Facebook’s Business Model

Before you go out and buy that Facebook stock when it IPOs today, consider the warnings. There are plenty of opinions out there. But the best consideration of the whole matter I have read in the last two weeks comes courtesy of Chris Dixon, who considers Facebook’s business model. Namely: display ads. Display ads generally hurt the user experience, and are also not very efficient at producing revenues. The crux of the matter:

The key question when trying to value Facebook’s stock is: can they find another business model that generates significantly more revenue per user without hurting the user experience? (And can they do that in an increasingly mobile world where display ads have been even less effective.) Perhaps that business model is sponsored feed entries, as Facebook seems to be hoping (along with Twitter and perhaps Tumblr). The jury is still out on that model. Personally, I have trouble seeing how insertions into the feeds aren’t just more prominent display ads. You still have to stoke demand and convert people from non-purchasing to purchasing intents. A more likely outcome is that Facebook uses their assets – a vast number of extremely engaged users, it’s social graph, Facebook Connect – to monetize through another business model. If they do that, the company is probably worth a lot more than the expected $100B IPO valuation. If they don’t, it’s probably worth a lot less.

Chris’s short post is worth reading in entirety.

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