SL has over 1.4 m Facebook users

Yesterday, I got the opportunity to attend the much-discussed and oversold event of the Chartered Institute of Marketing Conference on ‘Digital Media’. Sponsored by the Daily FT, some amazing insights were shared at the event.

I realised that being on just one platform in a brand communication strategy was not enough. It had to be a multipronged internet platform strategy given that only on FB there are 1.4 million users. Given the penetration of mobile phones at 18 million, I guess the future communication strategy of a brand will have to be internet-based mobile applications. While we still rely on traditional media, it’s time that we understand the value of brands like FB. Let me do a deep dive into brand FB.

FB: One billion globally

Facebook is currently the leading social network site in the world in the internet industry and is touching almost a billion subscribers, which means one sixth of the world can be reached by Mark Zuckerberg. Its mission is to “make the world more open and connected” and it helps users to stay connected with friends, families, and colleagues, and basically any person, and via Facebook they can share their opinions, ideas, photos, and other activities.

Facebook provides a variety of features, which are free of charge to its users, such as Timeline, News Feed, Photos, Videos, Messages (email, chat, text messaging), Groups, Lists, Events, Places, Subscribes, Ticker, Notifications, and Facebook pages. Facebook had approximately 845 million monthly active users by end 2011. Information gathered from the site states the following figures:

n100 billion friendships, 250 million photos uploaded every day

n2.7 billion likes and comments per day and more than 425 million MAUs (nearly half of total MAUs used Facebook products on mobile)

Facebook offers advertisers to include social context in their ads. Businesses and organisations also can create Facebook pages to interact with potential customers. As cited in the websites reviewed, by the end of 2011, more than seven million apps and websites had been integrated with Facebook. As mentioned above, advertising is the key source of revenue for Facebook and it is said to be increasing consistently. Payment revenues have increased from 2% in 2009 to 15% in 2011. Their advertising revenue had contributed 85-90% to the total revenue in 2012.

FB fiasco?

Facebook, Inc. was founded in 2004 in Cambridge, Massachusetts, United States (an American multinational company) by Mark Zuckerberg and Eduardo Saverin, in the industry of internet. Initially they served the area of United States and then expanded worldwide. Their product is social networking services. It was initially privately owned by Mark Zuckerberg and other founders. The shared ownership was contested and they went for an initial public offering on 1 February 2012. Their company information that was flashed was as follows:

Most of the Facebook revenue is generated from advertising. Facebook filed for a $ 5 billion IPO, making it one of the biggest in tech history and the biggest in internet history. They have valued its stock at $ 38 a share, pricing the company at $ 104 billion, the largest valuation to date. The IPO has raised $ 16 billion, making it the third largest in US history. However, Facebook’s IPO is said to be under investigation. It is also under a class-action lawsuit due to trading glitches which had prevented investors from selling the stock, forcing them to incur bigger losses on trading the shares. Additional lawsuits are ongoing for revealing adjusted earnings estimates to preferred clients, and the remaining underwriters and Facebook’s CEO and Board are also facing litigation. By the end of May 2012, the stock has lost over a quarter of its starting value, which has led to the Wall Street Journal calling the IPO a “fiasco”.

Comparing the brand value of 2012 against 2011, it has increased. The comparative enterprise value is not stable as it has gone down from 64.78 billion in June to 44.46 billion in September in 2012. However, it has increased from 2012 to 2013 up to 59.67 billion.

From 2007 to 2009 there was a tremendous increase in sales growth but it has started to decrease from 2010 and further in 2011 to 87.99%. In the same manner the pre-tax income growth has the similar trend. It has increased tremendously in 2008 and 2009 at 553.57% but has started to decrease in 2010 at 296.85% and in 2011 at 68.15%.

Therefore, on the overall analysis of the sales revenues and pre-tax income, thought it has increased majorly from 2007 to 2009, from 2010 onwards it has decreased in growth and ratios in both aspects. The revenue growth is said to have decreased in 2012 as against the figures in 2011.

