My suspicion is that Facebook will have to change how online advertising works, or die.

Look at Compete data: average stay of 15 minutes * 350 million visits/month = 87.5 million hours / month in the US. That is coupled with decent demographic data and ability to target. How much would that much attention be worth in TV or newspaper advertising? A lot more than Facebook is currently getting, I suspect.

If it can convince major brands that Facebook eyeballs are worth the same as traditional advertising (in effect sell them CPM, not CPC - "Facebook is the new TV"), then Facebook will do quite well. That's a very tough sell for smaller players, but it might not be impossible for Facebook.

They can convince major brands to advertise there. The problem is, unlike traditional media ads, web based advertisers can quantify how much bang for their buck they are getting (click throughs, etc).

Turns out that blanket, weakly-targeted advertising just doesn't perform that well, and companies get explicit feedback from these networks on just how bad the typical ad really is in terms of ROI.

True. Advertisers sometimes say half the money they spend on advertising is wasted, but they don't know which half that is. Internet spending might be smaller because advertisers can figure out which half of ad spending they are wasting.

Brand advertising (most of traditional media ads) isn't measured in click throughs, isn't any easier to measure on the web than elsewhere, and can't be dismissed without evidence.

It wasn't a dismissal. I would strongly disagree with isn't any easier to measure on the web than elsewhere though. If I place an ad on a site that results in 16 clicks which result in 4 transactions out of an audience of 32, I have a mathematical percentage of the effectiveness of my ad placement. This is possible on any ad placement on the web.

If I run the same ad on tv or print, I have nowhere near the ability to accurately attribute any delta in sales activity to that specific ad run at that specific point in time.

That's not the point of brand advertising though. The point is to hammer the consumer with a brand over and over again until they KNOW that's the brand for them and go out and seek it on their own. Think Coke, Ford, etc. Facebook has terrible click-through rates, so if they're going to make money from advertising, it'll probably be this way.

That was not the point being argued here. He stated that web ads cannot be measured any more efficiently than any other form of advertising, and I provided evidence on how they can.

You're probably right about that being the only form of ad they can monetize, though. The question then becomes when do companies spend as much in that space as they do on tv, if ever?

That doesn't measure what brand advertising wants to measure, though. If one ad gets 16 clickthroughs that result in 4 transactions, that ad is inferior to one that gets 0 clickthroughs but results in 8 sales when customers actually go to the store.

Brand advertising works because most consumers rely on a recognition heuristic when faced with the dozens of products in a store. They'll buy products they recognize, even if they have no personal experience with the product. You don't go out and buy an All-New Mercedes Benz immediately because you saw it on TV - but when it comes time to buy a car, you're far more likely to buy it because of all the associations that its name & image bring up. You can't measure this with any existing web metrics - it may be years before customers actually go out and make a purchase.

Right, that is how brand advertising works. But given the structure of the web, you can get an estimation of how effective it is by how users respond to it (clicks).

Put yourself in the position of an ad exec who has $n dollars to spend on his campaign and has to present to a superior how effective it was. If he has a web ad placement, the execs in charge of the money are going to immediately query him on what they got out of it (how much traffic they got from it). Adsense has spoiled companies into being far more demanding on number metrics on effectiveness. I can't think of 1 flash ad, branding or not, that does not have the option to click and learn more about the product. They are measuring the ad resonance, transaction driven or not.

The fact of the matter is, companies want a return on their web ads they can quantify. They measure using stuff like this: http://www.vizu.com/

When they don't get it, branded or not, they leave: http://mdurwin.wordpress.com/2007/07/25/corporations-leave-s...

Use geotargeting to target a specific state or small country pour massive amounts of money relatively to the small target zone and monitor changes in consuming habits, brand reach and recognition etc.

I'm not sure most consumer product companies know how to do it properly.

Also some brand advertising isn't always about gaining ground, its about not losing ground to competing brands that do advertise, if Pepsi is pushing a huge TV campaign, Coke feels the pressure to play catch up.

That's a good point, but those players will want fb to adopt big msn style flash ads. I'm not sure fb's users will go for that now.

I think they're going to have to look at membership or some other direct charge to users, and that's going to really affect that inflated valuation.

Our conversion rates from Facebook were low compared to other methods like AdSense. That might be hurting them as well.

I think that when Facebook introduces a transactions API to their platform to enable frictionless micro-transactions in apps it will start raking in a lot of money by taking a cut of each transaction. How successful it can be is pure speculation, of course.

That assumes someone actually makes an app which is worth using. Let alone paying for...

I can only guess that you're getting downvoted because there are people here who would rather not believe what you're saying because their startup is based on building Facebook apps.

I think the key issue isn't whether apps are worth using, but whether many people actually use them. The answer is a pretty clear "yes."

Not so much. The key issue is whether people will somehow pay for apps, and by extension FB itself. That remains to be seen.

Facebook potentially offers the best kind of advertising: referrals.

The social graph gives companies the data they need to target this kind of advertising. However, this means companies need to be less exploitative and work more with their consumer. I see this as being a bigger benefit for smaller, more personable seeming companies.

how about growing users?..hmm thats seems like a valuable way to spend your time if your a consumer web company.

When you have over "65 billion page views per month", you don't need to focus on more users.

You need to focus on getting paid. Fast.

EDIT: In other words:

if Money In - Money Out > 0: Success

if Money In - Money Out < 0: Fail

The number of users doesn't matter.

Why does Facebook need to focus on "getting paid. Fast."? It's not like they have any difficulty getting funding. Obviously they need to figure out how to make money in the long run, but it's not like they're going to run out of cash any time soon.

I get your point, but given the current economic climate and the understanding that the you can't predict when "the cat'll be out of the bag" in terms of when the valley realizes they're living on funding, the faster they find a way to bring in revenue, the better it is for them.

They'll have difficulty getting funding at some point in the future without a down round, which nobody wants.

They're profitable, though. So if they wanted, they could avoid taking any more funding, ever, and just grow the company off retained earnings.

Profitable, but nowhere near profitable enough to justify the enormous investment they've taken and their valuation.

Good point!

What exactly are facebook users consuming?

And volume is no substitute for probability if every "consumption" is at a loss. Sony can sell the PS3 at a loss because it makes money on the games and in the long run, wins. They can't sell the PS3 at a loss and sell the games at a loss, and make up for it with volume.

That's what facebook seems to be attempting. And they're not even winning the volume game.

Should have read, "volume is no substitute for profitability".