For more than a year, Facebook has faced a rolling public relations debacle. Part of this is the American public’s shifting attitudes toward Big Tech and platforms in general. But the driving problem has been the way the platform was tied up with and perhaps implicated in Russia’s attempt to influence the 2016 presidential election. Users’ trust in the platform has been shaken, politicians are threatening scrutiny and possible regulation, and there’s even a campaign to get people to delete their Facebook accounts. All of this is widely known and we hear more about it every day. But most users, most people in tech and also Wall Street (which is the source of Facebook’s gargantuan valuation) don’t yet get the full picture. We know about Facebook’s reputational crisis. But people aren’t fully internalizing that the current crisis poses a potentially dire threat to Facebook’s core business model, its core advertising business.
Facebook is fundamentally an advertising business. Almost all of the company’s revenue comes from advertising that it targets with unparalleled efficiency to its billions of users. In a media world in which advertising rates face almost universal downward pressure, Facebook’s rates have consistently risen. Monopoly power may drive some of that growth. But the key driver is efficiency. If old-fashioned advertising shows my advertisement to 100 people for every actual buyer and other digital platforms show it to 30 people and Facebook shows it to 5 people, Facebook’s ads are just worth a lot more.
As long as the rates bear some relationship to that efficiency (those numbers above are just for illustration), I’ll be happy to pay it. Because it’s objectively worth more. Indeed, as the prices have gone up, Facebook has actually gotten more efficient. As one digital ad agency executive recently told me, even if Facebook jacked up the prices a lot more, his firm would likely keep using them just as much because on this cost to efficiency basis it’s still cheap. This is the basis of Facebook’s astronomical market capitalization which today rates at over $450 billion, even after some recent reverses.
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