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Is there life after ads for St Zuck?

Facebook credits, and what they might buy

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Analysis As we reported today, the third-largest advertiser in the United States says it's going to stop advertising on Facebook, citing lack of engagement. General Motors is taking the $10m it spunks on Facebook ads somewhere else. This is a tiny proportion of GM's $1.1bn annual advertising budget, but it's hardly a vote of confidence from major brands in boy-child St Zuck's burgeoning global empire.

More ominously, Facebook's quarter-on-quarter revenue actually fell this year, reflecting a global slowdown. Quite soon Zuck will be rich enough not to care, but perhaps he should drop GM's CEO a thank-you note. If anything, it reminds us that advertising isn't really the success Facebook wants you to think it is. Fortunately, there's quite a lot else it can do.

Zuckerberg has a long history of over-promising and under-delivering to advertisers. Hark back to 2007 when Zuck began what he promised was the next 100 years of advertising.

"For the last 100 years media has been pushed out to people, but now marketers are going to be a part of the conversation. And they're going to do this by using the social graph in the same way our users do," he vowed. Yet the Tupperware Party-style social ads he introduced that day failed to lift off, and the notorious 'Beacon' tracking program was hurriedly withdrawn. Last year Facebook injected 'Sponsored Stories' into news feeds – which is rather less revolutionary.

Analysts STL Partners recently cast doubt that Sponsored Stories "will ever become a large revenue generator and we expect that they run the risk of becoming 'Spam' and having negative value to the user experience". According to the analysts' models, the flotation hype seriously overvalues Facebook; they say a valuation closer to $30bn is more realistic.

But despite its modest advertising take, Facebook does have other options. And while there's an element of risk attached, these could be far more lucrative in the long run than ads.

Facebook takes a hefty commission on its own virtual currency, currently used by games developers. The credit commissions contributed almost one-third to Facebook's $1.5bn revenue last year. Currently games developers like Zynga generate almost no margin and Facebook takes a swingeing 30 per cent commission. The Zyngas are simply happy for the exposure.

But with Facebook already hogging a lot of the time people spend online – 405 minutes per US user per month – it's in a prime position to capitalise on this audience. It can start to think about sending higher value products through its credit system, such as TV or movies. The disadvantage to this for Facebook is that it couldn't drive such a hard bargain with experienced rights-holders in the same way it does with games start-ups. The producers of popular shows know the value of their product, and are unwilling to give it away for peanuts.

Recently BSkyB spent £5 per viewer to take the latest series of AMC's Mad Men. AMC didn't so much care that far fewer people watched the show on Sky rather than the BBC, but were happy with the outcome. It isn't difficult to imagine that it could outbid Sky and show it as a web pay-per-view, using Facebook credits. The disadvantage for Facebook is that it couldn't demand the 30 per cent commission – the percentage would have to be much lower.

Another area where the social network could expand its credits revenue is telephony, and that's a natural area for Facebook, given that it's become the most popular 'contacts book' in the world. Telephony is simply another form of messaging, which has been in Facebook from the start.

There are several Over-The-Top players nibbling at the old telcos today, but of these, only Skype is a household name. The two already have a deal. But you do wonder, given the way OTT enablers allow the business to become commoditised, what exactly Skype brings to the party. Critical mass? Brand? Facebook has them beaten for both. Again, Facebook is in a prime position to nudge Skype out of its slot and simply become 'Facebook Voice'.

It's much more likely that Facebook will use its new riches to go on an acquisition spree, effectively buying new revenue. But if it is to realise its value, the social firm may have to start thinking ambitiously, leaving the squabbles over pennies in the advertising world far behind. ®

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