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By Nate Elliott
Media reports suggest that Facebook will file for an IPO this week that could value the company at $100 billion — and leave the company sitting on $10 billion in cash. I’m not a financial analyst, so I’ll leave it to Wall Street to discuss and debate that valuation. But the fact is this newfound wealth could not only allow Facebook to solve its biggest business challenges, it could also help Facebook finally achieve its longstanding goal to change how marketing works. So how should Facebook use its IPO windfall?
- To make its marketing platform actually work. For a site that makes almost all its money from advertising, and which claims 96 of the top 100 US advertisers as customers, Facebook harbors a dirty little secret: Marketing on Facebook doesn’t work very well. In fact, user engagement rates on branded pages are declining rather than increasing, and most large marketers tell us they simply haven’t gotten much value from their Facebook investments. (The biggest difference between the Google IPO in 2004 and the Facebook IPO? In 2004, even the least sophisticated marketers were generating enormous ROI on Google; today, even the savviest marketers often struggle to do likewise on Facebook.) Facebook can – and must – domuch more to turn the data it has on users into effective ad targeting. (Buying a demand-side platform would be a good start.) And it must build or buy much better tools for building, managing and measuring branded pages. (And again, there are several companies who could help, and who are no doubt reaching out to Facebook as I write this.)
- To find transformative new revenue streams. At its core, Facebook’s revenue model is pretty simplistic: They sell little advertising badges on Facebook.com. The fact that hundreds of millions of people around the world come to Facebook every day means this simple little business generates perhaps billions of dollars in annual revenue; but if Facebook was a baseball team, you’d accuse it of playing “small ball.” For Facebook to become the company it wants to be (and the company investors want it to be), they need to swing for the fences – and data is the key. Facebook needs to use its data not just to power ad targeting on its own site, but everywhere online. Building or buying an ad exchange or a sell-side platform is one obvious way to do this; and they need to work hard on other creative and profitable (and legal) uses of their data as well. Two years from now, Facebook should be competing with Google to see who can best use your own data to help marketers target ads to you, no matter where those ads appear. If they let Google walk away with this opportunity unopposed, as it currently looks could happen, then Facebook will have missed its single biggest revenue opportunity.
- To fight off its biggest external threat: Government regulators. Some people worry about Facebook’s ability to fight competition from new social start-ups, but not me. Whether introducing new features they’ve dreamed up on their own or quickly and strategically copycatting the best of other social sites, Facebook has long been the most aggressive innovator of all the social sites – and that’s consistently kept them one step ahead of the competition. One external threat they can’t outrun, though, is the government. One of the first things Google did after its IPO was to hire an army of lobbyists, and I expect Facebook to follow suit — especially if they follow the advice above and look for creative and expansive new ways to use their data. Expect lots of blue business cards floating around Brussels and Washington by the end of 2012. After all, $10 billion buys a lot of influence.
- To aim for global domination. Facebook has clearly won the hearts of social citizens in North America, but in other countries the story looks a little different. The global markets where Facebook dominates are the ones that use social media least, like Europe. And in the global markets where users are most enthusiastic in their use of social media — including Asia and many large emerging markets — Facebook isn't doing as well. They're behind in Russia, Japan, and Korea, and they're not even playing in China. We've never seen a social network successfully buy its way into a foreign market, so an acquisition probably isn't the way forward. But Facebook must earmark some of its new capital for investing resources in these countries, and possibly building site features or flavors that appeal to user preferences there. If Facebook can both make its marketing platform more effective and grow its user base in Eastern and emerging countries, it could finally offer what so many marketers are asking for: A truly global social media marketing platform.
Nate Elliott is Vice President & Principal Analyst at Forrester Research, serving Interactive Marketing professionals. Follow him on Twitter @nate_elliott.
