Facebook can still innovate... but only as it relates to ads

By Erin Griffith , written on January 30, 2013

From The News Desk

Facebook's year-end earnings weren't too shabby. The company earned $1.53 billion in the fourth quarter, beating analyst expectations by two cents a share. Shares traded slightly up in after hours trading.

The message to Wall Street was, "Don't get used to it." Even as Facebook's stock has rallied over the last quarter, the company was very clear in warning investors of weak profits ahead.

Facebook plans to increase its costs by 50 percent this year in order to invest in new product development, CEO Mark Zuckerberg told analysts on a conference call today.

"The company is at an interesting point in our evolution where there are of areas we need to invest in," Zuckerberg said. "We won't optimize for profit this year." The headcount is going to increase further, the product developments will become more ambitious, and the profits will look slightly less attractive. It's refreshing to hear that a company will ignore the pressures of quarterly performance expectations and, instead invest its profits in new innovations.

For the last few months, the techochamber has been wondering if Facebook can still innovate. The answer, it appears, is yes -- but only in the narrow, boring, wonky world of online advertising. Don't expect too much else in the way of magic.

The company has big plans for things like Facebook offers, a promotions tool. And custom audiences, an ad targeting tool. And its mobile advertising platform. And new ad formats. And new ad analytics. And bigger, better targeting tools. And its ad exchange, FBX.

The biggest thing missing from Facebook's areas of focus and investment are the company's two newest and most promising lines of revenue: Graph Search and Facebook Gifts. These businesses are exciting to investors because their potential is huge. And because they're simply more exciting businesses than display ads.

Facebook could be a player in search, making the first time anyone has managed to take a significant bite out of Google's monopoly on the money-printing search ad market. And with Gifts, Facebook could become a dominant player in e-commerce, a market it has failed to enter several times now. The company could sell products directly to its users instead of selling ads to companies that want to sell products to their users.

But Facebook was just as careful to let the air out of the tires around those two business lines. The company is still "excited" about the businesses, Zuckerberg said, but their current revenue could not be disclosed beyond the characterization of "very small." The company expects to it remain small. Very small. Not meaningful. Stop asking about it.

As Sarah reported last week, the first six weeks of Gifts was a bit of a mess. Vendors have been disappointed and the user experience has been buggy and frustrating. Graph Search, which is still in beta and not available to most users, is a long way from monetizing. The dream of new revenue streams I wrote about prior to the company's first earnings call as a publicly traded entity is still quite a ways off.

Facebook is thinking like an advertising company now. As I noted when I outlined the company's need for new lines of business, display ads are a commodity business and not a great one to be in. Facebook hasn't yet proven ads are its strong suit, either. There's still a long road ahead in proving the performance of money spent on the platform. But at least the company realizes how much it has to invest -- and hustle -- to monetize the gold mine of engaged users it has with ads.

Proof of Facebook's enlightened approach to advertising is the evolution of more ad-like news feed items. Facebook wants its so-called "native" ad units -- the Sponsored Stories in the news feed -- to look just like status updates. (You could argue that, in doing so, Facebook and all native advertisers want to confuse the audience; native ad-vocates (ha!) would argue that people aren't dumb enough to know the difference.)

Advertisers want bigger, richer ad units because those get the most engagement and recall. So Facebook has begun making its news feed stories bigger and more content-rich. Zuckerberg said it's a philosophy he learned from Instagram's simple, beautiful, highly consumable feed of photos. Perhaps this means will begin to look less messy. As news feed stories become richer and easier on the eye, a new, expensive ad unit can then follow. That's innovation, just not the kind Facebook fans crave.

[Image courtesy toodlepip]