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The Marketer’s Guide to Facebook

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Marketer's Guide to Facebook

The Marketer’s Guide to Facebook

Written by Dillon Baker
Image by Vetra Kori
DECEMBER 4TH, 2015

https://contently.docalytics.com/v/contently-ultimate-guide-to-facebook

And read this:

THE FACEBOOK EPOCH

I’m fond of saying that few companies are as underrated as Facebook is, especially in Silicon Valley. Admittedly, it seems strange to say such a thing about a $245 billion company with a trailing 12-month P/E ratio of 88, but that is Wall Street sentiment; in the tech bubble many seem to simply assume the company is ever on the brink of teetering “just like MySpace”, never mind the fact that the social network pioneer barely broke 100 million registered users, less than 10% of the number ofactive users Facebook attracted in a single day late last month. Or, as more sober minds may argue, sure, Facebook looks unstoppable today, but then again, Google looked unstoppable ten years ago when social seemingly came out of nowhere: surely the Facebook killer is imminent!

Actually, I don’t think so: I believe the Age of Facebook has only just begun, and to truly understand why, you have to start with Microsoft back in the 80s.

THE PC AND INTERNET EPOCHS

I wrote last year in The State of Consumer Technology at the End of 2014 that there have been three epochs in consumer technology: the PC, the Internet, and Mobile. It’s important to note, though, that the PC and Internet epochs are interrelated. Specifically, the latter was built on top of the former.

In the case of the PC, Microsoft’s dominance was captured by their iconic mission statement: A computer on every desk and in every home, running Microsoft software. And they succeeded! Moreover, those computers didn’t just run Microsoft software, they also supported an entire ecosystem of 3rd party software developers, systems integrators, OEMs, and more. Windows was a true platform: the company made billions, but, as their executives bragged repeatedly, that number was only a fraction (usually about a quarter) of the money generated by the ecosystem as a whole.

The consumer Internet was a part of this ecosystem: through the 90s and into the 00s all of those desks and houses added first dial-up and then, more importantly, broadband connections to the Internet, setting the stage for Google, the winner of the second epoch. The Internet was infinitely vast, but Google search, by virtue of relying on links — the very structure of the web itself — not only scaled with the web but actually became stronger and more effective the larger the web became.

Still, Google’s dominance was gated by the platform it operated on top of. This limitation had two forms: the first was the total number of PCs, the active number of which is measured in the hundreds of millions, and the second was the way in which users interacted with their PCs: with intent. People use PCs because they have a reason to use them, and Google’s traditional focus on search advertising is a particularly good fit in that regard: search ads are so valuable to advertisers precisely because the user’s intent is known.

It may seem odd to view either of these as limitations, particularly a decade ago when, per my observation above, many assumed the company would rule the Internet forever. But, over the last several years, two things have happened to make Google’s natural habitat of the web seem likerelatively small potatoes.

ANDROID AND THE MOBILE EPOCH

The third epoch, as I noted, is mobile. But rather than being measured in the hundreds of millions, mobile users are measured in the billions. And, to Google’s credit, they saw mobile’s importance far earlier than their Internet peers: the company bought Android in 2005, and even more impressively, pivoted the entire project away from the Blackberry imitator it was originally designed to be into an iPhone alternative. And, in what was a masterstroke at the time, the company made it free, helping to assure its adoption by OEMs desperate to compete with Apple and, over time, jump starting an ecosystem that in user numbers dwarfs even Microsoft’s.

I have said and continue to think that making Android free was one of the smartest strategic moves any tech company has ever made. As Bill Gurley noted in a prescient 2011 post:

AdWords is an highly respectable castle, and Google would clearly want to put a “unbreachable moat” around it. Warren himself is on record suggesting that Google’s moat is pretty good already. But where could you extend the moat? What are the potential threats to Google’s castle? Basically, any product that stands between the user and Google and has the potential to distract the choice of search destination is a threat…

Android, as well as Chrome and Chrome OS for that matter, are not “products” in the classic business sense. They have no plan to become their own “economic castles.” Rather they are very expensive and very aggressive “moats,” funded by the height and magnitude of Google’s castle. Google’s aim is defensive not offensive. They are not trying to make a profit on Android or Chrome. They want to take any layer that lives between themselves and the consumer and make it free (or even less than free). Because these layers are basically software products with no variable costs, this is a very viable defensive strategy. In essence, they are not just building a moat; Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it. And best I can tell, they are doing a damn good job of it.

