For all its valuation, the
social network is just another ad-supported site. Without an
earth-changing idea, it will collapse and take down the Web.
Facebook not only is on course to go bust but will take the rest of the ad-supported Web with it.
Given its vast cash reserves and the glacial pace of business
reckonings, this assertion will sound exaggerated. But that doesn't mean
it isn't true.
At the heart of the Internet business is one of the great business
fallacies of our time: that the Web, with all its targeting abilities,
can be a more efficient, and hence more profitable, advertising medium
than traditional media. Facebook, with its 900 million users, its valuation of
around $60 billion (as of early June), and a business derived primarily
from fairly traditional online advertising, is now at the heart of the
heart of this fallacy.
The daily and stubborn reality for everybody building businesses on
the strength of Web advertising is that the value of digital ads
decreases every quarter, a consequence of their simultaneous
ineffectiveness and efficiency. The nature of people's behavior on the
Web and of how they interact with advertising, as well as the character
of those ads themselves and their inability to command attention, has
meant a marked decline in advertising's impact.
At the same time, network technology allows advertisers to more
precisely locate and assemble audiences outside of branded channels.
Instead of having to go to CNN for your audience, a generic CNN-like
audience can be assembled outside CNN's walls and without the CNN-brand
markup. This has resulted in the now famous and cruelly accurate
formulation that $10 of offline advertising becomes $1 online.
I don't know anyone in the ad-supported Web business who isn't
engaged in a relentless, demoralizing, no-exit operation to realign
costs with falling per-user revenues, or who isn't manically inflating
traffic to compensate for ever-lower per-user value. Continue at Michael Wolff
