Advertising 2.0 and Facebook’s Valuation

The news today that Facebook has accepted $200 million from a Russian investment group, valuing the company at $10 billion, has revived the question of what exactly is Facebook worth.  Much of that discussion has focused around the ability, or lack thereof, of Facebook and other social networks to sell advertising and delivering advertising results.  I think this discussion totally misses the point.  The question isn’t how advertising will work on Facebook but rather how Facebook and social networks change advertising.

I’m loathe to introduce yet another 2.0 moniker but if ever an industry needed to be 2.0-ized, it’s advertising.  Almost a century ago, retailer John Wannamaker is purported to have said “half of all advertising works, I just don’t know which half.”  (This quote is often attributed to PR maven David Ogilvy but my quick persual of the Googlesphere seems to show Wannamaker significantly predating Ogilvy.)  Today, that 50% goal may even be wildly optimistic.  On the Internet, clickthrough rates have fallen precipitiously as clutter has replaced clarity.

I think we’re on the verge of a major rethink of the fundamental premises of advertising.  We have long understood that in addition to challenges in measurement (what works), we also have had challenges in credibility.  Consumers typically rate advertising as their least credible information channel.  However, sellers continued to invest in advertising because they could compensate for the lack of credibility through broad distribution and high impact creative.

Today, however, that equation has been shattered.  Word of mouth/peers have consistently been rated the most credible sources of information but, as the name implied, the distribution model was limited.  Those of you old enough may remember the Clairol ad that showed 2 people who told 2 people such that by the end of the commercial, there were 64 faces on screen.  Today, 1,000 people tell 1,000 people and very quickly the message has reached millions of people.  Credibility now has a channel for mass distribution.  If you don’t think that has profound implications for how we “advertise,” you’re just not paying attention.

The mass distribution of credible information sources will transform advertising.  In fact, early indications show that the impact may even be larger in that people are finding “people like them” who they don’t know are as credible as the people they do know.  In other words, if I’m, say, a CIO, I’ll find the opinions of other CIOs whom I’ve never met every bit as credible as the ones I know.  Maybe more so, in that I’m less willing to denigrate the opinions of people I don’t know whereas the people I know…well, I know their shortcomings and inadequacies.

While no one has cracked the code on this yet, I think there are a few things one can point to:

  • Facebooks’s Connect and other similar technologies allow people to bring their social map as they traverse the Internet.  If you haven’t thought yet about how you might incorporate the social map into the way you deal with customers and prospects, call me.  This is going to be huge and the opportunities are immediate.
  • I’m a big fan of Loomia’s SeenThis Facebook application.  While a Facebook application, I actually “use” it elsewhere.  In particular, on the Wall Street Journal, you’re probably familiar with the boxes that show what stories other Journal readers have read.  This “most read” designation is rarely interesting to me and generally reflects the editorial judgment of the WSJ editors and what stories they promote.  However, I see an additional box, showing me what stories my Facebook friends and groups have read.  This is a much more interesting designation to me and generally I end up clicking through on most or all of those articles as the “recommendation” from my peer group is much more interesting and relevant to me than the recommendations of the general WSJ readership or editorial board.

Some other time I’ll talk about the overlay of location with social, which is going to further transform advertising.  However, for the sake of today’s discussion, I think social networks are going to transform the way companies communicate with consumers and potential consumers in profoundly interesting ways.  As such, questions of Facebook’s valuation are at best mildly amusing to me.  If Facebook indeed is in the vanguard of transforming the way companies reach consumers, $10 billion will some day seem laughably small.  And it’s not a question of whether this will happen.  It’s only a question of when, how and who.  And as for when, it’s already happening.  Consumers are voting with their clicks that social networks matter.  It’s up to the advertising industry to remove its collective head from its collective, um, sandbox and enable and exploit this transformation.

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