What to Expect When Facebook Is Expecting: Five Predictions for Facebook’s First Public Year

This article was published as a guest post at AllThingsD, and is republished here for Digital Quarters readers.

Mark Zuckerberg’s baby will be coming of age in a few days, just eight years after it was born in a Harvard dorm room. We’ve been there for the first steps, and the first missteps. But do any of us know what Facebook-all-grown-up-as-a-public-company will look like?

I have five predictions of how Facebook will be maturing in the first year after its IPO:

1. Search

Facebook has become home base for users in many ways. But when it comes to search, Facebook makes you take a bus transfer at Google every time you want to leave the house.

And that’s a shame, because Google starts each search from a place of knowing almost nothing about me. When I’m taking a vacation to Bali, I’m far less interested in Google’s generic recommendations of things to do than I am in recommendations from my friends who have been there.

Facebook already knows which of my friends have been to Bali, and which restaurants and attractions they liked the best. It can even differentiate between the friend I trust for restaurant recs and the friend who always finds the best surfing spots.

There is a clear battle between Google and Facebook. But it’s not over “search vs. discovery,” as it is often framed. Rather, it’s “transaction vs. relationship” — which is why Facebook has the potential to disrupt search as we know it.

Prediction: Facebook will launch a purely social search by the end of 2012 (before tackling the whole hog in 2013).

2. Advertising

Despite the company’s fierce ethos of consumer experience first, business concerns second, an IPO will inevitably put upward pressure on the latter. With the numbers published quarterly and the prices reset every day, Facebook will be forced to support that share price (if not for the sake of its shareholders, then at least for its employees!) by expanding its advertising revenues.

Facebook today brings in quarterly ad revenue of $872M — just a tiny fraction of Google’s $9B. But transactions are by nature pecuniary — and relationships are priceless. As a gatekeeper to nearly a billion consumer relationships, Facebook can roll out new advertising products that are far more valuable than AdWords.

The market for online brand advertising is already huge at $85B today. As soon as Facebook unlocks the potential of relationship-based advertising, the market will open up by tens of billions more.

Prediction: By Q2 2013, Facebook will have more than tripled ad revenues to $3B per quarter.

3. Open Graph

Occupy Facebook! Oh wait, we already do. Or does Facebook occupy us? Facebook currently occupies 1 in 7 minutes of all time spent online.

As the locus of consumer identity, attention and relationships, Facebook has the potential to be the one true platform that links together every destination on the web.

But it’s not there yet. Open Graph was a start, but it lacks a complete and actionable vision for how publishers can connect, access data and establish relationships. Publishers don’t want bits and pieces of data that they need to analyze themselves — they want a unified schema that bridges their audiences’ online worlds and real lives.

When I buy a chicken at Whole Foods using a Facebook app’s mobile grocery coupon, Facebook can match that incoming data point with the fact that I read Cooks Illustrated and that I’ve been on an Indian food kick lately (based on my restaurant check-ins). By the time that chicken is in my reusable bag and I’m hauling it out the door, there should be chicken curry recipe suggestions on my Facebook page.

Facebook has an opportunity to turn data from the long tail of Facebook apps into real inferences about you and me that publishers and other brands on the web can actually use.

Prediction: Facebook will completely redesign their analytics offering by Q2 2013 to provide not just data but real, integrated audience insights that will guide brands’ personalization efforts.

4. Commerce and Currency

Advertising won’t be the only revenue play Facebook makes in its first year as a public company.

Digital commerce (i.e. digital goods) already represents more than $16B in market size, and is projected to grow to $36B globally by 2014. E-commerce is another $680B on top of that. Both are currently conducted by arcane means: Visa card numbers and PayPal accounts.

Why have digital payments been so slow to evolve? Because even the most trusting of us only allow a few close associates access to our most private details. Who knows me the best? My bank, my lawyer, my mother and Facebook. In fact, no one owns my identity as well as Facebook these days (sorry, Mom!). Just because Facebook doesn’t have access to my wallet yet doesn’t mean it’s not going to happen.

A host of companies today (Google, Apple, Square) are trying to become your digital wallet, but Facebook holds a valuable advantage: it is already the locus of your relationships with third-party Web sites through Open Graph. While the logistics will certainly be no piece of cake, commerce is right up Facebook’s alley.

Prediction: By Q2 2013, Facebook will be presiding over $2B in transactions.

5. Timeline

There’s nothing more core to Facebook than its user experience, and Facebook has since its birth shown a consistent healthy dissatisfaction with it no matter what the status quo.

The current timeline experience is a nice try, but it’s not quite right. Timeline solved one problem — the indigestible frequency and quantity of updates at all levels of priority — while creating several more. New Problem #1: Timeline’s intuition about what’s important is too frequently just plain wrong. And while it gives us a great retrospective on people, it does a surprisingly poor job of helping us stay up to date with them. New Problem #2: Timeline depends heavily on Open Graph widgets to summarize our lives.

