Facebook is now worth $50 billion and has become the hottest property on the Internet.  The problem is that the site may find it more difficult to generate revenue than many imagine.

Despite the Facebook addiction, Google Inc. (NASDAQ: GOOG) so far has nothing to fear from Facebook when it comes to advertising.  This may be a harbinger of good news for the Yahoo! Inc. (NASDAQ: YHOO) and Microsoft Corporation (NASDAQ: MSFT) partnership, and it ditto for IAC/InterActiveCorp. (NASDAQ: IACI).

Chris Trayhorn noted in a report at mThink, “There’s so much hype around Facebook right now that it would be easy to think that they are an immediate threat to Google’s business model, but the reality is that they’re not even close. Not only does Google still make at least six times more revenue per user than does Facebook, but Facebook’s advertising model is still very much a work in progress.”

mThink shows that the performance metrics for advertisers is not even close.  Where Facebook seems to win is in targeting to demographics.  It was noted, “Facebook remains a terrific ad platform for ads that benefit from demographic targeting – at least until the next Acai-type products come along that can be thrown against the wall of the entire world population.”

Wait a minute here…. “at least six times more revenue per user”??? At issue is that Facebook ads have to be reworked over and over, and the CPM and click-thru rates (CTR) are lower.  On Google, search ads can be left literally for weeks and months because its ads are tied to search behavior.

Webtrends research cited by mThink noted that Facebook advertising is predicted to roughly double to $4 billion in 2011.  The company’s top advertisers have increased their ad spending tenfold.  Nonetheless, it is currently much cheaper to get a wider footprint on Facebook compared with Google because of the social network site’s metrics are worse.  Even if ad-burnout does come into play it won’t matter for many businesses.

What is a truism for yesteryear is likely a truism for the future: There is generally speaking only so much advertising spending that can occur.  Sure, overall ad spending can and will grow.  At issue is that it has to drive more and more business to support more and more advertising.

Building newer and newer sites and newer and newer ad-models that rely solely upon advertising ultimately reaches a bleeding point where only the top sites out there get the lion’s share of all the ad money. Just because more and more advertising channels are coming up does not mean that companies will spend more and more money on the same promotions.  At the end of the day, the sites displaying ads are reaching around or reaching down for advertising revenues.  Some of the revenue may be new, but ultimately there are limits.

The implication here is that whether Eric Schmidt left the adult supervisory role or not, Google currently has little to worry about from Facebook.  Just keep in mind that internet models can come and go literally overnight and internet users can prove to be fickle if the new hottest trends and new hottest sites overtake larger more entrenched leaders.  It has happened before.

JON C. OGG

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