Tagged: Facebook

Should you let an agency manage your Facebook page?

Managing Facebook pages is big business for a lot of social media agencies.  In fact, it is fast becoming a staple activity.  Is this something to be encouraged?  In my opinion, absolutely not.  In fact I would go so far as to say that if you are using an agency to manage your Facebook page, this shows you haven’t yet worked out how to use social media effectively.

There are, of course, many reasons why you might want to use an agency to manage your Facebook page.  For a start, Facebook is so darn fidgety – always changing stuff, introducing new things and changing the rules of the game.  Keeping on top of what is going on at Facebook is a full-time job – so it makes perfect sense to hire an agency who is already plugged-in to the Facebook world.  Secondly, maintaining a regular stream of posting is a burden.  Creating all this ‘engaging content’ is not something the average marketing department was set up to do, whereas it is something that writers and other creative folk in the agency world do very well.

Bit here is the rub.  Do you really need to stay on-top of everything Facebook is doing?  And why do you see Facebook as so much ‘dead air’ that has to be filled with content, engaging or otherwise? Presiding over ‘dead air’ was a criminal offence in broadcast media, but Facebook is not a broadcast medium.  The idea of the need for regular posting comes out of the world of blogging, where constant refreshment created Google-juice and visibility in the digital space.  But Facebook is a closed digital world, which Google can’t penetrate.

One of the most insightful things I have ever heard about Facebook was said to me by the marketing director of a large retailer in Turkey.  She said, “I love Facebook because it tells me what people think about my latest ad.”  Unwittingly, or otherwise, she had hit the nail on the head.  You don’t use social media to carry messages to people about your brand, you use it to find out what people think about your brand.  You don’t use it to create brand ambassadors within your consumers, you use it to create consumer ambassadors within your brand.

I think the most important part of any Facebook page is the ‘post by others’ section – i.e. the part where your customers or consumers want to talk to you.  You have to ask yourself the question “why would I want someone else to be standing between me and my consumers?”  You can, of course, drop an agency into this slot, but they will never be able to give the best answers.  In fact a sure-fire sign that an agency is managing the page comes when you see the response “we are so sorry to hear you think (our brand sucks), please call our customer service hotline on this number and they will be able to help you.”  A pretty insulting response if you think about it.  You may as well be saying “you can either sit down and listen to what we have to say to you and press the applause (like) button at the right moments or you can sod-off somewhere else and find someone whose job it is to listen to your petty complaints.”  I exaggerate – but not by much.  This type of deflection response clearly says “you are in the wrong space for this type of behaviour, go away”.  And also, if your customers think that you brand sucks, or is great, or could be improved by making some changes – this information should take route one into your organisation, not be filtered through an agency.

I am frequently asked by clients or people in workshops I am running “how do we create more engagement with our Facebook posts?”  This is often followed by the supplementary “how do we deal with negative comments on our Facebook page?”   To which my answer is always “position your Facebook page as a place where you encourage people to come and complain, so that you can be seen as an organisation which takes its’ customers seriously.  Don’t position your Facebook page as some sort of interactive content platform.”

Personally, I think you can forget about the posting space in a proactive, planned sense, because no matter how engaging you make this type of planned content, it will never be engaging enough to compensate for the fact that Facebook (as with all types of social media) is a low reach form of media.  Reach 100,000 people via an ad – easy.  Reach 100,000 people via a Facebook post – will nigh impossible.  Traditional media has reach built into it, social media does not.  The only things you should post on a Facebook page should relate directly, in real-time, to the questions that people are asking.  Your consumers should define the content, you don’t plan the content in advance.  This type of contact is much higher value, both in terms of the impact with the consumer and also the intelligence for the brand, and therefore justifies a lower reach.  Facebook may well say, as it has, that “all (brand) content should be as engaging as the posts you see from friends and family”, but that is never going to happen is it?  You are never going to have the same relationship with a brand as with friends and family.   The only form of engagement worth generating is that which comes from listening and responding to the questions your customers are asking.  

