In light of Facebook’s disappointing IPO, I'll pull up an article I wrote in February, which said, “... social networks have always been poor at monetizing their traffic, and that hasn’t changed since they gain popularity. Click-thru rates for ads on social networks have always been really low, so they can’t charge nearly as much as Google per pageview. That hasn’t changed since social networks entered the internet landscape and won’t change in the future.”
I didn’t include any figures at the time because I couldn’t find any. I just knew that it was similar to the click-through rates on message boards, which I remembered - from my days monitoring the forums at Rotten Tomatoes - was pretty low. When I was still at Rotten Tomatoes, we didn’t charge our advertisers for ads on the forums. We just gave it to them for FREE as a value-added service. We were afraid it would drag down the click-through rate of the entire site, which meant we would have to charge a lot less per ad shown - or worst, scare off potential advertisers. We’ve had instances when an advertiser would cancel a campaign because our click-through rate wasn’t as high as another site they were running the same campaign on.
So what are those frightful click-through rates for Facebook? According to Webtrends, it’s 0.05 percent, half of the industry average of 0.1 percent. Their ads are only half as effective as the average site. If they’re charging by the number of ads shown and they’re charging as much as non-social sites, then it’s just a matter of time before advertisers realize that the money they’re spending on Facebook are better spent elsewhere. If Facebook is strictly charging by clicks, then they just have to match what others, like Google, are charging per click. The only problem with that is because they’re only half as effective, they can’t make nearly as much as Google from the same number of users.
I don’t see click-through rates improving much for Facebook in the future. Interactive products like chats, message boards, and social networks have never been good with click-throughs. They can tweak to their heart's content, but I don’t see it improving. Chats and message boards have been around way before social networks, and none of them have figured it out. It’s just a fact of life that they’ll have to live with.
That’s kinda scary because 80%-85% of the revenue on the internet is generated by advertising. What determines what a site can charge for ads is the click-through rate, and Facebook’s click-through rate is way below average. That’s why even though the two companies have about the same number of users in the U.S., Google earns $37B a year while Facebook could only manage to do $3.7B, one HUGE decimal off.
Facebook's valuation at the time of its IPO was around $100B. Now, it's around $70B, that's a 30% drop. People who bought shares on the day of its IPO and kept them lost a decent chunk of money. Don't say I didn't warn you.
Still, Facebook founders, employees, and pre-ipo investors are huge winners. It is a great, great product and almost everyone uses it. It's just not all that it's hyped up to be, that's all.