The latter is both ambitious and troubling. We admire great biographers for their ability to identify and communicate the essence of a person. It’s an insult say that a Nike Fuel score algorithm can capture the “real me” in the same way.

Timeline is a v1 product. It will take significant and deep tuning over many versions to reach its full potential.

This may seem like it’s just a UI update, but it’s not. Timeline is the clearinghouse for everything that happens on Facebook. Getting Timeline right is probably the single most valuable thing Facebook can do to grow its effectiveness with users — and its revenues.

Prediction: Facebook will release the first major redesign of Timeline by the first half of 2013.

Will the precocious kid that Facebook is today grow into a smart, savvy adult? A boatload of investors and J.P. Morgan certainly seem to think so. Over the long term, it will depend on Facebook’s ability to leave its youthful single-minded focus on users behind and execute consistently against two metrics: great user experience and revenues to match.

Demand Media + Google = Mutually Assured Destruction

This article was originally published as a guest post on Business Insider.

In my recent meetings with the leaders of top digital media organizations, executives have been unanimous in their bafflement over the impending Demand Media IPO.

Strategic thinkers know exactly what I mean: Demand Media’s “formula for success” is to select topics that only a statistician would love; produce low-quality content at absurdly low cost; and then drip spider-food pages into domains with a legacy of trust from Google built under prior ownership.

Once that’s done, Demand Media financially engineers its income statement to move what everyone else has called “cost of goods” below the line into depreciation; the intent here is to optically reduce expenses by spreading them over five years.

Reactions among media executives and entrepreneurs range from serious eye-rolling to violent throwing up. It’s instinctual rejection.

But why?

Because Demand Media violates the most basic definition of what “good” media is. Indeed, the formula that has built top media properties – from Disney to Glee to The New York Times – was simple: build a great brand on quality content, and then attract a loyal audience. And the formula worked for both analog and digital media, all the way up until the Age of Google.

But Google’s algorithm (Demand Media’s great ally) broke the formula by making every audience interaction with media separate and independent. Like Drew Barrymore in 50 First Dates, the Google algorithm has no memory of relationships; and for frustrated Adam Sandler publishers trying to build a loyal audience, the algorithm sets up an insurmountable amnesia.

Even worse, with every new Demand Media article, Google’s index gets more polluted, and the customer becomes even more underserved. It’s not an exaggeration, but Demand Media probably pollutes Google’s results more blatantly and thoroughly than the top black-hat spammers of the Web.

Then why doesn’t Google just downweight properties like this from its results?

There’s a good reason, and the catch is extraordinary.

Google’s network revenue, which includes its AdSense program – the advertising product that runs on affiliated publishers’ sites like Demand Media’s – accounted for $2.50 billion (30%) of total revenues in its most recently reported quarter.

So, if Google were to reduce the prominence of sites that use AdSense, its revenues and liquidity in the ad market would take a significant hit. And that would be intolerable.

On its side of the fence, Demand Media needs Google, too.

As Demand Media said in its recent S-1 filing:

“For the year ended December 31, 2009 and the six months ended June 30, 2010, we derived approximately 18% and 26%, respectively, of our total revenue from our advertising arrangements with Google … If any of our advertisers, but in particular Google, decided not to continue advertising on our owned and operated websites and on our network of customer websites, we could experience a rapid decline in our revenue over a relatively short period of time.”

The upshot here is that Demand Media is ruining Google’s search results; but Google, for its part, is actively perpetuating the rewards, encouraging Demand Media to keep its content just above a (very) low bar for high rankings.

I don’t blame Demand Media for being an opportunist and playing Google’s game.

But I certainly wouldn’t want to invest in Demand Media shares. The company is too precariously dependent for its lifeblood; and its spotty content quality has badly undermined its ability to earn brand loyalty. That’s a tough setup for a public company, and it makes for a very high-risk stock.

Google, on the other hand, bears more blame. As its quality of results goes down, so does its users’ quality of experience.

And the real competition isn’t just from Bing.

Earlier this month, a digital media executive told me that her 16-year-old niece prefers to search in

Facebook, since it prioritizes the content real people – i.e. her friends – like. Google’s results, she said, are useless and overwhelming. Facebook gives her the good stuff.

The unthinkable is actually happening to Google. Its algorithmic perfection is unraveling; and it has become the entrenched incumbent that is lagging in consumer experience.

And the challenge from Facebook is definitely coming.

The big question is how long Google can hold on to its revenues at the expense of its consumer experience.

Demand Media’s new shareholders will want to be the first to know. That way, they can get out front and sell.