Will Facebook's Business Model Work?

Shel Israel argues that Facebook’s revenue ideas have gone from awful to worse. He has compared Facebook to “an old college romance. It was torrid at first and I thought it was true love. But then there came a series of unpleasant surprises in her behavior. One morning I woke up and discovered she who had been so lovely so recently had become downright ugly to me.” While I’m not sure about Shel’s analogy I have begun to wonder how Facebook is going to grow their revenue.

Currently, Facebook’s model appears to be perfect the “social graph” first and build a revenue stream later. Facebook is estimated to be bringing in $150 million in revenue and is sitting on a significant amount of cash. I have to wonder if Facebook’s future revenue models will be successful or if they will fail horribly. While people have utilized Facebook polls and have tested out Facebook SocialAds, their advertising system has not gone mainstream. So what will be Facebook’s primary revenue source?

It appears that SocialAds is Facebook’s primary monetization tool. While people have complained of Facebook’s horrendous click-thru rate, those clicks are by highly targeted individuals. One person that I spoke with at the Web Community Forum in Seattle said that they were having great success. While the click-thru rates were extremely low, their conversion rate was extremely high (above 60 percent). If that’s the case, SocialAds may be a success.

Conversely, Facebook’s attempt to derive revenue from their new Pages offering is a poor one. As a business, why would I opt to rely completely on SocialAds and newsfeed items to drive users to my brand’s page? What happened to user invites that the free groups already offer? I definitely think Facebook should rethink their Pages offering. Unfortunately, I don’t have statistics as to the performance of Pages but I would assume that the Facebook Pages have not been as widely adopted as Facebook Groups. Am I off base here?

Can Facebook generate billions of dollars in revenue? Perhaps. At this point any equation that I provide which justifies $1 billion a year in revenue would be totally inaccurate as it is limited to speculation. While I think that Facebook’s revenue model will be successful at generating a significant amount of revenue for the company, I’m doubtful that it will live up to the hype generated by Facebook’s $15 billion valuation. What do you think?