Michael Wolff reminds us that Facebook still has not figured out its business model:

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.

I was thinking about this in the context of Dalton Caldwell's audacious proposal to build an ad-free Twitter: http://daltoncaldwell.com/an-audacious-proposal

Ads work for Google but not for Microsoft, which just took a $6 billion write-down because its aQuantive acquisition was a huge stinking crater.

Why? Because ad targeting is hard.

I'm not sure what the business model for Facebook is, but I'm certain it's not ads.

Maybe it's PayPal.

Maybe it's something else entirely.

Brilliant article! Though I don't know a lot about these things, I thought his logic seemed pretty solid.

But it seems like Zuck can operate at a loss for quite some time on the cash he raised in the IPO, so my guess would be that we're talking at least 5 years for this story to play out.

What do you think?

I agree: Zuck has bought himself five years.

And it's not a sure thing. The volatility of the stock price reflects that.

All I see from Facebook these days is experiment after experiment.

Every action is them testing to see what works.

They could figure it out. Google did.

Or they might never figure it out. Microsoft didn't.

5 internet years is like 5 dog years. Soooooo much can happen.

So another strong possibility is paradigm shift: the ground could move underneath them.

That would probably be a bad thing, the Facebook aircraft carrier is probably too slow to turn around if the future lies elsewhere... but it could be a good thing if the shift is something already in their wheelhouse or that requires their core competencies/assets.

Another theory is that FaceSense is just around the corner: http://pandawhale.com/convo/3445/facesense-adsense-for-facebook

It took Facebook less than 5 years to find its business model: mobile ads. 

We seem to think we know everything from the outside, looking inside the glass house.

No one can know everything.

So we write what we believe, to get feedback, so we can improve our understanding.

Wolff is most interesting as a compass pointing the direction of "True Negativity".

FB's value is best understood, roughly, as arising from a ~25% chance they wind up creating a $200B+ company, and a ~75% chance they stabilize as smaller, say $25B company. Weighted average: their current market cap.

I think they'll figure something out. They've never turned the revenue dials on their existing assets all the way up, instead consolidating advantages and gingerly experimenting. While whatever they figure out might be ad-related, they've also got an inside track on post-email trusted, spam-resistant communication, if they don't fumble that with heavy-handed errors like the @facebook.com email-changing mixup.

I believe they will figure something out, too.

Maybe it's like AdSense, maybe it's like PayPal, maybe it's on mobile, maybe it's something completely different.

But they have the time, the resources, the talent, and majority control of the company, so the odds are in their favor.

Mobile is increasingly looking like a great idea.

He hedges his bets massively by saying "without an earth-changing idea;" it's a great example of hyperbole and histrionics.

Naturally, we won't recognize it as earth-changing until after it has "changed the earth;" therefore, all he's saying is that FB advertising is not as effective as other mediums -- print, television, radio -- which is a much more boring assertion to make.

That being said; Facebook is well on its way to achieving the goal of becoming a "social utility." It's usefulness is undoubtedly high; what folks question is whether being the next dominant social utility has a path to extraordinary profits.

It will happen when it happens.

Not if Facebook keeps creeping people out.

I think all web services would really creep people out if they knew exactly how the sausage was made (e.g. data + analytics tracking).

Yikes. I wish there were a way that both users and customers could be happy with.

Turns out Facebook's business model is mobile ads.