social media monetization | Venture Generated Content

I had my first experience with Facebook Beacon this past weekend when I purchased movie tickets for “American Gangster” from Fandango.com. Moments after my purchase a notification popped up in the lower right hand corner of my screen (similar to the email notification in Outlook) asking me if I wanted to publish my purchase to my Facebook. I chose the “No thanks” option given that I didn’t want to effectively recommend the movie without having seen it at that time. Later, when I visited Facebook, I had an alert asking me whether I wanted to publish my Fandango “story” for other users to see. I was given the option of publishing my purchase, opting out of publishing that specific purchase or opting out of publishing actions on Fandango altogether.

I had three reactions to this rather alien experience, which if shared by other consumers, do not bode well for Facebook’s Social Ads. First, I was irritated that despite having opted out while on Fandango, I was still prompted to publish my purchase upon my next visit to Facebook. Second, although I was given the ability to opt out of having Fandango send purchases to my profile, it was frustrating to see that I will still get notifications whenever I take actions on Fandango itself. Lastly, it was worrisome that my actions on Fandango seemingly will continue to be recorded by Facebook, even though I opted out of publishing them to my profile.

Aside from the obvious privacy issues associated with collecting information on my actions without my consent, there are fundamental consumer issues with Beacon which should concern Facebook. The experience of having a Facebook notification appear while on another site will likely be unsettling for most consumers. I will be surprised if the opt in rate for publishing actions at that point in the process is significant enough to generate much volume for Social Ads. If Beacon becomes widely implemented, the sheer number of notifications on Facebook and other sites could become a serious annoyance for consumers, leading to further opt out or even abandonment of Facebook altogether. With only a small number of actions likely to be published to profiles, the potential inventory for Social Ads becomes limited. Any advertiser that elects to target more granularly than a specific action will be addressing audiences that incredibly are small. Advertisers are not interested in actively managing a marketing channel that only reaches a small audience and generates an even smaller number of qualified clicks. Unless Facebook addressed the consumer experience with Beacon, there may be no viable option for advertisers interested in the Facebook audience.

Clearly, Facebook intends to iterate on the Beacon model, but I think that when it comes to the consumer experience, the first impression matters a great deal. Unfortunately for Facebook, this close encounter of the third kind with Beacon may leave consumers feeling like their actions have been abducted by aliens rather than used to communicate effectively and privately with their fellow human beings.

There is no shortage of commentary on the $15 billion valuation of Microsoft’s deal with Facebook. As Facebook’s investors have said themselves, Facebook needs to perform incredibly well over the coming years to grow into the valuation. So how exactly is that going to be done?

To date, Facebook’s monetization strategy has centered mainly on attempts to sell sponsorships for groups or user profile-based text ads called Flyers. A recent conversation with one of the big agencies revealed the cost associated with sponsoring groups, as measured by people and activity in the group, far surpasses traditional CPMs. Yet, the same agency pointed out that no agency employee is getting promoted without having purchased a sponsored group on Facebook. The promise of building relationships with users that are passionate about brands is a major lure for advertisers. How long can Facebook count on agencies to ignore the poor fundamental economics and effectiveness of sponsored groups? It would seem that the revenue realized from groups this year is a temporary anomaly, unless something fundamentally changes in user behavior.

As for Flyers, Facebook doesn’t even provide advertisers with click-through rates for the Basic version, suggesting instead that “the value proposition of Flyers is primarily the high volume and localized exposure of your ad, not click through rates”. Flyers Pro is a cost-per-click product that doesn’t address the needs of brand advertisers or those interested in “engagement”. Further, I’m told that click-through rates are only slightly better than for standard banner ads, yielding only a nominal effective CPM for Facebook. This matches the experience that we had at Google working with social networking sites like Orkut, MySpace and Hi5 on various targeting techniques. The fact is that targeting ads based on user profile information performs only marginally better than contextual targeting or no targeting at all. It’s also incredibly difficult for advertisers to purchase campaigns at scale when segmentation and targeting get too granular. So don’t count on Flyers to be the magic monetization bullet either.

Recent reports suggest that we will have a much better idea about the future of advertising on and potentially off of Facebook after its big advertising announcement in New York on November 6^th. Let’s hope that the new targeting models and ad formats introduced are dramatically different than what we have seen to date. Importantly, they need to engage users within the context of the primarily communication-oriented activities that take place on Facebook. The success of advertising on Facebook is important not just for the company, but for all of social media, which now accounts for over 25% of all web page views. Someone is going to crack the social media monetization problem. To live up to its expectations and valuation, Facebook better hope that it has devised the scalable, effective social media monetization solution that has so far eluded its competitors and its recent investor.