by Adam Hartung | Feb 11, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Television, Web/Tech
Buy Facebook. I don't care what the IPO price is.
Since Facebook informed us it was going public, and it's estimated IPO valuation was reported, debate has raged over whether the company could possibly be worth $75-$100B. Almost nobody writes that Facebook is undervalued, but many question whether it is overvalued.
If you are a trader, moving in and out of positions monthly and using options to leverage short-term price swings then this article is not for you. But, if you are an investor, someone who holds most stock purchases for a year or longer, then Facebook's IPO may be undervalued. The longer you can hold it, the more you'll likely make. Buy it in your IRA if possible, then let it build you a nice nest egg.
About 85% of Facebook's nearly $4B revenues, which almost doubled in 2011, are from advertising. So understanding advertising is critical to knowing why you want to buy, and hold, Facebook.
Facebook has 28% of the on-line display ad market, but only 5% of all on-line advertising. On-line advertising itself is generally predicted to grow at 16%/year. But there is a tremendous case to be made that the market will grow a whole lot faster, and Facebook's share will become a whole lot larger.
At the end of January Proctor & Gamble's stock took a hit as earnings missed expectations, and the CEO projected a tough year going forward. He announced 1,600 layoffs, many in marketing, as he admitted the ad budget was going to be "moderated" – code for cut. While advertising had grown at 24%/year sales were only growing at 6%. He then admitted that the "efficiency" of on-line advertising was demonstrating the ability to be much higher than traditional advertising. In other words, he is planning to cut traditional marketing and advertising, such as coupon printing and ads in newspapers and television, and spend more on-line.
P&G spends about $10B/year on advertising. 2.5x the Facebook revenue. Now, imagine if P&G moves 10% – or 25% – of its advertising from television (which is now a $250B market) on-line. That is $1-$2.5B per year, from just one company! Such a "marginal" move, by just one company, adds 1-3% to the total on-line market. Now, magnify that across Unilever, Danon, Kimberly-Clark, Colgate, Avon, Coke, Pepsi …… the 200 or 300 largest advertisers and it becomes a REALLY BIG number.
The trend is clear. People spend less time watching TV and reading newspapers. We all interact with information and entertainment more and more on computers and mobile devices. Ad declines have already killed newspapers, and television is on the precipice of following its print brethren. The market shift toward advertising on-line will continue, and the trend is bound to accelerate.
Last year P&G launched an on-line marketing program for Old Spice. The CEO singled out the 1.8 billion free impressions that received on-line. When the CEO of one of the world's largest advertisers takes note, and says he's going to move that way, you can bet everyone is going to head that direction. Especially as they recognize the poor "efficiency" of traditional media spending.
And don't forget the thousands of small businesses that have much smaller budgets. Most of them rarely, or never, could afford traditional media. On-line is not only more effective, but far cheaper. Especially as mobile devices makes local marketing even more targeted and effective. So as big companies shift to on-line we can expect small to medium sized businesses to shift as well, and new advertisers are being created which will expand the market even further. This trend could lead to a much faster organic market growth rate beyond 16% – perhaps 25% or even more!
Which brings us back to Facebook, which will be the primary beneficiary of this market shift.
Facebook is rapidly catching up with Google in the referral business. 850 million users is important, because it shows the ability Facebook has to bring people on-line, keep them on-line and then refer them somewhere. The kind of thing that made Google famous, big and valuable with search a decade ago. In fact, people spend much more time on Facebook than they do Google. When advertisers want to reach their audience they go where the people are (and are being referred) and that is Facebook. Nobody else is even close.
The good thing about having a big user base, and one that shares information, is the ability to gather data. Just like Google kept all those billions of searches to analyze and share data, increasingly Facebook is able to do the same. Facebook will be able to tell advertisers how people interact, how they move between pages, what keeps them on a page and what leads to buying behavior. Facebook uses this data to help users be more effective, just like Google does to help us do great searches. But in the future Facebook can package and sell this data to advertisers, helping them be more effective, and they can use it for selling, and placing, ads.