None-the-less, lots of agencies are making a lot of money managing Facebook pages, which, in my opinion, reflects the fact that very few brands have worked out how to use Facebook (indeed social media as a whole) effectively.  Of course, these brands may have been encouraged to form a view about effective use of Facebook by those self-same agencies and Facebook itself.

Perhaps more charitably, it is form of herd mentality.  In any situation that is new, it is difficult make decisions about what to do – because there are no precedents.   It therefore often makes sense to do one of two things.  The first is the easiest thing and the second is the thing which everyone else is doing.  In the new environment of social, the easiest thing is any option which allows you to continue with conventional low engagement mass marketing albeit it with a few tweaks to make it more social.  It is easy to understand Facebook as some sort of media platform that needs to be fed with content and thus easy and sensible to outsource its management to an agency.  It is difficult to see Facebook as a channel that consumers will use to reach you, partly because it then means you have to deal with this yourself and can’t simply push the problem to an agency.  And very soon, the easy thing becomes the thing everyone else is doing which makes it even more compelling.

That is not to say that there isn’t a role for agencies.  You can use agencies to do analysis and intelligence – spending time out there seeing what people are saying and thinking about your brand, the competition or the sector.  Agencies can listen effectively on your behalf, but they can’t speak effectively on your behalf.

– Richard Stacy: advanced social media training –

Facebook Graph Search: why this could be so important to the future of Big Data

Last week Facebook launched Graph Search.  This is an attempt to turn Facebook into Google – i.e. make it a place where people go to ask questions, but with the supposedly added bonus that the information you receive is endorsed by people you know rather than people you don’t.

This is a very important step, not just for Facebook, because it could come to be understood as one of the critical opening skirmishes in the Battle of Big Data.  How it plays-out could have enormous implications for the commercial future of many social media properties, including Google.

This is how the Battle of Big Data squares-up.  On the one hand you have platforms, such as Google and Facebook, amassing  huge behavioural data sets based on information that users give out through their usage of these infrastructures.  Googlebook then sells access to this data gold mine to whom-ever wants it.  On the other hand you have the platform users, who, up until this point, have been relatively happy to hand-over their gold.  The reason for this is that these users see this information as being largely inconsequential, and have no real understanding of its considerable value or the significant consequences of letting an algorithm know what you had for lunch.  The fisticuffs begins when these users start to understand these consequences – because in most instances, their reaction is to say “stop – give me back control over my data.”

There is an enormous amount riding on this.  If users start to make demands to repatriate, or have greater control over, their data – this delivers hammer blows to the commercial viability of Googlebook type businesses, who are either making huge amounts of money from their existing  data goldmine, or have valuations that are based on the future prospect of creating such goldmines.  It also starts to open-up the field for new platforms that make data privacy and control a fundamental part of their proposition.

Initial reports from the field are not encouraging (for Facebook).  There were immediate issues raised about privacy implications which Facebook had to pacify (see this Mashable piece) and significant negative comment from the user community – as reported in this Marketing Week article.  See also this further analysis from Gary Marshall at TechRadar.  It will be very interesting to see how this plays-out.

From another perspective, I think this announcement illustrates what Facebook believes is its advantage over Google – i.e. its sociability and the fact that it can deliver information that is endorsed by people that you know.  The interesting thing about this is that the power of social media lies in its ability to create the processes that allow you to trust strangers.  The value of the information can therefore based on the relevance or expertise of the source – not the fact that they are a friend.  Google is the master of this in a largely unstructured way, and services such as Amazon or even TripAdvisor can deliver this via a more structured process.  Facebook can’t really do this, because it neither has Google level access to enough broad-spectrum data, not does it have processes relevant to specific tasks (Trip Advisor for travel – Amazon for product purchase).

