Facebook HQ

Facebook profits leaped 166% in the latest quarter, compared to a year ago. Shares fell on the news. Why?

During the height of the dotcom boom of the late 1990s, a new company announced a plan to enable users to receive a fee every time they visited a web-site. The CEO was interviewed at the time and he said words to the effect that the day when ‘web-sites can receive visitors and not pay for the privilege is over.’

Facebook has released its latest results and they were very impressive indeed, yet shares fell. It is possible that the company may be set to hit major hurdles in its efforts to grow. The lesson from the late 1990s may be the key.

Back in the late 1990s, online advertising was receiving a lot of hype, although spending on online advertising was tiny compared to more traditional forms of advertising. But given that the marginal cost of operating a web-site is zero – or virtually zero – the argument went that publishers of web-sites should share that ad revenue with visitors.

Then the dotcom bust happened, and that idea got consigned to the dustbin.

These days the story of online advertising is quite different and for a reason that, for all its hype, the narrative of the late 1990s boom didn’t see coming. Online advertising is about targeting, and it ties in with the discipline called marketing science. Thanks to Google and Facebook, it is now possible to target an ad with a degree of accuracy once thought impossible. Everybody else, the publishers, big and small, are left to fight over the scraps.

In the online advertising business, Google and Facebook are the lions, the publishers, for all the money they throw at producing content, are like hyenas, – they can laugh at their fate, but a credible case can be made for saying that the current way of distributing ad revenue is not in the interests of readers.

And to illustrate this, consider the desperation that has led some publishers to fall to new lows – ads that are so pervasive that it is quite hard to read the article they accompany. Or you get the click bait, you know the kind of thing: ‘you won’t believe the names of celebrities who have had close encounters with aliens.’ And then you try to read the article, and you find it is about nothing, and in any case, you keep clicking on ads, by mistake.

This is the direct consequence of the apparently unstoppable rise of Google and Facebook.

Facebook made a profit of $2.4 billion in its latest quarter, a mere 166% up on the same quarter last year. Advertisements viewed by users while on their smartphones or tablets accounted for 84% of ad revenue.

But Facebook warned that growth in ad revenue is expected to fall next year and that there would be fewer ads.

There is a suspicion that we are reaching the point when users are in danger of being turned off by the volume of advertising.

But actually, for Facebook, the big driver of ad revenue lies with data, the more it knows about us, the higher the premium on its advertising. There are limits, and the spat this week between Facebook and Admiral illustrates this. The insurance company wanted to charge different rates for car insurance depending on what it knew about insurance applicants from their Facebook activity. But Facebook, with half an eye on public perception and another half an eye on regulators, put the kybosh on that plan.

Even so, big data is valuable, and Facebook is only ever going to get better at collecting it.

Until, that is, you consider who the big data belongs to. The sharing economy is about people being able to generate an income from assets they already own. Why should social media companies generate revenue from our data – should that not belong to us?

The hotel industry hates Airbnb, the taxi firms hate Uber. Regulators seem to be with the hoteliers and the taxi companies. But what happens when the sharing economy threatens to disrupt Silicon Valley firms?

Maybe the day when social media sites can receive visits, gain lots of information, and not pay for the privilege, is over. A social media company that has, at its ethos, sharing its revenue from data with its users – a kind of cooperative social media – could yet prove to be the force for disruption in this business.