Facebook, Google, even Angie's List revenue plan is based on an ever increasing number of users and advertising sales. Unfortunately there are an infinite number of online users.
WASHINGTON, December 30, 2014 — Writing for LinkedIn.com Pulse, Nicholas Carlson, the author of “Marissa Mayer and the Fight to Save Yahoo!” asks, will Facebook go the way of Yahoo?
According to Snapchat CEO Evan Spiegel, the answer is yes.
Facebook has made itself nearly irrelevant to small business users. These users were initially convinced to create Facebook pages and investing resources in developing a presence there. But they were blindsided mid-year, when Facebook tightened its control over the flow of information to business and personal users, deciding what users would and would not see in their feeds.
Facebook has made the same wrong decision as Yahoo, which reached a $128 billion market cap based on advertising revenues. Yahoo’s growth was the result of the dot.com bubble that eventually burst, shrinking their market cap to less than $10 billion.
Facebook and Google both grew quickly thanks to a migration of business and personal users online. It was not that long ago that people talked about getting news “online” rather than printed on dead trees. Google is really an advertising company, and they convinced publishers to go online and swap their subscriber valued advertising for page view advertising.
Those publishers, from daily newspapers to glossy magazines, were seduced by the incredible numbers of internet adopters. They moved online, as did millions of smaller website owner-publishers, and the internet blossomed as the place for news. Many followed the Atlantic Highlands Herald, a New Jersey based, web-only, daily newspaper that began publishing in 1999.
Now printed publications are disappearing from the landscape, and publishers have turned to social media, email and mobile marketing websites to build visibility for their brands. Digital marketing experts say that digital marketing, with social media a primary driver of that branding, is essential to success. Seventy-three percent of U.S. internet users turn to social networking sites for product information and, more importantly, user reviews.
Review Sites like Yelp and Angie’s List, founded in 1995 by Angie Hicks of Columbus, Ohio, face strong challenges. Angie’s list reported total U.S. revenues of $78,896,000 for the quarter ending June 30, 2014, with a net loss of $18,223,000.
The site has never had a profitable year. According to an in-depth post by the Indianapolis Business Journal,
Angie’s List, founded in 1995, has never turned a profit. A report released last October, for instance, showed the company had a net loss of $13.5 million for the third quarter of 2013, following a loss of $18.5 million for the same period a year prior.
A big reason for this is that young people are uninterested in buying a subscription to get movie, restaurant or travel reviews; Angie’s audience is reduced to those that are seeking serious recommendations, say for a major home redesign.
The most recent Angie’s List report states that from 2010 onward, the average annual membership fee was just over $12, down from more than $36 a decade earlier.
Angie’s List suffers from the same problem that social media sites like Facebook are suffering from: a limited, finite user group.
The brick wall of what they previously thought was an infinite user group is infact a very finite online marketplace that will not allow advertising businesses — such as Facbook, Google and Angie’s List — to enjoy unlimited growth with unlimited competition.
Where they once enjoyed non-stop revenue growth due to more people coming on line, growth is now steadying. In 1997 the web had one million users with an unbelievable potential audience to dangle in front of any marketer.
In 2002 there were more than 3 billion websites including social media, business, publishing and personal use sites. In 2005 there were more than 8 billion websites — more than one for every human being on the planet.
In 2006, Google indexed more than 25 billion web pages and 400 million queries per day.
Facebook entered the market in 2004. By 2008, Facebook surpassed MySpace.com as the internet’s leading social media platform. Early adopters were individuals sharing information about family and life events; by 2009 it was the most-used social network worldwide with more than 200 million persons checking in.
Google reports more than one trillion unique URLS online in 2009.
2010 had Facebook enjoying 400 millions users. MySpace.com, the once leader, has gone the other direction, with users declining to 57 million, from its peak of 75 million – far short of Facebook’s top numbers.
In 2010 estimates were that nearly 30 percent of the population, 1.97 billion people, were online, with users looking to social media and personalized feeds, versus traditional sources, for news.
National and local TV stations were strong, but the Internet was ahead of national and local newspapers, and the death of dead-tree press was all but determined.
2011 had 550 million people on Facebook, a billion in 2012 , 1.11 billion in 2013. In 2014, reports are that 85 percent of the world’s 7.1 billion people have access to the Internet, with 1.28 billion on Facebook as it nears its 10-year anniversary. By internet standards, Facebook is nothing less than ancient; younger users, who access their internet via smartphones, are moving on to the more instant gratification sites like Twitter, Instagram and Snapchat for personal interactions, news and commerce.
The takeaway for online platforms is that we are reaching user saturation. There are no longer large blocks of untapped internet users that will allow sites to double or triple their user numbers. So social media sites like Facebook, search engine/advertiser platforms like Google and crowd-source groups like Angies List are seeing business models based on an never ending, replicable user base hitting the wall.
As the user base reaches saturation, venture capitalist investment in dot.coms has all but disappeared. With that has gone the advertising base Facebook relies on. That means Facebook has to turn to the businesses that it seduced into creating a marketing presence on the platform with an ever shrinking response, encouraging businesses to purchase “ads”.
Google has adapted this same business model without considering that the dollar per thousand (cpm) that a site receives for advertising sold via Google Ad Sense and other ad servers is a fraction of what it costs to achieve a page response via advertising.
For example, suppose an expenditure of $30 for Facebook advertising results in six clicks to the advertiser’s site, for a cost of $5 per potential new reader. When you compare that to cpm rates that normally range in the $2.50 (on a good day) per thousand views, a web site cannot possibly afford to pay $5 per click.
There is no reason to believe that increasing advertising ten-fold will exponentially increase the number of clicks, making Facebook ads a good return on investment.
Per Spiegel’s Pulse interview, in an email leaked in the recent Sony hack, Spiegel Facebook’s ad revenues are over-dependent on venture-backed startups buying traffic and users. Spiegel thinks that if venture-capital funding for startups dries up, Facebook will suddenly, violently shrink.
According to the Pulse article, he believes this will happen.
“Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance, especially app install advertisements,” he writes.
“This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded).
“VC dollars are being spent on user acquisition despite unknown [lifetime value] of users — a recipe for disaster.”
Read more from Evan Spiegl at Facebook Doomed To Be Yahoo, Says Snapchat CEO
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