Monday, April 23, 2012

CTR Half-Lives: NASDAQ's Biggest Unasked Question

With their IPO getting closer and closer, the massive variance in opinions as to Facebook's enterprise value can be seen from Wall Street to Main St. On the buy side, you have grandmothers calling their Silicon Valley grandkids to say they plan to buy shares at the IPO, and sell-side analysts baking four as-of-yet non-existent lines of business into Facebook's current enterprise value.

On the sell side, most discussion forum trolls, direct response advertising guru's and employees at Google, Amazon, eBay, Yahoo and Apple are equally confident Facebook's IPO will crash and burn, relative at least to the presumed $50-100Billion valuation.

Me? I know better than to make a call here, but I will say this: whether or not Facebook lives up to the valuation hype will depend more than anything on their ability to deal with the fact that their standard ads have a click-thru-rate (CTR) half-life of approximately two days. As the below chart from WebTrends shows, Facebook ads' CTR typically halves within 48 hours, due to the simple fact that their targeting system results in largely the same people seeing the same ads.

If Facebook solves the half-life problem, then their massive user base and engagement levels allow for a sustained $50-100B valuation. If not, Facebook's revenue growth will quickly fall to zero and it'll become a mid-tier cash cow.

Solutions to this problem exist...


Blogger Unknown said...

I just published a blog about my experiences with CTRs on Facebook ( I'm not sure if my findings are the same as yours, but I've identified the main problem to be what I am calling 'booklicants' which are profiles that obsessively click on ads, thus causing initial click-thru rates to be much higher than the steady state rate after they bleed themselves off. They may or may not be bots, but the effect is similar to what you describe here. Curious to hear your thoughts. I wish I had read your post earlier, been busy with other things.

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Blogger searchquant said...

@Unknown - great read on possible Booklicant activity on FB. What % of your total Likes do you think are of this type?

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Blogger Unknown said...

Seems like between 30 and 90 percent of profiles depending on a variety of factors (target demographic, how long the campaign runs, etc.). I added some more data in the comments of my post.

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