However, it is noteworthy that even though the sales revenue and pre-tax income has grown first and then decreased, it is now again on the rise and the impact of these on the brand value is almost to none, as the brand value in fact has grown from 2011 to 2012 from 3.6 billion to 8.7 billion. Furthermore, ‘Brand Rating’ on Brand Finance shows a significant improvement. It has jumped to AAA from A, i.e., Facebook has a high awareness and strong metrics around user emotion.

However, Brand Finance has not given an enterprise value for Facebook. They argue that revenue achievement is not compatible enough to justify the high awareness and user loyalty to generate revenue from the brand of Facebook.

Share price

The share price is also on the decrease as per the current trend analysed. In 2013, it has started to pick up. However, it is still below the initial offering price. This shows us that there is no significant relationship with brand value and share prices.

Facebook’s IPO has been estimated at US$ 75-100 million and their website has 845 million monthly active users as stated above. This is said to be more than the population of Europe and a valuation higher than the Gross Domestic Product of Luxembourg. Therefore, one main question is then, why did Brand Finance value Facebook’s brand under US$ 10 billion or to be exact less than 15% of the enterprise (company) value?

After all, a brand does not become valuable just because it has so many users that it may be even equal to a population of a continent or even a country. It becomes valuable because it can derive revenue. It is true that 250 million photos can and are uploaded to Facebook per day. But this does not mean that their (Facebook) brand is capable of increasing revenues and furthermore, that they could sustain their business model.

Future of FB

The revenue model Facebook uses is an old internet business model: display ads (these are believed to hurt the user experience and aren’t very efficient in generating revenue). The business model of Facebook is creating a platform to connect each other. However, when Facebook tried to monetise the user engagement, it badly affected users’ privacy. There are several privacy failures in Facebook history which have discouraged user engagement.

Facebook makes about 1/10th of Google’s revenues. In analysis of the strategic brand management perspective, Facebook shows excellent brand management for users but not in terms of customers who generate revenue for the company. Facebook users are not customers. This creates a huge conflict in implementing revenue growth strategies for the company and in creating user engagement. The analysis of the relationship between brand value, enterprise value, revenue, profits, advertising spend, and share prices clearly shows that brand rating has gone up with the increase of the awareness and loyalty from Facebook users. But revenue and enterprise values are not justifiable when compared to the awareness level of the brand. Furthermore, the brand value is also less when compared to other brands, such as Apple, Google, etc.

The share price has no relationship with brand popularity. Many internal and industry happenings affected the share price and brought the share price down due to false valuations, employees and investors selling their shares, GM withdrawal on advertising, privacy policy changes and drop of user engagement, etc. Furthermore, arguments are arising that this is the mature age of Facebook as a social media platform and 2020 will be the decline for this business. However, where stock price is concerned, the main question is, can they generate more revenue from this business model? And will it work? If Facebook can use its major asset – the vast number of extremely engaged users – then they may be able to do this and in that case, then, the company may be worth more than this, but if not, they may be worth a lot less than this.

Conclusion

FB should use the asset in developing their business model and it should have a strategy to generate revenue from this base as well as new users/business, individuals and corporates. Google makes most of its revenue when people search for something to buy. But Google users are searching a specific item with an intention to buy. In contrast, Facebook users use Facebook to generally socialise. This is why the ads become ineffective.

Another concern to note is the ever-increasing mobile applications where display ads are less

effective. Therefore, adapting the current business model in line with the changing mobile world and user requirements or adopting a new separate business strategy focused on generating revenue is recommended for Facebook, Inc. This strategy should focus on creating separate marketing plans for acquisition and retention efforts.

(The author is an award winning marketer of the Chartered Institute of Marketing and a Fellow Member, Chartered Marketer. He is a Board Director on many public and private sector organisations. The thoughts are strictly his personal views and not the views of the organisations he serves in Sri Lanka or globally.)