With all the recent chatter about the FTC’s Do Not Track proposal, I thought it might be interesting to contrast business models that show us better ads against those that don’t show us ads at all. If a web service chooses not to deliver high-value ads through targeted tracking, it needs to get its revenue from somewhere — most likely our wallet. So, with all the swirl around Facebook, let’s use them as a case study.
Looking beyond Facebook’s current (arguably) speculative arc, they will eventually need $28B in revenues to justify a valuation of $56B (assuming operating margins of 20% and a typical valuation of 10 times earnings). That’s $4.67 per active user per month across its 500M active users.
Facebook is working to make the bulk of that $28B from advertising. The bad news is that advertising revenues are not easy to come by. Compared to Google’s click-through-rate (CTR) of 1-2%, Facebook’s CTR of 0.04% looks pretty anemic.
Google converts well because we’re searching for stuff (duh), and we help Google figure out what we want with our search terms. It’s not a big leap for us to move that cursor from Google’s organic search results on the left to the paid advertisements on the right. Compare this with social networking where we’re not searching but socializing — chatting, liking, updating, messaging.
The Facebook/Google CTR chasm has to be creating pressure on Facebook from their advertisers to better target their ads so we’ll click them more often. Unfortunately for us, a good way to increase an ad’s CTR is to target the ad using information we might consider private — like the sites we’ve visited, what we’ve Liked, our friends list, our interests, or where we’ve recently checked-in. I think a big reason for Facebook’s history of privacy missteps stems from this tension between user expectation of privacy and the business need for revenue.
The good news is that there really is a simple solution to Facebook’s privacy/revenue dilemma. Give us a Track Me or Charge Me option. We, the users, decide to be charged $5/month or to be tracked so the ads served to us net Facebook $5/month.
The Track Me or Charge Me model gives Facebook a reason to renegotiate their deal with us on how our data is used and relieves the growing political pressure for federal regulation and legislation. And with Facebook’s pending e-commerce platform, the infrastructure to charge customers shouldn’t be too tough for Facebook to support.
Track Me or Charge Me — seems like a good New Year’s resolution on how to get off the online free lunch we’ve been enjoying and, at the same time, empower us on how we’d like to pay for the best online services.