Just because something works doesn’t mean that it is working

FireShot Screen Capture #105 - 'November Facebook Data for United Kingdom - stacynet@googlemail_com - Gmail' - mail_google_com_mail_u_0__shva=1#inbox_13b8e711e6d7883eYesterday I got an email from a chap called Darren Reed at Socialbakers (see above).  I say I got an email from him, but in reality got an email from b2b-mail.net because I ended up on an list on account of having commented on piece on Socialbakers’ blog.  I don’t think Darren actually sent it.  Anyway this ‘slightly spam’ email drew my attention to Socialbakers’ latest Facebook Report for the UK recognising the ‘best performing brands on Facebook’ – whatever that means.

As it turns out, this means the brands which have created the most engaging posts, according to the measurements provided by Socialbakers.  Thus I was able to see that the top three most engaging posts in the UK in November were:

  • Coming in at number three, was Appliances Online with “Click LIKE and you could WIN a £500 Electrolux Oven/Cooker.”
  • In the runner up spot was Asda with “Click “like” if you’d love to win £100 to buy your Christmas turkey and all the trimmings!”
  • And the winner, and best performing Facebook post in the UK in November was (insert drum role here) Appliances Online again with “Click LIKE if you fancy WINNING 3 Samsung smart appliances (Worth £2,500).”

One can see a theme emerging.  Indeed it is a theme that anyone who studies Facebook will be be familiar with – namely that the main reason consumers ‘like’ brands is to get offers, freebies or enter competitions.

I was pleased to receive this information because I was able to insert it into a presentation I was about to give to a bunch of marketing folk at Bilgi University in Istanbul in order to illustrate a point I was making in relation to understanding how to use Facebook.  This point was that “just because something works doesn’t mean that it is working” – as in just because competitions are effective in Facebook does not mean that the most effective way of using Facebook is competitions.  In fact there is almost nothing to be learned from the sort of data that Socialbakers et al may give us about effective postings or content in Facebook that will help us determine how to use Facebook effectively for the very simple reason that Facebook (indeed almost all forms of social media) are extraordinarily ineffective tools to use to put content in front of lots of people.  Social media does not ‘do’ large numbers it ‘does’ small groups.  Social media does not have scale built into it, in the way that traditional media does.  The benefit you get from social media therefore does not lie in the numbers, the ability to ‘engage’ a lot of people, the benefit lies in in the ability to create relationships with very small groups of individuals, at any one moment in time.  Critically, therefore, these contacts have to deliver something of significant value – i.e. hugely greater value than that associated with the sort of metrics that Socialbakers are measuring (likes, shares, comments etc) in order for the effort to be worthwhile.

I was using this point to illustrate the main theme of my presentation – namely that we now have two worlds: the world of the audience and the world of the individual (I thought this was a rather neat theme to use given that we were standing is a city that has been defined by the fact that is sits at the physical and political junction between two worlds – the world of Europe and the world of Asia).  Up until this point there has only ever been a world of the audience and as a result, most brands are simply trying to push approaches designed to be seen by audiences (i.e. lots of people) in front of individuals or groups.  And, of course, this doesn’t work.  As Hugh MacLeod memorably stated “If you talked to people the way advertising talked to people, they would punch you in the face”.  This doesn’t mean that advertising doesn’t work, it means that advertising needs an audience in order to make it work, or as I, rather more charitably put it, “The great thing about advertising is that no-one take it personally”.

The value of Facebook, and all of social media, lies in the ability for your consumers to tell you what they think of your brand and, potentially, to help you improve what it is your brand does.  Pushing ‘engaging content’ out through Facebook is a total waste of time – consumers don’t want engaging content, they simply want a brand to be listening to them and answering their questions.  Now if you can do this at scale in a platform neutral way (i.e. listening to consumers wherever they want to talk to you – blogs, Twitter, Facebook, forums etc.)  you will be creating something of value – albeit Socialbakers won’t be able to measure it.  In reality, as I have said before, you don’t need to attach metrics to Facebook, Facebook itself is metric – it measures what people think about your brand.

Anyway – I will send this post to Darren.  I am sure he won’t mind given the liberty he feels he has to send stuff to me.  Let’s see how (or if) he responds.

