The Facebook Reckoning

Earlier this week the New York Times reported that Facebook was offering publishers a deal:

With 1.4 billion users, the social media site has become a vital source of traffic for publishers looking to reach an increasingly fragmented audience glued to smartphones. In recent months, Facebook has been quietly holding talks with at least half a dozen media companies about hosting their content inside Facebook rather than making users tap a link to go to an external site.

Such a plan would represent a leap of faith for news organizations accustomed to keeping their readers within their own ecosystems, as well as accumulating valuable data on them. Facebook has been trying to allay their fears…To make the proposal more appealing to publishers, Facebook has discussed ways for publishers to make money from advertising that would run alongside the content.

The prevailing wisdom seems to be that this is a bad idea. The late great David Carr, who first broke the news about Facebook’s initiative last fall, said, “Media companies would essentially be serfs in a kingdom that Facebook owns.” Robinson Meyer at The Atlantic recounted Facebook’s previous efforts in this space, particularly its Social Reader, and concluded:

The company will work very hard to satisfy the altar of engagement—in fact, it’s a business imperative that it always work harder. But history shows just how fickle, and how unpredictable, that idol can be.

Ryan Chittum at the Columbia Journalism Review declared flatly: “The news business should refuse Facebook’s deal,” adding:

The point is not that news organizations and other publishers can ignore Facebook and Google and the like. The point is that it’s intolerably risky to build their business models around them.

Perhaps my favorite warning, though, came from John Gruber:

I can see why these news sites are tempted by the offer, but I think they’re going to regret it. It’s like Lando’s deal with Vader in The Empire Strikes Back.

For those who don’t remember, or who (gasp!) have never seen Star Wars, Darth Vader, thanks to a tip from bounty hunter Boba Fett, arrives at Lando Calrissian’s Cloud City to set a trap for the Millennium Falcon and its crew. We find out later that this is when Vader and Lando made their deal: Vader will get Luke Skywalker, Boba Fett will get Han Solo, while Calrissian can keep the Millenium Falcon, Chewbacca, and Leia. Ultimately, though, Vader intends on keeping everyone, delivering his famous line: “I am altering the deal; pray I don’t alter it any further.”

The problem with Gruber’s criticism is that Lando never really actually had a choice. Vader was far more powerful than he was; taking a chance on a deal was the best of a bunch of bad options. That, I think, is the case with most publishers when it comes to Facebook.

Publications’ Mobile Problem

I’ve written several times about the dramatic impact that the Internet has had on journalism, in particular Newspapers are Dead; Long Live Journalism and just a few weeks ago in Why BuzzFeed is the Most Important News Organization in the World. Succinctly, the Internet dramatically increased competition, not only for readers, but also for advertisers. Many newspapers with obsolete print-centric cost structures were ill-equipped to compete; however, many online-only publications, built from the ground-up for Internet economics, quickly appeared to take their place.

This mixture of online newspapers and online-only publications primarily monetized with display ads that appeared alongside the content, and the results have been decidedly mixed. The problem is that online ads are inherently deflationary: just as content has zero marginal cost, so does ad inventory, which means it’s trivial to make more. A limited amount of total advertising dollars spread over more inventory, though, means any individual ad is worth less and less. This resulted in a bit of a prisoner’s dilemma: the optimal action for any individual publication, particularly in the absence of differentiated ad placements or targeting capability, is to maximize ad placement opportunity (more content) and page views (more eyeballs), even though this action taken collectively only hastens the decline in the value of those ads. Perversely, the resultant cheaper ads only intensify the push to create more content and capture more eyeballs; quality is very quickly a casualty.

What is interesting is the particular impact that mobile has had on this dynamic:

  • First, mobile display ads stink. Unlike a PC browser, which has a lot of space to display ads alongside content, content on mobile necessarily takes up the whole screen (and if it doesn’t, the user experience degrades significantly, making quality a casualty once again). This results in mobile ad rates that are a fraction of desktop ad rates (and remember, desktop ad rates are already a fraction of print ad rates)
  • Second, on mobile, clicks are expensive from a user experience perspective. Not only do PCs typically have faster broadband connections to download assets and more powerful processors to render pages, they also have multiple windows and tabs. On a phone, on the other hand, clicking on a link means you can do nothing but wait for it to open, and open quite slowly at that. The cost of clicking a link, already quite high because of the deluge of crap content and particularly-annoying-on-mobile ads, is even higher because of the fundamental nature of the device

Note that all of these issues with mobile affect new online-only publications just as much as they do old-school newspapers; the problem stems from the display ad business model.

Enter Facebook.

Facebook and Native Advertising

There are three ways to combat the deflationary trend in online advertising:

  • Sell/display more ads (which is problematic for the reasons listed above)
  • Sell more effective ads that better engage the viewer
  • Sell better targeted ads that reach the advertiser’s target audience

Facebook, in stark contrast to publishers, is dominant in all three areas:

  • Facebook’s fantastic targeting capabilities are well known, and the company is pushing to make tracking, particularly for brand advertising that results in offline purchase, even more effective
  • The company is actually selling fewer ads on the desktop – increasing the price per ad – even as it continues to grow its mobile inventory
  • Perhaps most importantly, Facebook has an incredibly effective ad on mobile: a native one

Native advertising has a bit of a bad rap thanks to poor executions like The Atlantic’s Church of Scientology disaster, leading to accusations that native advertising only succeeds to the degree to which it “tricks” the reader. And, for the record, I completely agree that this sort of native advertising is a bad idea, particularly for the publications that employ it: not only does it ruin the publication’s credibility, it doesn’t even work that well.

