What is Facebook?
It seems like an easy enough question to answer, doesn't it? If you ask the co-founder, chairman and chief executive officer, Mark Zuckerberg, he's likely to tell you that it's a platform which hopes to connect the world in a much more open way. If you ask the average person on the street, he'll probably tell you that it's an online place to connect with friends. If you ask a nerd like me, you'll hear the words "online social network" or "social media channel" bandied around. None of those are wrong answers, but none of those are tied to any semblance of a business objective.
We're looking for the business of Facebook.
Apple sells computers, iPhones and iPads. Ford sells cars, vans and trucks. Lululemon sells yoga clothing and gear. What does Facebook sell? You could say advertising. They sell advertising to the tune of several billions of dollars each and every year. If we lay that business model against other companies that sell advertising (think newspapers, magazines, TV shows, radio stations and online channels like the Huffington Post, etc.), we wind up in one place: Facebook is a media company. Is that how the C-level suite of Facebook would define themselves? If Facebook is a media company, we then have to ask ourselves: What kind of media channel does Facebook provide and how does it compare to those other media channels?
This is where we start getting into trouble.
The current woes of Facebook's IPO are being driven by business people who are lumping Facebook into every other media channel and comparing it -- in terms of advertising revenue performance -- to them. Why are we trying to make Facebook be like every other media business? Well, with over 900 million people connected on it, we have a mass audience of eyeballs that are primed for marketing and media messages because they spend so much time on Facebook staring at pictures of people they swore they would never want to see again after high school. The problem with this business model diagnosis is that the average Facebook user probably doesn't believe that she is on a media page, does she? The average Facebook user has about 120 connections. He's not on Facebook to read the news, watch a funny music video or edit a piece of content. He's on Facebook to share personal information with either people that he knows or people that he wants to know. A brand's ability to get a message through to an individual with such a small amount of connections is challenging, to say the least. Facebook is a very personal experience for most users.
The business of Facebook is still -- for the most part -- undefined.
Two weeks ago, at the Canadian Marketing Association's Annual Summit 2012, Jordan Banks (head of Facebook in Canada) started off his presentation by saying that Facebook has accomplished only one per cent of what it has set out to do, and that because of its massive user base, it will do some things right and some things wrong moving forward. The context of that quote wasn't so much aimed towards product and future developments, but to the business of Facebook. What this means is that it's hard to say what the value of a Facebook stock should truly be worth, because the company has not clearly put a stake in the ground to define its own business model yet. So, if the only measurement we're using to define the value and business of Facebook is the advertising revenue that it's currently pulling in, we will probably be very far off the mark when it comes to a true valuation. The problem is we have no way of knowing if that true valuation is way more than what the stock is currently trading at, or if the net result of Facebook pushing beyond that one per cent of where they're at will take it to a place that doesn't show any real semblance of a business model.
Is that even possible?
It is. This doesn't mean that Facebook is bad. It just means that one billion people sharing their interests between friends may not be the most exciting IPO in the history of business. Nor does it mean that there are hundreds of billions of dollars at play. It may, ultimately, just mean that Facebook is a place that connects the world in a much more open way. Nothing more. Nothing less. Until Facebook figures out how that becomes a serious business, brands may be best suited to figure out how to be relevant enough in a way that speaks to a social graph with one hundred and twenty connections, instead of figuring out how to make Facebook so generic that it can be advertised on as if it were the website for the New York Times.