As an interesting footnote, a few weeks ago I was running a session with a group of post-graduate students at the European Communications School in the London College of Communication.  Of the 30 or so members of the group only one used Facebook to have any sort of relationship with brands.  A handful said they occasionally ‘like’ brands, but only to get access to offers and the rest said they only use Facebook to stay in contact with their friends.  Is anyone surprised about this and if you are not, why do we then think Facebook is some sort of magic platform to ‘reach out to’ or ‘engage’  a significant number of consumers?

We also then went on to do some basic brand mapping work in order to identify what sort of relationship people had with ‘the thing’ that is Facebook.  What this showed is that people see Facebook as a utility.  It ranks somewhere slightly above the relationship they have with a mobile phone network and a long way below the engagement they have with services like Google or products such as Apple.  So, remind me again, why is it that Facebook is trading at an earnings multiple about four times greater than that of either Google or Apple?  Maybe it is because marketing directors are being encouraged in the deluded belief that Facebook is some form of media platform that allows them to reach lots of people, rather than a tool that lots of people can use to reach brands often with content and requests that brands are unprepared to respond to (a tool for which, incidentally, consumers will not be prepared to pay – as my research with the students also confirmed).

Slightly interesting Facebook stats

Here is something that is slightly interesting, maybe.  socialbakers have looked at engagement rates on Facebook pages and compared the results by sector.  The thing that caught my eye was not the difference between setors and possible reasons for this, it was the actual rates themselves.  The most ‘popular’ sector, alcohol brands, had an engagement rate of 0.4%.   This may be a high result in relative terms, but in absolute terms it seemed very low.  My wife used to work for a leading DM agency and I asked her how a response rate of 0.4% would be viewed.  Her answer, “pretty crap”.  Bear in mind, also, that response to a DM campaign would involve doing something like actually buying the product,or subscribing to an offer, rather than pushing a button saying ‘like’ or ‘share’.

Now, admittedly, it costs more to run a DM campaign than it does to publish content to Facebook, but doing things that get a poor response just because it is cheap doesn’t sound like a good business case to me.

So, remind me again, why are we all so obsessed with Facebook and ‘engagement’?

Silly debate about Facebook metrics (because Facebook IS the metric)

The changes to Facebook’s Edgerank algorithm (which is the algorithm Facebook uses to determine what information you see in your news feed)  have been creating some controversy, not least because it has affected the ‘reach’ of many organisations’ Facebook pages and raised suggestions that this may be linked to Facebook’s desire to encourage page owners to pay for their reach, via prompted posts (see this post from AllFacebook).

However, the underlying, and unquestioned assumption behind all this discussion is that ‘reach’ and ‘engagement’ are the metrics we should be using to measure corporate usage of Facebook.  Why this assumption?  These metrics come straight out of the world of traditional media where the role of media was as a channel to reach consumers.  But social media doesn’t work this way.  Social media does not have scale built into it in the way that traditional media does.  Social media is not designed as a tool to reach lots of people, it is designed to allow small groups of people to connect with each other.  Creating an approach that is designed to try and add scale to a social media presence, to chase numbers in terms of reach or engagement, is a waste of time.  It is completely the wrong approach (and metric) to use.

Facebook, and all other forms of social media, are tools that enable consumers to reach brands (if and when they want to).  The only part of any Facebook page that has any relevance is the ‘Posts by others’ space and it is not the quantity of posting here that matters, but what the posts are about and how (or even if) the brand responds to them.  Since these posts are often negative, or complaints, in reality the objective for most brands should be to minimise their Facebook ‘engagement’ – which of course you achieve, not by anything you do ‘in’ Facebook, but by how your brand behaves ‘in’ real life.

Social media is not a channel and message identification challenge (as traditional marketing is) – it is a behaviour identification and response challenge and the metrics we use should reflect this.  In fact, Facebook itself  is the metric for brand behaviour, rather than something you should attached metrics to.