It’s only now that the downside of this approach is coming into focus for Google: its scorched earth Android strategy prevented anyone from making Microsoft-type money from Android the platform — and “anyone” includes Google. Even that would be ok, though, were Google to replicate its PC-era positioning as the front-door to the Internet, but that is how we get to Facebook.

THE MOBILE MARKET

Before he moved his blogging to Twitter, Marc Andreessen wrote a post on Product/Market Fit. Of those three words, though, the one that matters more than anything is market. Andreessen wrote:

If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team…On the other hand, if you ask engineers, many will say product. This is a product business, startups invent products, customers buy and use the products…Personally, I’ll take the third position — I’ll assert that market is the most important factor in a startup’s success or failure.

Why?

In a great market — a market with lots of real potential customers — the market pulls product out of the startup. The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along. The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product. In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy. And when you have a great market, the team is remarkably easy to upgrade on the fly.

Mobile is a great market. It is the greatest market the tech industry, or any industry for that matter, has ever seen, and the reason why is best seen by contrasting mobile with the PC: first, while PCs were on every desk and in every home, mobile is in every pocket of a huge percentage of the world’s population. The sheer numbers triple or quadruple the size, and the separation is increasing. Secondly, though, while using a PC required intent, the use of mobile devices occupies all of the available time around intent. It is only when we’re doing something specific that we aren’t using our phones, and the empty spaces of our lives are far greater than anyone imagined.

Into this void — this massive market, both in terms of numbers and available time — came the perfect product: a means of following, communicating, and interacting with our friends and family. And, while we use a PC with intent, what we humans most want to do with our free time is connect with other humans: as Aristotle long ago observed, “Man is by nature a social animal.” It turned out Facebook was most people’s natural habitat, and by most people I mean those billions using mobile.

FACEBOOK’S ALIGNED ADVERTISING

Keep in mind the second part of Google’s dominance: it wasn’t simply that they were the front-door to the Internet, but also that their business model, search ads specifically, was perfectly aligned with how PCs were used — with intent. That allowed Google to gradually come to dominate direct response advertising, which is all about generating immediate sales or leads. Direct response advertising, though, is only between 10 to 15 percent of all advertising; as I noted in Peak Google, far more money is spent on brand advertising:

The idea behind brand advertising is to build “affinity” among potential customers. For example, a company like Unilever will spend a lot of money to promote Axe or Dove, but the intent is not to make you order deodorant via e-commerce. Rather, when you’re rushing through the supermarket and just need to grab something, the idea is that you’ll gravitate to the brand you have developed an affinity for. And once a customer has picked a brand, they’re loyal for years. That adds up to a lot of lifetime value, which is why consumer-packaged goods companies, telecom companies, car companies, etc. are among the biggest brand advertisers.

Brand advertising is a bit of a mysterious thing — the biggest sign that it works is that when companies don’t invest in it sales suffer — but at its core it is about engaging potential customers in the empty spaces when they aren’t too focused on any one thing, and thus more receptive to formation of subconscious affinities. There have traditionally been few better places to do brand advertising than TV: it offers a captive audience at scale that is in a laid back state of mind, not an active one. Advertising on TV, though, is in serious trouble: first came DVRs, and then subscription services, and, perhaps more importantly, that device in your pocket ever tempting you to do what is most natural: connect to others.

To be clear, all of the brand advertising money on TV will go somewhere; the U.S. has had about the same amount of advertising — between 1.1% and 1.4% of GDP — for as long as we’ve been measuring. And, what better place for that advertising to go than to an app that, more than any other, fills the empty spaces in people’s days?

