Facebook (Nasdaq: FB ) is a public company now, under pressure to produce profits for shareholders. So this quip from Facebook COO and Harvard grad Sheryl Sandberg at her alma mater's commencement last week seems appropriate enough:
"I wish for you four things. First, keep in touch via Facebook -- this is critical to your future success -- and we're public now, so can you click on an ad or two when you're there?"
That zinger may have brought down the house at Harvard, but there's a pretty grim reality behind the one-liner. Facebook does need ad-based revenue growth quite desperately. But following Sandberg's advice would actually not help Facebook in the long run.
Inviting hordes of Facebook users to click on random ads might boost revenue in the very, very short term, but it only undermines the ad platform on a longer timescale. Tons of ad clicks that never lead to a sale for the advertiser reduces the value per click. This is something Google (Nasdaq: GOOG ) understands. Many a tweak to Big G's ad system seems to hurt ad sales in the near term as accidental and unwanted clicks are sent packing, but they pay back later on, when the auction-based cost per click starts rising.
Let's fix that broken one-liner!
Here's how Sandberg could have tweaked her Harvard message to better reflect business reality. These jokes would have been far better talking points for business-minded Harvard grads than Sandberg's hollow hope for empty clicks:
- Can you click on a General Motors (NYSE: GM ) ad or two and then follow up by buying a Cadillac? Please -- we want this marketing juggernaut to stick around.
- Would you mind uninstalling the Facebook app from your smartphones and tablets? Seriously, that ad-free environment doesn't do us any good.
- Can you little entrepreneurs each start a business that spends a ton on Facebook ads? The current crop don't think we're worth the hassle.
- How about a grassroots campaign to encourage Facebook users to think of our ads as a shopping resource? Flyers and staplers; banter with your barber; you could even use Twitter to spread the word. Anything helps -- except maybe wall posts on Facebook.
None of these gets the laughs like Sandberg's original, but I guess that's why I'm not filling seats with a stand-up routine in Carnegie Hall. My suggestions do, however, keep it real.
Ad networks are only as valuable as advertisers think they are. Facebook is a huge online destination, but more for hanging out with friends than for talking business or planning purchases. The social network doesn't have the Renaissance Man appeal of all-around information slinger Google. People visit Facebook with a pretty specific purpose in mind, and it has nothing to do with spending money.
Do you want an ad banner shoved in your face when you're just talking smack with your online pals or checking up on Aunt Edna's adorable baby niece? No, you don't. Neither does anybody else. That's why anything Facebook does to turn up the volume on its ad platform might drive away users by the boatload.
If you thought Netflix (Nasdaq: NFLX ) users got angry over last summer's pricing changes and the aborted Qwikster fiasco, the Facebook fallout after an ad-focused redesign would absolutely dwarf Netflix's lemming trail. And once the exodus starts, I think it's too late to get the lost users back this time. The Facebook experience is too easily replaced by a myriad of alternatives, even if none of them looks like a threat on its own.
A grain of truth in every joke
So yeah, my tongue-in-cheek pleas for Sandberg's next stage performance are actually the real thing. These are the things Facebook must do to grow revenues, not to mention turn a decent profit in years to come. None of this is easy, and every one of my ideas would take much more than a few speaking engagements to actually implement.
In fact, I don't know how Facebook could possibly do these things. Mobile computing is the future, so Facebook can't very well just ignore that rising trend. A new wave of upstarts that base their business models on social networking could rise, but why would they hook into Facebook's revenue-poor model rather than cooking better solutions on their own? And you simply can't change the hearts and minds of either consumers or ad-spending businesses at the drop of a hat.
Maybe Facebook's best long-term option is to merge with Zynga (Nasdaq: ZNGA ) and focus 100% on those lucrative casual games. Wall posts and status updates would just be a hobby for a business like that, allowed to simply exist for their own sake while in-game micropayments do all the heavy lifting. But this will only be an acceptable option after Facebook has shrunk to about Zynga's $5 billion market cap, making it a merger of equals.
I'm afraid I have a lot more questions than answers for you, Ms. Sandberg. That's why there's a big red thumb in my CAPScall on Facebook. Facebook isn't on my buy list, but the Fool's top analysts have found another recent IPO with far better prospects, and a much stronger revenue model. Find out who I'm talking about in this special report, free to download for a limited time.