The Breakdown

Explaining Southern California's economy

Facebook IPO: It's all about the advertising

Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California.
Facebook founder and CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters on October 6, 2010 in Palo Alto, California. Getty Images

This information is all over the place, but I got it from the Globe and Mail:

Facebook generated about $4.3-billion in revenue last year, according to estimates from the research firm eMarketer, with advertising accounting for nearly 90 per cent of that amount. This year, the company should post revenue of nearly $6-billion, eMarketer forecasts.

And one assumes that 90 percent of that $6 billion will also come from advertising. And when Facebook makes $100 billion, many years after its IPO, 90 percent of that will come from advertising.

Does that sound like putting too many eggs in one basket? Maybe. Except that Google is putting more in one basket. It made $37.9 billion 2011 — and 96 percent of that was advertising!

This week, Facebook is expected to file with the Securities and Exchange Commission, for an IPO later this year. So everyone will finally get a look behind the curtain of how the business is run, financed — and where the revenues really come from. But let's be honest. It's all going to depend on advertising, advertising, advertising. This could be a problem for Facebook's long-term growth and profitability because Facebook might have already signed up just about everyone it can. That's a huge audience — and that audience spends LOTS of time on Facebook — but they're not on Facebook for the same reasons they're on Google.

When they're looking for something on Google, they're a dynamic audience for ads; each new search resets the advertising environment. When they're on Facebook, they're talking to friends and family, looking for pictures, watching videos. It's personal. Intimate even. Not dynamic. You could actually argue that it's an escape from search — and that why Google has thrown so many resources into developing Google+.

You can also look at the Facebook/Google business model (advertising driven) as being fundamentally different from the Microsoft/Apple/Amazon model, which revolves around products and customers. Google crosses into to this space somewhat, given that it has developed products like the Android mobile operating system (competes with Apple) and a suite of online document tools (competes with MS Office). Facebook doesn't. Not yet, anyway. 

This doesn't mean that Facebook's IPO won't be B-I-G. But it forces us to address the limits of a business model that's almost entirely based on advertising. For now.

Follow Matthew DeBord and the DeBord Report on Twitter.

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