
Let’s take a step back and look at what makes facebook so valuable. Sure they get money from advertising but why? Tightly focussed campaigns? Sure. But what good is a tight campaign if you only show it to a couple of hundred people instead of a couple of million? It loses it’s value very quickly. Facebook would risk losing millions of users if it was to start charging for access and every user is advertising dollars. In short we are the product that facebook is selling to advertisers.
So where can facebook start making more money? The answer is closer than you think. If you have a smart phone or tablet have a look at facebook with that device now. What do you not see? Advertising.
Mobile advertising in facebook is the next big thing and more people access facebook on their phones and tablets than pretty much other way. This is a massive opportunity for facebook and is perfectly timed with this IPO to give the investors some revenue growth to look forward to. As for future projects we have rumors around a Facebook branded phone and we could see facebook included in other devices such as televisions and other appliances as they get smarter.
In all, the Facebook IPO looks well-timed and there is plenty of opportunity for further growth. Facebook’s immediate future for now looks pretty bright and it is now sharing the ride with public investors. My only regret is not getting my hands on some of these shares.
Disclaimer : I am only an observer, I am not a financial expert – trust me! This is in no way a recommendation for you to buy or sell anything. I am not a financial adviser.