Instead, the sort of native advertising that is interesting is the type that lives in a stream like the Facebook news feed. I detailed a couple of years ago how Facebook had the best digital ad unit in the world:

The Facebook app owns the entire screen, and can use all of that screen for what benefits Facebook…You can’t help but see the advertising, which makes it particularly attractive to advertisers. Brand advertising, especially, is all about visuals and video (launching soon!), but no one has been able to make brand advertising work as well on the web as it does on TV or print. There is simply too much to see on the screen at any given time.

This is the exact opposite experience of a mobile app. Brand advertising on Facebook’s app shares the screen with no one. Thanks to the constraints of mobile, Facebook may be cracking the display and brand advertising nut that has frustrated online advertisers for years.

There’s just one catch to this sort of advertising: it depends on people immersing themselves in the stream. Clearly, that’s not a problem for Facebook; incredibly, despite its dominance both in terms of users and engagement, the company continues to grow both! Twitter, too, although suffering from a small user base, is monetizing very well because of its immersive nature. Similar opportunities await Instagram, Pinterest, and Snapchat. Each of these services has hundreds of millions of users voluntarily opening their app daily.

Destination Sites

That bit about visiting directly is critical: native advertising only really works if customers go directly to your site or app; it’s much less effective if your site is only ever at the end of a link in another stream (which is the case for the majority of publications). It follows, then, that if native advertising is the only truly sustainable advertising on mobile, that the only sites or apps that can succeed with ads are “destinations” – sites or apps that users go to directly.

Most people don’t have many destinations: a few social networks, and maybe a web page or two; I suspect my list is on the high side when it comes to quantity (and truthfully, the news sites are mostly visited via Twitter or Nuzzel):

My destination apps and sites
My destination apps and sites. The full list: Twitter, Facebook, Instagram, Nuzzel, Snapchat, Grantland, Techmeme, The Information, ESPN, Daring Fireball, Brew Hoop, The Wall Street Journal, The New York Times, and the Financial Times

The problem is that it’s really hard to become a destination: you need compelling content of consistently high quality. Notice, though, that that is precisely the opposite of what most online publications have focused on: in their race for ever more content and ever more clicks most publications have lowered their quality bar and made themselves uniquely unsuited to making money on mobile.

Of course native advertising is not the only option: three of my “destination” sites (The New York Times, Wall Street Journal, and Financial Times) require a subscription. The quality and consistency bar for a subscription is even higher than for a destination site though, because it requires customers to actually pay money.

The Facebook Future

I believe the vast majority of publications, particular newspapers and older online-only outfits, are in serious trouble on mobile. Not only does their chosen business model (display ads) monetize incredibly poorly, but the incentives that model creates work against those sites becoming destinations capable of supporting effective native advertising.

In this light the Facebook offer is a lifeline:

  • Facebook will enforce a quality user experience
  • Facebook will utilize its superior targeting and ad unit to generate revenue
  • Publishers will be incentivized to create content that is shared, not just clicked

In fact, the incentives will look a lot like BuzzFeed’s – and that’s a good thing. As I noted a few weeks ago:

By not making money from display ads, and by extension deprioritizing page views, BuzzFeed incentivizes its writers to fully embrace Internet assumptions, and just as importantly disincentivizes pure sensationalism. There is no self-editing or consideration of whether or not a particular post will make money, or if it will play well on the home page, or dishonestly writing a headline just to drive clicks. The only goal is to create – or find – something that resonates.

As an aside, there should be zero surprise that BuzzFeed is a pilot member of Facebook’s initiative: their entire business is predicated on understanding how to get content shared. The fact that they make money by selling this ability to brands is what makes them independent (and is why they are important).

Of course most publishers won’t replicate that part of the BuzzFeed model, which means by partnering with Facebook they are committing their future to a company that has very different priorities and could change course at any time, just as they did with the old Social Reader. The problem, though, is that while the Facebook path leads to an uncertain future, uncertainty is preferable to what is probably certain irrelevance (and death). After all, there’s little question in my mind that Facebook will over time favor content that is on site, slowly freezing out everyone else; I think this likely explains the New York Times’ involvement: I just noted the New York Times is unique in that it is a destination, and one that can charge a pretty steep subscription fee to boot. Absent Facebook, though, its growth is almost certainly limited.

That said, even with Facebook’s offer, I think the next few years are going to be difficult ones for the journalism industry. Too many sites have bad business models with bad incentives, and there will be a shakeout. I think, though, this will on the whole be a positive transition for consumers especially. Creating a destination,1 giving customers content that resonates, or building up alternative revenue streams that benefit from a site’s journalism2 all argue against the sort of content-farming and click-bait writing that dominates the web today. If it takes Facebook to hasten that shift, so be it.

  1. I think Vox Media fits here; check out this excellent profile of The Verge on Nieman Lab, and note that one of my destinations – BrewHoop – is an SB Nation site; note also, though, that the company also has a very thoughtful Facebook strategy as well []
  2. Recode is an excellent example here; the journalism drives the prestige and access of the Recode Conferences []