How Advertising Works, and Why It Won't For Facebook
My Facebook posts showed me that a lot of people don’t understand the basic theory of advertising and some of its ramifications. I thought I’d explain it a bit here as it might help people understand.
What advertising all comes down to, in the end, is return on investment. How much does a company have to spend to make $1 in profit. If Budweiser spends $100 million in ads in a year, but those ads sell enough beer for them to make $200 million in profit, it was money well spent. If it nets them $30 million, it was a mistake. And there are many different types of ads, ranging from infomercials, which make money by calling you to act immediately, to frogs croaking your brand name, which make money by imprinting a brand into your subconscious, but they all have the same intention in the long run, which is to make the company money.
When corporations choose where to allocate their ad budgets, they look for the places that have the highest return on investment. Before the internet, this was a complex process. It was still doable, but it wasn’t as easy as just tracking who clicks what.
There are basically two factors advertisers consider when trying to guesstimate their ROI. First there’s reach, which is the total number of people who will see the ad. All other factors being equal, more distribution per dollar spent is better. And there’s engagement, which means, what percentage of people who see the ad will react to it. Figure out how many people will see your ad, what percentage of them will react to it, and how much you’ll make off of those that do, divide by the cost of the ad, and you now have an approximate ROI. It’s a little more complex than that of course, but that’s the basic principle.
Reach is pretty easy to determine. Magazines know their subscriber counts and typical newsstand sales. Television and radio stations pay ratings agencies like Neilsen to tell them how many people are watching their shows. Websites track page views. None of those are exact numbers, but they’re all close enough.
Engagement is much harder to figure out. There are a few tricks advertisers use there. One is demographics. If a beer company sells most of their product to 18-45 year old men, then they will do better advertising on fantasy sports sites or ESPN, which have high populations of young and middle aged men. A cosmetics company will do better with Lifetime or Desperate Housewives, because that’s what the people in their customers are watching. This isn’t a great way to go, as there are lots of 18-45 year old men who don’t drink beer, and men who don’t want cosmetics but watch Desperate Housewives. But on broadcast television, it’s about the best you’re going to get.
Another way advertisers evaluate ad slots is focus. Ford will do much better advertising on a car forum or an auto-themed show (because people tend to view these more when they’re in the market) than a food-themed show, even if both have the same demographics.
Focus is the reason that search advertising is so wildly successful. If you’re looking to sell Budweiser, what better way is there to reach customers than to show your ads to the guy who goes to Google and types in “beer”? You know every single one of them wants to know something about beer.
And this is why Facebook will never be Google. Facebook has reach. Not as much as Google (about 1/3 if you believe Alexa and don’t count YouTube) but they may actually get there. I don’t think they will, but I wouldn’t lay big odds against it. But even if they do, they don’t have focus. Google has both.
Facebook can do a little better than just blanket advertising. They have complete demographic information and targeting. It would be trivial for them to enable customers to advertise to 18-34 year old males. And they might be able to get some clue as to your interests by what you put into the site. But they’ll never know what you want right now, and Google always does.
Every Google query returns a website focused exactly on what you want to know right now. If I want to know something about my car, I could go to the maker’s website, or a specific forum. But even there, most of the content is about their other models because mine just one of a dozen. Or I can just Google my model number and get all the related content in the world.
It’s as focused as anything can ever get. It’s the theoretical limit. You can’t find an audience easier to sell Ford Focuses to than the people who Google for “Ford Focus” or “buy Ford Focus” or the like. You can’t find a group of people who need a lawyer specializing in Mesothelioma better than the people who Google for “Mesothelioma Laywer”. It has never existed, and will never exist in the future. That’s why Mesothelioma clicks were running in the hundreds of dollars at one point. The only way a website could better focus advertising is if it somehow knew what you wanted before you did, and that’s not on the horizon.
And Google’s reach is pretty high too. It’s essentially 70% of the people who use the internet, which over time (if their market share remains steady) will approach 70% of the population. That’s bigger than the Super Bowl. And since it’s hyper-focused (Budweiser doesn’t get the option of not paying to show its ads to teetotalers on television) even small businesses can advertise there at an affordable rate. You get the largest reach in the world but only pay for the small portion of it that wants what you’re selling.
So if Facebook wants to match Google they have a few avenues for doing so. They can expand their reach to one or more orders of magnitude larger than Google’s. If users see 10x the number of ads on Facebook that they do on Google, then each one only has to sell for 10% of the cost for Facebook to achieve the same revenue. Or they can try to become more of a utility (i.e. search) and somehow increase their focus by finding out what people want in real time.
Both of those are going to be very hard. The reach is obvious. They’re reaching saturation already and hitting a plateau, and they’re still nowhere near Google. It seems unlikely they’ll ever catch up, but even if they do, they won’t be ten Googles.
The focus issue is less obvious and is where the debate comes from. People seem to be of the impression that that is the benefit of having the “social graph” and that focus (and the ensuing monetization) cannot be far behind. But neither they nor their thousands of application developers seem to have figured this out at all. So far it’s just a theory with as little actual evidence or logic behind it as intelligent design or the existence of bigfoot.
There hasn’t even been the slightest hint that this will happen. Nobody has proposed anything other than vague “you’ll be able to see what movies your friends recommend” type ideas that already exist elsewhere and haven’t even come close to search. It’s all just Web 2.0, pie in the sky optimism.
But I think reality is slowly setting in. Because what we’re finding is that when people want something specific, they go to Google. When they want to kill time or just communicate with friends, they go to Facebook. And that isn’t changing.
And that’s why I think that despite the fact that the web developer community looks down their collective nose at MySpace, because of their crappy technology and appalling design, it’s the smarter site. MySpace realizes they are entertainment, and they’re building from there. They’re not sitting around waiting to make their ad space valuable, they’re going after the entertainment bucks.
They’re launching music features (they’ve embraced artists and other celebrities since their inception and it’s the reason they’re still much larger stateside) like karaoke and downloading. They bought Photobucket for photo sharing. And I think we’re going to see them push hard into gaming, movies, and other entertainment areas, especially once their platform is fully baked. They’re going to use that to capitalize on the throngs of people wanting to waste time while Facebook sits around scratching their heads trying to figure out how to squeeze blood from a turnip. MySpace will be collecting gold while Facebook is trying to turn lead into it.