Unless you’ve been out the last two weeks climbing Mt. Everest, sailing across the Atlantic or hiking in the Sahara, you’re probably aware that Facebook IPO’d today. For the last two weeks, the impending event has generated wall to wall media coverage, most of it speculating on what valuation the company will achieve and whether it is worth the money.
Given the parallels between them (prominence as an internet juggernaut, reliance on advertising revenue, and valuation of their IPO), comparing Facebook to Google has become the de facto way of evaluating Facebook’s prospects. This comparison can be boiled down to a single question: Can Facebook grow its ad revenue, currently $4B, as quickly as Google did?
This, however, is fundamentally the wrong question. If you try and value Facebook by comparing its ad revenue to Google’s you’re making a mistake.
The problem with comparing Facebook to Google as advertising platforms is that it’s an apples to oranges proposition…and it is a comparison that Facebook cannot win. Advertising is all about getting in front of qualified prospects at the right time. For decades, advertisers sought better and better ways to target their messages until they finally reached Nirvana in the form of Google. Every month, Google provides advertisers billions of opportunities to get their message in front of prospects at the exact moment prospects are shopping for the advertisers’ specific goods and services. Short of mind reading, it’s about as good as it gets.
In comparison, ads on Facebook are only loosely targeted. While an individual may be involved in a social interaction that is related a particular product or service, the odds are much, much lower that they are qualified and that they are currently shopping.
GM’s decision to pull its ads from Facebook this week offers a perfect example of the difference. For GM, advertising on Google gives the company the equivalent of dropping a dealership across the street from your house as you head out to shop for cars. Facebook places the dealership across the street from your house when your friend drops by to show you their new car – a car you may not be interested in and even if you are, are probably not currently shopping for.
Putting this comparison aside, there are still plenty of reasons why Facebook could be worth its lofty valuation. I’m still up in the air about whether Facebook is a good investment or whether it will follow in the footsteps of Groupon (Groupon is off 40% from its IPO price and has never closed higher than it did on its first day of trading). However, if it is a good investment, it’ll be because of what makes Facebook Facebook (like having a large chunk of the human race as users), not because it is the next Google.