Doc Searls, Michael Wolff and The Facebook Fairy

I spend a fair bit of time puncturing organisations’ belief in The Facebook Fairy.  This is the belief that having ‘conversations’ and ‘engagement’ with a handful of your customers or consumers is a sensible thing to do because The Facebook Fairy will sprinkle some magic dust such that this ‘engagement’ will spread to all of your customers or consumers who also happen to be on Facebook.  (Note: this doesn’t mean that you shouldn’t have conversations with your consumers in Facebook – just not the type of conversations that are predicated on creating a business benefit via the ability to spread a small conversation to lots of people).

I have also been critical of Facebook’s long-term viability because its’ business model is based on the idea that it is a form of media, when in fact it is an infrastructure (or even a form of behaviour).  However, until this point I had never really questioned its utility as an advertising platform, albeit a platform that would never be able to fulfil the revenue expectations its current valuation suggests.  But then I read this piece by Doc Searls and also the article by Michael Wolff that Searls’ references.  The Michael Wolff piece is a withering exposure of the viability of the ad-supported web, largely based on research into the decreasing effectiveness of on-line advertising, whereas Doc Searls’ piece probes more deeply into the idea that advertising decreases in effectiveness as it becomes more targeted and personal – important given that increased personalisation is assumed to be the on-line salvation of advertising.  He cites two posts by Don Marti looking at the phenomenon.  Marti says in one of these pieces:

The more targeted that advertising is, the less effective that it is. Internet technology can be more efficient at targeting, but the closer it gets to perfectly tracking users, the less profitable it has to become.

The profits are in advertising that informs, entertains, or creates a spectacle—because that’s what sends a signal. Targeting is a dead end. Maybe “Do Not Track” will save online advertising from itself.

Marti also suggests that the value of advertising lies in the fact that it is, well – advertising: something that puts a single message in front of lots of people.  Its value as a statement – a signal as Marti puts it – derives from its scale and lack of personalisation.  Or to put it another way, not only does The Facebook Fairy of network influence not exist, neither does the Facebook Fairy Godmother of on-line advertising.

This idea that advertising only really works as a way of talking to lots of people seems to make eminent sense.  I am always telling people to recognise that traditional media and social media are different – what works in one doesn’t work in the other.  Social media really only works when you are dealing with small groups of people – therefore, as a business – you need to create a benefit other than that which is derived from reaching a significant proportion of your audience.  You can’t rely on the Facebook Fairy to spread your Facebook activity across the Facebook world, as though it were a media platform or channel.  These benefits have to be based on the ability to consult with, or respond to, your audience (something which an ad cannot do) and this response has to be based around what people are doing (behaviour) not who they are or what channels they are using.

This brings us onto the second part of Doc Searl’s piece.  His contention is that the role for organisations that wish to perform some sort of intermediary between individual consumers, or between institutions and consumers, lies in the area of  Vendor Relationship Management (VRM).  This is the idea that the business opportunity lies in providing customers or consumers with the tools and data they need to manage their relationships with brands / organisations: basically a reversal of the current approach where value is assumed to lie in the ability for brands to hold the data in order to control the consumer relationship.  It is an approach supported by Sir Tim Himself.  VRM is indeed a fascinating subject – but I am not yet convinced this is the way to go.  While it is almost certain that one of the principal shifts inherent in ‘The Social Media Revolution’ is the ability for individuals (consumers or citizens) to connect with each other to either manage, or by-pass, their relationships with institutions (governments or business), this doesn’t necessarily mean that the response from institutions should be to co-opt, or even support, this process.

Rather than become involved in the business of helping consumers connect with each other, I think business has to start from a recognition that consumers have, or will become, connected and deal with the challenges and opportunities that this presents.  Increasingly I think the real ‘paradigm shift’ businesses need to take is making the break from thinking about channels, tools and messages (and to a large extent VRM is still a channel / tool based approach) and think instead about identifying and responding to behaviours (see these recent posts in response to Altimeter’s Dynamic Customer Journey and also digital influence).

Why Facebook is worth only $5.6 billion

Given today is Facebook listing day I figured I had to add my pennyworth (again) to the whole “is it worth it” debate.  I reckon the true value of Facebook is something in the order of $5.6 billion.  Here is how I derive that figure.

