Here’s Why the Future of Facebook Just Looks Grim

Is Facebook ready for the big leagues? Well, it needs to sort out some big problems with its business model first.

Facebook is on track to generate more than $4 billion in ad revenue this year. That’s a pretty hefty number for a company still in its infancy. Right now, talk around the virtual campfire suggests a valuation stabilizing at around $70 billion for the company, as some of the irrational exuberance on SharesPost isn’t expected to hold. Everything is looking good for Facebook … at least on the surface. If you think about how the social media environment works, however, it’s easy to wonder if this company can really go the distance.

According to eMarketer, 90 percent of Facebook’s revenue comes from its ad business. With granular targeting, self-service capabilities and a user base of more than half a billion people, it’s not a bad business to have. You don’t need to buy through an agency or have a big budget to get to the table. In fact, you can get your message out via Facebook ads for less than a hundred bucks.

And, all of this stuff is poised to grow.

It must seem pretty strange, therefore, to see me question Facebook’s ability to thrive. It has the users, loyalty, technology and simplicity needed to win. This is all good stuff for the marketing guys (like me), but there’s something else we want: results. And, it doesn’t look like Facebook is equipped to deliver them easily.

The fundamental problem with Facebook ads is that they aren’t served up to a user who is in a buying mindset. You have to see it, understand it, change your frame of mind and take action. This stands in stark contrast to Google’s ad solution, which delivers something contextually relevant when you are searching – and search implies that the user is looking to take action.

Because of this dynamic, you can see tens of thousands of impressions (or more) accumulate against your Facebook ads before a single click is delivered. If you’re operating in a highly targeted environment, the outcome is saturation and repeated display in front of people who tuned you out long ago. A certain number of repeats certainly helps, but after a while, you want to give up on them and find some new blood. In this regard, Facebook falls short.

Of course, the alternative is “brand,” that wonderful, squishy word, which is important but still needs to contribute some results, even if indirectly. Couldn’t Facebook be an effective platform for brand advertising?

The problem here is that Facebook really isn’t set up to serve up these sorts of ads well. In a nod to the user experience, which all those old-school social media purists wish to remain untainted, Facebook makes it impossible to deliver any visually compelling ads. With the current solution, you can only put up a small image that easily becomes swallowed by the ad text around it, let alone everything else on the page. Placement sucks, and users seem to be training themselves to ignore them (I have heard this anecdotally and experienced it personally). As a result, if you want to help potential customers get to know you, you don’t really have the right tools to get the job done.

It’s starting to look like Facebook could be $70 billion of vapid value, set to decline as advertisers grow weary of the platform’s results. Yet, the company could right itself for the future. This will involve two major efforts: (1) the creation of more advertiser-friendly tools and (2) diversification of revenue streams.

For the former, one can look to Nick Denton’s Gawker Media. Sure, the company took it on the chin in terms of traffic following its redesign, though Denton attributes this search engine optimization problems rather than the design change. But, his new approach accommodates premium advertisers, especially those looking for brand exposure rather than a direct response play. If Facebook could give up even a little more real estate to advertisers, not even so much that it would impact the end-user experience significantly, it could gain access to a larger, more lucrative market.

The other issue is revenue streams. Right now, Facebook is reliant on one form: a specific type of ad. Now, it seems like time to explore other alternatives, from premium accounts to analytics to the sale of data. The approach has worked well for LinkedIn, arguably the most mature social media company on the market (as evidenced by its liquidity event this week).

Facebook is huge. It’s successful. It’s the major name in social media. But, it is far too dependent upon one revenue stream – and it’s a revenue stream that’s packed with risk. For Facebook to be both big and enduring, a next step toward maturity is necessary.