The notion that Facebook and other social networks will suffer most deeply when the bubble bursts sounds plausible because it rehashes the last tech boom and bust, when advertising revenue run-ups at huge web portals (remember those?) turned out to be funded mainly by venture capital investments. In 2001, revenue at Yahoo ”” the largest portal, and something like the Facebook of its time ”” plummeted by almost $400 million when start-ups stopped spending during the bust. Yahoo has never recovered its former glory. Could Facebook face the same fate?
Probably not ”” or not yet, at least. On closer inspection, the theory that Facebook’s growth depends on unsustainable venture capital is mostly overblown, another strain of Facebook Second Guessing Syndrome. It’s a story that misses important facts about Facebook’s advertising business. For one thing, as Facebook’s executives have repeatedly pointed out, ads from app companies make up a small percentage of the company’s overall business. Most of the social network’s revenue comes from video ads and ads for large brands.
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The theory also misses two other points. Not all these ads are coming from unproved start-ups. And the ads are set to be adopted more widely because they actually work.
According to several app makers and observers of the industry, the ads are tremendously effective at leading paying customers to new apps. It’s the effort to reach these paying customers ”” and not venture funding ”” that is often the reason for all the money pouring into ads for apps.