To be sure, people don’t only use Facebook: Instagram is hugely popular, as is messaging. And, unsurprisingly Facebook has acquired the former and the biggest player in the latter (WhatsApp); I say “unsurprisingly” because here Facebook is following Google’s playbook as well: the former nailed search, but “borrowed” the concept for AdWords from Overture, acquired Applied Semantics to create AdSense, acquired YouTube, and, as noted above, Android. The company has a brilliant acquisition record (Motorola notwithstanding), and, in my estimation, created a model that ought to be followed: get your core right and acquire what you need to augment it. Facebook is doing the exact same thing.

WHY FACEBOOK IS UNDERRATED

This, then, is why I think Facebook is underrated: a company’s potential is first and foremost measured by its market, and Facebook’s potential market is, when you consider both sheer numbers and time spent, an order of magnitude greater than the PC-based Internet market ever was. Then, on top of that, you increasingly have brand advertising dollars — also an order of magnitude more than direct response dollars — looking for somewhere to go other than TV, and it just so happens that Facebook is the perfect brand advertising platform.

The company has the right set of products in the right market at the right time.Notice that I have barely touched on the product or team at all, because, as Andreessen noted, market matters most. But Facebook is in very good shape on those two points as well; while I get that many in tech don’t use Facebook much — how many of us spent our younger years trying to get away from friends and family? — it is dominant for the vast majority of the population, and not just in the U.S.: here in Asia the app is used for not only friends and family but also professional connections, business pages, and even e-commerce (I don’t think it’s a coincidence that Asia also happens to be mobile first to a far greater degree than the U.S. as well). More impressively, no matter Facebook’s alleged struggles with youth, the reality is the company is part of the fabric of the Internet: you may not like email, but you have an email address, and you could say a similar thing about Facebook. If anything the fact some don’t like the product yet use it anyway is a testament to just how strong it is. And for everyone else there is Instagram and Messenger (or, in the developing world, WhatsApp).

To be sure, Facebook won’t completely own the market: I’m bullish on Snapchat, for one, and Google is probably best placed to harvest whatever advertising money is left to be made on the web. But at least to this point Facebook has given no indication that they won’t own a big chunk of this massive market opportunity: their team’s disciplined execution, led by Mark Zuckerberg, is among the most impressive I’ve ever seen.

FACEBOOK AND THE PLATFORM SIREN CALL

There is one more curious acquisition Facebook has made, and that is Oculus Rift. Zuckerberg said at the time:

Our mission is to make the world more open and connected. For the past few years, this has mostly meant building mobile apps that help you share with the people you care about. We have a lot more to do on mobile, but at this point we feel we’re in a position where we can start focusing on what platforms will come next to enable even more useful, entertaining and personal experiences.

I’ve long argued that the shift to mobile gave Facebook no choice but to abandon its platform pretensions, and that it was the best possible thing that could have happened to the company. To be an ad company is inherently incompatible with being a platform company: the latter requires letting others share the spotlight — the same spotlight you want to sell to advertisers. Indeed, Google on the Internet has never been a platform either.

Platforms, though, are tech’s most potent siren call. All companies — and perhaps more accurately, all founders — wish to build a dominant one, but their construction is the most difficult endeavor in the industry. Windows remains the ideal: Microsoft made billions, and crucially, so did everyone else.Apple is making even more than Microsoft ever did — see the bit about the size of the mobile market above — but perhaps not doing as good a job as they could sharing the proceeds with their ecosystem. Google, meanwhile, has their platform, but barely anything to show for it from a profit perspective, at least directly. And now, perhaps, Facebook has the seeds of their own platform: the company has learned so much from Google, to their immense benefit; it will be fascinating to see what lessons they end up applying to Oculus.

Not that it matters for now, anyways: the truth is my list of epochs was incomplete: first came the PC, and on top of the PC was the Internet. Now we are on the mobile era, and on top of mobile is, well, Facebook. They are their own epoch, a reality that cannot be underrated.

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