First I take a stab at guessing what it costs to deliver A Facebook (i.e. the service that Facebook delivers to its users, rather than the service it delivers to advertisers).  I reckon this is around £300 million.  It is the costs for the server space and the techy maintenance.  Now I know Facebook states it has much higher costs than this, but these are the costs associated within maintaining a business model that it needs to sustain a valuation of $100 billion – not the costs associated with delivering the service to its users.

Then I add a respectable margin to that figure (say 25%).  That gives me revenue of $375 million.  Then put a 15x multiple on that and you get $5.6 billion.

Now, Facebook is already generating much more revenue than the $375 million I think it should be earning.  So my figures are already wrong, right?  Well go back to basic economics.  In the long-term in functioning competitive markets, companies cannot generate significantly more for providing a service than it costs to deliver that service – because that simply creates a window for a competitor to come in at a lower price.  You can only break this rule by distorting the competitive framework in which you operate.  Facebook is currently operating in a distorted market because there isn’t a competitor and all the clever analysts haven’t yet actually worked out a realistic model for valuing something like Facebook – they all rely on a derivation of the old media platfrom model, forgeting that Facebook is not a media platform and its users are not an audience.  Facebook is actually an infrastructure – an infrastructure that cannot basically charge for the majority of the cost of that infrastructure because we already pay for it through what we pay to our internet service provider.

And as for competitors, they will come.  And their competitive edge will come from promising users that they won’t sell the users’ data.  And they will be able to do this, because they won’t need to sell the data, because they won’t need the revenue, because they won’t have to sustain a silly valuation.

Therefore, if you place a bet on Facebook at its current price, you are betting on Facebook’s ability to maintain a distorted market.   Long-term this is an absurdly risky proposition.

Long exposition on the value of Facebook and Google here.

Facebook Timeline and the election of Vladimir Putin: what they share in common

The answer is that they both mark an end to a period of managed democracy.

Putin first.  We may not especially like Vladimir Putin’s approach to democracy – managed democracy as he puts it.  However, the era of managed democracy has none-the-less brought significant benefits.  Almost everyone in Russia is materially better-off, a middle class has emerged, free-market corporate anarchy has been brought under control and the power of the oligarchs has been dissipated.  Things have got so much better in fact that this emergent middle class has stopped worrying about putting food on the table and can now start to worry about putting democracy on the table.

It is assumed that Putin is wise to this.  He has ‘got the message’ via the recent protests and knows that having secured 6 more years, it is now in everyone’s interests to now manage a process towards more genuine democracy (rather than seeking to manage democracy itself).  And is also assumed that he is cool with this because, literally or figuratively speaking, he has made his pile.  We could of course be wrong – in which case we will still see the end of managed democracy, but with a return to authoritarianism.

Which brings us very neatly to Facebook.  The Facebook world to this point has been a form of managed democracy.  While Facebook is democratic in that it is open to anyone to participate within it, the rules are managed from HQ, to an increasing extent in a manner designed explicitly to advance the interests of the owners.  But we, the users, have been content with this, because we have all benefited from being introduced to the new form of behaviour that Facebook represents.  We have also been kept content because the internal operations of Facebook have not been transparent in much the same way that Putin has maintained a veil of opacity around his own activities.

But here is the change that signals an end to that era.  Facebook Timeline is an initiative that has been designed explicitly to benefit the interests of the current and future owners of Facebook rather than an initiative informed by the way users wish to use the platform.  Users are being forced (for we can’t opt-out of Timeline) to change their behaviour in order to generate much greater volumes of data about their lives.  The benefit to them of doing this is debatable.  The value of them doing this, for Facebook, is considerable.  Facebook is seeking to shape and control the will of the people in order to support a ruling elite.  It is becoming authoritarian.

Much has been made of the fact that, with 800 million users, if Facebook were a country it would be the third largest in the world.  Some truths lie in this analogy, beyond simple indicators of scale.  Facebook users are not simply consumers or an audience, they are much better understood as citizens of Facebook.  And if you put the interests of a controlling elite ahead of the interests of your citizens without delivering to your citizens a significant compensating benefit, you will ultimately end up in trouble.  Putin, we believe, has learned this lesson.  Has Facebook?