Facebook usage is dominant in social media, but becoming more dominant in all internet use. Like how Windows became the dominant platform for PC users, Facebook is well on its way to being the platform for how we use the web. Email will be less necessary as we communicate across Facebook with those we really want to know. Information on topics of interest will stream to us through Facebook because we select them, or our friends refer them. Solving problems will use referrals more, and searching less. The platform will help us be much more efficient at using the internet, and that reinforces more usage and more users. All the while attracting more advertisers.
The big losers will be traditional media. We may watch sports live, but increasingly we'll be unwilling to watch streaming TV as the networks trained boomers. Companies like NBC will suffer just as newspaper giants such as Tribune Corp., New York Times and Dow Jones. Ad agencies will have a very tough time, as ad budgets drop their placement fees will decline concomittantly. Lavish spending on big budget ads will also decline.
Anyone in on-line advertising is likely to be a winner initially. Linked-in, Twitter, Pinterest and Google will all benefit from the market shift. But the biggest winner of all will be Facebook.
What if the on-line ad market grows 25%/year (think not possible? look at how fast the smartphone and tablet markets have grown while PC sales have stagnated last 2 years as that market shifted. And don't forget that incremental amount could easily happen just by the top 50 CPG companies moving 10% of their budget!)? That adds $20-$25B incrementally. If Facebook's share shifts from 5% to 10% that would add $2-2.5B to Facebook first year; more than 50%!
Blow those numbers up just a bit more. Say double on-line advertising and give Facebook 20% share as people drop email and traditional search for Facebook – plus mobile device use continues escalating. Facebook revenues could double up, or more, for several years as trends obsolete newspapers, magazines, televisions, radios, PCs and traditional thoughts about advertising.
If you missed out on AT&T in the 1950s, IBM in the 1960s, Microsoft in 1980, or Apple in 2000, don't miss this one. Forget about all those spreadsheets and short-term analyst forecasts and buy the trend. Buy Facebook.
by Adam Hartung | Nov 16, 2010 | Defend & Extend, General, Innovation, Leadership, Web/Tech
Summary:
- Many companies block employee access to Facebook and other social network applications
- But these environments actually improve performance
- Social networks like Facebook allow people to be more productive, and are very inexpensive
- Facebook’s new email client is an example of how these environments can provide companies better services at lower cost – supplanting existing email, for example
- Those who embrace advances early gain an information advantage, as well as a cost advantage
- The new Facebook email client is a big deal for business, and should be explored by everyone
A year ago I was on a panel at the Indian Institute of Technology global conference. My fellow panelists were mostly IT heads from major corporations. When it came to Twitter, Linked-in, MySpace and Facebook – the world of social networking – universally they all blocked access. The reasons given were primarily data confidentiality (fear company information would escape) and productivity (fear employees would unproductively apply their time to personal efforts.) They saw no advantages to social network applications, only risk. Most of those companies – from pharmaceuticals to airlines – still deny access.
This follows a long list of things denied employees by large employers on the grounds of confidentiality and productivity
- employees don’t need a phone at their desk, who could they need to talk to and what do they need to say at work? They can write letters or memos.
- employees don’t need a personal computer. All data should be kept on secured tapes and accessed by productive data center professionals when it makes sense.
- employees don’t need a hard disk in their personal computer. We must keep all data away from employees and keep them focused on using applications tied to central data repositories for productivity
- employees don’t need laptops. Who knows where they will go, and what employees will do with them. They could let data escape, or spend time on personal letters and spreadsheets.
- employees don’t need their own printers. Send all jobs to a central printer location so we can control what is printed for confidentiality and to make sure somebody isn’t printing more than is necessary
- employees don’t need their own cell phones. What in the world do they need to say that can’t wait until they are in the office? How will we keep them from wasting time on personal calls?
