Facebook’s $7 Test is a Good Idea

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

LinkedIn (NYSE: LNKD) has a unique business model that allows it to earn revenues from users as well as from advertisers.  For the users, it operates a “freemium” model for using the service.  Adding connections, applying to jobs, and joining groups are all free services.  However, it adds premium packages like “in-mail,” where job-seekers, salespeople, and recruiters can buy in-mails at $10 a message and message anyone they want. 

On the advertising side, LinkedIn sells ads to businesses.  I have used the platform before, and I am incredibly impressed at the depth of coverage it provides.  The ad platform allows advertisers to target LinkedIn members across a wide range of metrics, including age, gender, industry, title, company or categories of companies, school, skills, and even groups.  The service is remarkably robust and comprehensive, and I believe that more business-to-business marketers will begin migrating to LinkedIn from other platforms.

Speaking to the user side of LinkedIn, part of LinkedIn’s success is that it understands that its users are willing to pay to get their message in front of other people.  Facebook (NASDAQ: FB) is now testing this concept.

$7 Promo Posts

Facebook feeds use Edgerank (this infographic explains it in detail) to display user information.  Essentially, Edgerank is Facebook’s version of SEO, Search Engine Optimization, and it increases based on user interaction, such as when friends click the ‘Like’ button.  Users spend 27% of their time looking at the news feed, making it an important place for promoters.

Recently, Facebook announced that it would test giving users the option to promote their own posts.  The feature essentially sells SEO to Facebook users.  Facebook’s intention is to allow users to promote announcements like engagement photos or that big coffee concert on Friday.  Facebook is on to something.

People love talking about themselves – I’ve heard it said that we are our own favorite subjects.  That said, Facebook is making a smart move by profiting from the ego of its users.  If you want to share an important message with your friends, and you want to make sure that most of them see it, would you consider paying $7 to share that information?  My guess is that many would.

A Good Idea

Amid increasing competition from Google (NASDAQ: GOOG) and Yahoo (NASDAQ: YHOO), who partnered with Microsoft’s to launch the Yahoo! Bing Network, Facebook is foraying into a new space.

Google recently made headlines when investors expected it to take the “triple crown,” reaching the top spot in “web search ads, mobile ads and display ads, which include graphical, interactive, and video ads,” said The Wall Street Journal.  For the first time, Google is expected to best Facebook at display ads, making Google a compelling investment for tech investors.  Estimates ping Google’s sales and market share of the display ad business at $2.31 billion and 15.4%, up from $1.38 and 13.5% last year.

Yahoo is also braced to see growth.  Ex-Googler Marissa Mayer is expected to make Yahoo more user-friendly as it seeks to improve its user-base.  Also, Yahoo’s share of the ad market could see a bump because Bing’s search has become far more relevant for users, a standard that likely must be met before ad revenues will increase. 

Bing recently ran a test comparing Bing to Google, and it claims that users chose Bing over Google 2:1.  I recommend you view the results, then take the test yourself.

Good Timing

Facebook is testing its new revenue stream at a time when users are moving from PC-based viewing to mobile viewing, where a smaller screen size makes it more difficult to place ads.

Facebook wants to avoid the path of Zynga (NASDAQ: ZNGA).  Zynga’s games like FarmVille and CityVille see high volume when played on the PC, but the games are losing their luster as users move to mobile gaming.  Zynga recently traded around $2.30, a long drop from its $10 IPO.  Zynga’s stock has been a loser – and to reverse the trend, the company desperately needs another way to monetize eyeballs. 

Like Facebook is doing.

Facebook is testing an innovative method to earn profits from its members – adding an income stream targeted to its 1 billion users.  The model works for LinkedIn, and I expect it to also work for Facebook.

LinkedIn says: You want users to see what you have to say?  Pay for it.

To reverse its share price, Facebook must do the same.

ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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