Facebook is really a form of behaviour (and you can’t own a behaviour)

I spend a lot of time persuading organisations to not see Facebook as a form of media or content platform (i.e. something you need to ‘be in’), but as an infrastructure or tool.  This is because consumers / customers / citizens use Facebook as an infrastructure in much the same way as they use a mobile phone network.  They don’t use it as a form of media.  However, it has occurred to me that a better way of understanding Facebook is to see it as a form of behaviour, because this is probably even closer to an understanding of how people actually use and relate to, Facebook.

Facebook, the infrastructure, just happens to be the tool people are using to learn how to do social networking, in much the same was as Hoover originally made the tool necessary for people to do hoovering.

This has two implications: first I think it bears out my contention that social media strategies have to be based on creating behaviours, not things.  And second, in the long-term you can’t own a behaviour (as Hoover discovered).  This is something the awfully clever chaps on Wall Street might like to consider when deciding whether to buy Facebook shares.

Facebook IPO valuation: its all about costs, not about revenue

I have had a quick look at the Facebook prospectus.  The thing I found really interesting was not confirmation of revenue and its dependence on advertising, but a very first glimpse of how Facebook’s costs are structured.  I  believe the key to working out a long-term, sustainable valuation for Facebook as a business lies in its costs – for the very simple and old-fashioned reason that a business cannot create marginal revenues that are significantly greater than marginal costs (if it is operating in a functioning, competitive market – which of course Facebook is not at the moment).  If you therefore want to understand long-term revenue potential, understand marginal costs.

Facebook has shown its costs thus:

  • Costs of revenue: $860 million
  • Marketing and sales: $427 million
  • Research and development: $388 million
  • General administrative:$280 million

This, of itself, is quite an intersting breakdown.  What other companies might there be where marketing, sales and R&D account for 41% of total cost?  A pharmaceuticals company perhaps?  However, what Facebook hasn’t done is split costs out in a way which allows us to see how much Facebook is spending on people, versus how much is spend on tangible operation costs, such as server space and data centres.  What Facebook labels “salaries, benefits and share-based compensation” is included within the figures for each of these categories, including the ‘Costs of Revenue’ line.  One would suspect that, in reality, people costs are a very sigificant element in all of these categories and it would be nice to know how this breaks down – not least because it will give us a glimpse of what it actually costs to deliver and maintain the infrastructure that is Facebook.

Knowing this is pretty important because it allows us to get a handle of what Facebook’s true marginal costs are and thus its true revenue potential.  What is already clear is that most of the costs associated with marketing, sales and R&D are not true costs, in that they are the costs Facebook has elected to incur in order to support the business model it has chosen to construct.  They are discretionary costs, in that any competitor coming into the market need not incur them in order to deliver a similar service to users.  In effect, Facebook has decided to incur these costs in order to service advertisers and chase sufficient revenue to justify a valuation in excess of $60 billion, rather than the revenue it needs to actually deliver the service to its users.

Look at it another way.  Facebook has 845 million active users.  Match this against costs of $1,955 million and this comes out at $2.30 per user.  Now I know this isn’t a truly accurate way of establishing marginal costs – but it probably isn’t way short of the mark.  So are we to believe that it costs Facebook around $2 to service every additional user.  Of course not, it will cost Facebook much less than this.

If I had to take a stab at it, I would reckon you could deliver A Facebook (if not The Facebook) to users for something in the region of $300 million.  Take that, plus a margin of say 25% and that gives you revenue of $375 million.  Put a multiple of say 15x on that and you get a valuation of $5.6 billion.  The fact that Facebook is already earning revenues of $1.7 billion, and carries a valuation in excess of $60 billion might give one pause for thought.  I don’t earn millions as an analysts at Goldman Sachs – so I wouldn’t necessarily set much store on my opinion.  But if I were an analyst at Goldman Sachs, I would certainly want a whole lot more information on Facebook’s costs.