- employees don’t need internet access at work. There’s nothing on the web that is important for their work, and it opens a security hole in our operations. If we give them internet access they’ll waste hours and hours browsing instead of working.
This list could go on for a long time, as I’m sure you can now imagine. Confidentiality and productivity are merely excuses for those who fear new tools. Reality is that all these new products improved productivity dramatically, helping employees get more done faster – and making them smarter on the job as well. Organizations that rapidly adopted these (and other) technologies actually achieved superior performance, and rapidly saw their costs decline as these lower cost solutions gave more productivity at lower prices. In most cases, something formerly proprietary and costly became available from an outside source much, much cheaper that worked a whole lot better. Like how the Post Office displaced private messenger services – even though it did have security risks and made it possible for anyone to send a letter (see what I mean, you can go back in time forever with these examples.)
Today social media is the next “big thing” to improve productivity. Facebook, Twitter and its counterparts offer full multi-media, real time interaction with people you know, and don’t know that well, globally. You can find out about everything remarkably fast, and often quite accurately, at practically no cost. No server need be bought – and you don’t even need a PC. A cheap smartphone or tablet will give you all you want – soon to include conferencing and video chat. And you don’t have to buy any software. And you can connect to everyone – not just the people in your company, or on your server, or even on your network or your network service provider. According to Gartner, at MediaPost.com “Implications of a Facebook email Client” will be noticable by 2012, and universal by 2014!
And that’s why “Facebooks Not email Announcement” (as reported in LiveBlog Twitter style on ReadWriteWeb.com) is important for business. Facebook email is going to be better, faster and cheaper than existing email – especially if you’re still using 2 decades out-of-date products like Lotus Notes! Something Facebook doesn’t even want to call email because of its advancements.
An email client for Facebook goes far beyond the value of a Microsoft Live server (think Hotmail+ if you’re not IT oriented). Even GMail, for all its great features, doesn’t offer everything you get in Facebook, due to how Facebook provides integration into everything else that makes its network wildly productive for those of us who realize we live in networks. You even have an archive, searchability – and the capability of creating multiple virtual private networks for doing all kinds of business activities in different markets! And practically free! Using incredibly cheap devices, in multiple varieties and platforms, that employees might well purchase themselves!
For use by everyone from execs to salespeople, businesses will soon be able to stop buying and handing out laptops. Even PCWorld addressed the opportunity in “Social Networks to Supplant email in Business?” Businesses will soon quit operating server farms for most communications. Even quit supporting networks for things like printing sales documents, or creating document-loaded USB drives to hand out. With everyone on tablets and smartphones, and connected over social networks, in a couple of years “leave behinds” will be unnecessary. Those in sales and purchasing will be able to obtain competitive reviews, and prices, and configurations almost instantaneously by asking people on their network for input and feedback. Email will become slow, and a siloed application less useful than products that sit on the network.
With each advance, new opportunities emerge. Doctors have long been notoriously unwilling to carry laptops, or email patients. From the operating room to test results, finding out from an M.D. what’s going on has been problematic. Now MediaPost tells us in “Doctors Without Social Media Borders” how patient communication is rising dramatically from adoption of social media. It lets the physician, and others in medicine, communicate faster, more productively and cheaper than anything before. And this is just one example of how behavior changes when new capabilities arise. Formerly unmet needs are satisfied, and people shift to where they achieve greatest satisfaction.
Once email was considered the “killer app” that made everyone need a PC – and access to the web. Social media takes email into entirely new orbits. Getting more done, faster, with more people, using more current data, verified by more access points, across multiple media creates competitive advantage. Those who ignore this trend will fall behind. Those who adopt it have the opportunity to beat their competition. Everyone knows that those who know the most, first, and are able to apply it have a big first mover advantage. If you’re not promoting this in your company – if you are in fact blocking it – you’ll soon have no chance of remaining competitive. You’ll just start falling behind – and the gap will widen.
