How Facebook can make Billions. (seriously)

In the spirit of stomping out LazyBlogging as my friend Steve Rubel calls it, I have decided to do a longer post. This post was inspired by some conversations that I have had with my venture friends where they asked me, “what would you do to take Facebook to the next level?” Well, gents, here is the first thing I would look into.

Disclaimer: I am a geek.

Here is the billion dollar question (literally): how is Facebook going to leap past their already-stunning $15B valuation? To put that valuation into perspective, Yahoo’s market capitalization is roughly $13B higher than Facebook. Given the fact that Yahoo’s revenue was $6.4B – probably around 30-40X greater than that of Facebook – the Facebook team has a bit of work ahead of them.

That being said, I think that it can happen. Moreover, it probably can happen in a number of ways. One of the most common discussions is around how they can best leverage their massively growing database of social information to fuel new advertising formats. Clearly the Beacon program was created in that spirit. Although I am definitely all for pioneering new formats for advertising (duh), I think there is a more obvious path – search.

What is the only other service that users of Facebook probably leverage as much as their favorite Social Network? Google. Well, here is a crazy idea, why doesn’t Facebook use their massive currency to purchase a search engine? Piper Jaffray estimates that the value of the paid search market will be $33B in 5 years. If they land 10% of this market that would translate into roughly $3.3B in revenue. Not bad, right? With a little elbow grease (ok a lot), they could leverage social data to generate more relevant listings. Let’s take it a step further. What if they purchased a company that was good at contextual text matching? Remember how Google acquired a little company called Applied Semantics, that gave birth to a little thing called AdSense?

So here is the vision:

– Facebook cuts deals to expand user base to break 100M
– Facebook purchases search engine like Hakia, or Powerset
– Search engine interface is the first thing on Facebook.com
– They make a big hubaloo w/the press, maybe by flaunting a cool people-search tool
– Facebook drives growing audience to the newly integrated service
– They leverage their existing ad system to monetize this massive new inventory
– They purchase a contextual targeting engine
– FB leverages creates monetization platform that leverages context + social information to target ads
– After perfecting the technology inside FB, they launch an ad product for publishers to use outside of FB to compete with AdSense.
– This search engine becomes the number one people search engine and swiftly gains market share in the primary search market
– FB purchases a local service and couples their existing local community data with it to create a new FB Local Search
– Web 2.0 geeks start complaining that we have created a monster (again).

IMHO the secret is not in looking forward, it is by looking back and executing a solid M&A effort to dive into one of the largest markets on the web today – search. If I were running strategy for Mark, I would get some money from the piggy bank and go shopping – fast.

Anyway, if FB guys read this and end up pursuing my nutty plan, please don’t forget to send me a check. Chamath, you know how to reach me. 🙂

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hoomanradfar Written by:

  • So how would you "leverage social data to generate more relevant listings"?

  • Awesome question! Right now, Google leverages serves the most relevant text advertisements based solely on the context of a page. They determine this context based on natural language processing and key word matching techniques. So if you are on a page for a hip-hop management firm, you might see jobs in production in hip-hop. This is a great start.

    Facebook can take the next step past this. In other words, imagine if they took your personal information and used that as criteria to further filter the ad that gets matched to you. Let's expand on the example above. Let's say that now I know that you are from New York City and like Mr. Lif. The ad might be a promotion for an event that yields a higher eCPM. In short, if you combine the knowledge of the page context with context about the person, you can deliver advertisements with a higher relevancy.

    Clearly this is a high-level concept, but my gut says there is something there. Does that make sense?

  • Andrew

    I think in theory it is a good idea but i still think people liking a change within how they use the net will be key.

    FB is fantastic right now and last year but 08 will be a very telling time as this is usually where companies make or break (ie, when they try to monatise). FB are trying to do this but, to their annoyance, its public knowledge which could go against them

  • Right right… I get that you could serve up more relevant ads and in an environment (search) where I'm more likely to want to click on an ad but why am I going to use that search engine?

    How would you use the knowledge of who I am, what I like, who my friends are, and what they like to provide more realistic search results?

    Seems like Google has to be doing this already to some extent. They know an awful lot about me from the cadre of services that I use from them. Some of their services are becoming more social (Google Reader.)

    They know what I like… they know what my friends like. They'd have to be crazy to not use that to provide me with more relevant search results… right?

  • Chad

    You might want to edit slightly — it's "Powerset" and "http://www.powerset.com" — not plural. Otherwise you are just sending traffic to a domain squatter…

  • Chad, thanks for the heads up. I made the change. Btw, I am a big fan of your product/service vision! Keep up the good work.

  • Andrew, of course foundational methods to make managing your services and data in a social context is paramount. I am with you. I was just thinking that there might also be some meat and potato things they can do to. Appreciate the comment.

  • Pingback: How Is Facebook Worth $15 Billion? - The Unofficial Facebook Blog()

  • "In other words, imagine if they took your personal information and used that as criteria to further filter the ad that gets matched to you."

    Your personal info is how you pay for the "FREE" service of Facebook. As Facebook starts to rake in profits…do they owe the user anything for the "taking" of their personal information?

    If Facebook wants to add new users in a hurry, why don't they find a way to monetize…a way that will pay them and the users?

    Maybe this is far fetched.

  • I think that it would be great if FB took up your idea. That being said, Danny, they currently ARE optimizing their ads by doing exactly what you said – that is the basis for their current system. Make sense?

  • agreed that by acquiring/introducing more targeted search functionality, Facebook can likely increase monetization behavior, at least to some extent.

    whether it results in material changes in per-user / per-visit valuation remains to be seen. but i'd say it's a decent bet.

    i wrote some related stuff in a post about Facebook Monetization here:
    http://500hats.typepad.com/500blogs/2008/01/faceb

    regards & hope to see you at GSP hooman 🙂

    – dave

  • Dave, thanks for stopping by. I did read your post and it is pretty great. A couple folks actually emailed it to me as well.

    I will definitely catch you at the conference – you know I am a big fan.

  • We've been toying with an element of this search idea for a while. It's around "who is saying what about whom?" That triple gives you all kinds of ad targetting opportunities!
    We've just launched an enterprise version of this kind of sentiment analysis and plan on giving this more thought moving forward. Great post though.

  • I think that it would be great if FB took up your idea. your post just great !!!