GM, one of the largest advertisers in the US, has decided to stop paying for display ads on Facebook, further highlighting weaknesses in the social network’s advertising revenue generation.
Today, The Wall Street Journal reports that GM has decided to stop paying for advertising on Facebook as paid ads on the site have little impact on consumers’ car purchases.
This follows a blog post earlier this week from Forrester analyst Nate Elliott wherein he challenged Facebook’s lack of innovation when it comes to servicing advertisers’ needs. Elliott alluded to companies that have expressed doubts on whether it’s wise to continue spending their social marketing budget on Facebook, and mentions that “one global consumer goods company told us recently that Facebook was getting worse, rather than better, at helping marketers succeed.”
Facebook’s last-minute amendment to its IPO filing conceding their weaknesses in advertising on mobile devices already caused a stir, but this latest revelation paints an even riskier picture, calling its standard display advertising model for the web into question. This air of discontent, and the threat that other advertisers might jump ship, could put potential investors on high alert ahead of Friday’s IPO.
Purchasing intent: the crucial difference between Facebook and Google
Facebook’s struggle to generate an advertising product that satisfies advertisers is particularly jarring when compared to Google’s huge success in this area. Entrepreneur and investor Chris Dixon notes on his blog that Facebook’s focus on display ads is reflective of an old internet business model, whereas Google’s decision to innovate with keyword advertising has been the measure of its online advertising dominance.
“Facebook makes about one-tenth of Google’s revenues even though they have two times the page views,” Dixon writes, adding that “some estimates put Google’s search revenues per pages views at 100 to 200 times Facebook’s.”
Dixon also notes that the key difference between Google and Facebook is that people searching for products and services online are more likely to be searching with the aim of eventually making a purchase. Facebook’s ads don’t fit in to this scenario as the people its display ads reach are in a social setting. The “purchasing intent” is not there.
Is GM’s flawed social media strategy to blame?
According to Kantar, GM’s advertising spend is in the top 3 for the US, after Procter & Gamble and AT&T. However, US$10m spent on Facebook advertising last year represents just a sliver of GM’s colossal total US advertising expenditure of US$1.8bn in 2011.
The Wall Street Journal reports that, at a meeting with GM executives where they expressed their concerns over the return on investment from Facebook’s display ads, Facebook executives criticised GM’s decision to put multiple firms in charge of its advertising on site. This is a valid argument against a company that claims to have spent US$30m on content creation for its Facebook page – three times the amount spent on advertising – a figure that Peter Kafka believes is “a sure sign that someone was doing something wrong”.
GM dropped its social media ad agency in December 2011, and then its media buying agency in January, which suggests that this recent decision may be as much to do with a mismanaged social media strategy as with Facebook’s advertising Achilles’ heel.
Reporting on AllThingsD, Kafka notes that the timing of this announcement, days before a momentous day for Facebook, implies more to this decision than meets the eye as GM must be aware that the news coverage alone could be harmful to Facebook’s IPO.
Facebook’s plans to improve advertising products
Now, the withdrawal of US$10m is not going to make a noticeable dent in Facebook’s 2011 revenue total of US$3.7bn. But, with most of this revenue coming from advertising sales, Facebook can’t remain ignorant of the pitfalls presented by advertiser drop-offs – and this has been addressed in its IPO filing.
“The substantial majority of our revenue is currently generated from third parties advertising on Facebook,” the document reads.” In 2009, 2010, and 2011, advertising accounted for 98pc, 95pc, and 85pc, respectively, of our revenue.”
The document goes on to address the issue that some advertisers may view Facebook’s ad products, such as sponsored stories and social advertising, as “experimental and unproven”. Aware of the issues, Facebook is intent on creating improved ad products for advertisers and users – lest it face further declines in advertising revenue.
“Advertisers will not continue to do business with us, or they will reduce the prices they are willing to pay to advertise with us, if we do not deliver ads and other commercial content in an effective manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives,” the document states.
How valuable is Facebook advertising?
The real issue for advertisers seems to be that Facebook’s marketing tools are more about engagement and improved sentiment than about sales and conversions. GM itself recognises Facebook’s power as a tool for consumer engagement in a statement published by Mashable, and this is further compounded by its decision to maintain its free Facebook brand page.
While Zuckerberg’s priority of putting the end-user’s experience first may be a model that frustrates advertisers, it’s also the reason why the social network has amassed 900m registered users – an audience figure that simply cannot be ignored. If Facebook does figure out how to sufficiently connect this user base with sales for advertisers, a valuation of more than US$100bn will be justified. If it doesn’t, then they will have a lot of disgruntled investors on their hands.