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Summary:

Facebook’s advertising woes, including the highly publicized departure of General Motors, reinforce the fact that while Facebook may function like a social network, on the business side it looks almost exactly like a media company — and that is going to be a major challenge.

Zuckerberg-media

There’s been a lot of attention paid to Facebook’s business model recently, especially with the news that General Motors has killed a $10-million advertising campaign devoted to the giant social network — not exactly a great sign of confidence in advance of the world’s most eagerly anticipated IPO. And GM’s move is only the latest indication of discontent, as other advertisers are also questioning their spending. What all of these moves reinforce is that while Facebook may look like and function like a social network for the majority of its users, on the business side it looks almost exactly like a traditional media company, and that is both good and bad.

Like Twitter, the content within Facebook may be generated entirely by users, but the business model is all about advertising, just like any other media entity. According to the social network’s latest S-1 securities filing, advertising accounted for more than 80 percent of its $1-billion in revenue in the most recent quarter. And while some of that represents experiments with “social advertising” such as Sponsored Stories and other features, much of it is essentially run-of-the-mill banner and display advertising — not all that different from what you would find on a newspaper or magazine website, or any blog network.

In some ways, Facebook ads are actually worse than regular ads

That helps explain why Facebook’s advertising isn’t exactly setting the ad world on fire: in fact, according to at least one study, clickthrough rates for ads on the social network are actually lower than the already abysmal clickthrough rates for regular Web advertising (for what it’s worth, Ford says that it is more than happy with its spending on Facebook, unlike General Motors).

Facebook actually has an even bigger mountain to climb than newspapers or other media entities do when it comes to advertising, since the social nature of the network could actually interfere with the effectiveness of traditional ads. Sir Martin Sorrell, chairman of WPP Group, has said that he isn’t even sure advertising can work within an environment like Facebook, which is inherently about social connections and conversation. As angel investor and blogger Chris Dixon notes, ads on Facebook are like putting billboards in a park:

When people use Facebook, they are generally socializing with friends. You can put billboards all over a park, and maybe sometimes you’ll happen to convert people from non-purchasing to purchasing intents. But you end up with a cluttered park, and not very effective advertising.

As Dixon points out, what made advertising such a spectacular business for Google was that people who are searching for things are already part-way down the road toward wanting to buy something — in other words, they are further along the spectrum of “purchasing intent.” And at least the readers of newspaper websites and other media entities are theoretically interested in information about the world, current affairs, even entertainment. Many Facebook users are simply there to socialize, share photos, etc. How does that translate into a receptive environment for advertising?

Facebook needs to start diversifying its revenue sources

Facebook is also hamstrung to some extent when it comes to the options that other media companies are experimenting with, such as subscriptions or paywalls. Not only has Mark Zuckerberg promised repeatedly that Facebook would always remain free, but it’s not clear that users would pay anyway — although the network is reportedly experimenting with a new feature that would allow users to promote their posts.

Those are the downsides of Facebook as a media company. But despite incidents like the GM announcement, investors are likely to focus more on the upside, and there is arguably plenty of it: for one thing, Facebook has close to a billion active users, and even in an age where advertisers want to target specific segments or groups as much as possible, scale still matters — particularly for major brands. So a lot of advertisers are probably going to stick with Facebook simply because it is one of the biggest games in town.

Not only that, but as Jon Steinberg of BuzzFeed pointed out on Twitter, what other option do advertisers have — to go back to video pre-rolls and banner ads? If the future of advertising is social, then hitching your wagon to the largest social player in the world is probably a better bet than trying to figure it all out on your own. And there is at least the potential for Facebook to disrupt the ad market in some interesting ways, such as an “open graph”-powered ad network that could extend its reach throughout all the millions of sites that use Facebook’s platform.

As Dixon notes, Facebook also has a number of other emerging business models, such as an e-commerce platform driven by Facebook Credits. These are embryonic at best, however, and so for the moment Facebook is still overwhelmingly reliant on advertising — and as every other media company is painfully aware, that sword cuts both ways.

Post and thumbnail images courtesy of Flickr user Olaf Gradin

  1. This article can best be summed up by Harvard math genius and early Facebook employee Jeff Hammerbacher’s now famous quote: “The best minds of my generation are thinking about how to make people click ads. That sucks.”

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    1. Indeed — that is a great quote :-)

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    2. To me, it’s fascinating to have the opportunity to measure the impact of psychological tests- what audience responds to what message? I’ve learned a lot about people, what they want, and how to write effectively. Perhaps instead we should be translating messages from whales? ;-)

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    3. No kidding. Any company depending on advertising for revenue is at risk of having that ad money go elsewhere. And it usually does, sooner or later.

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    4. yuryprokashev Wednesday, May 16, 2012

      So true. :(
      And what is really interesting is that most of Internet business models are always parked at ads business.
      Looks like ads is the only way to monetize traffic to your content.

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      1. g2-0e479e5056ead09670652e2f55a31d8e Sunday, May 20, 2012

        well, that or produce a related physical product and sell it via an online store. that works pretty well too.

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  2. Outdoor advertising (billboards, kiosks, cab toppers, etc.) and poorly displayed 5-cent web banner ads are not the same. Not even close. People are not stupid.

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    1. g2-0e479e5056ead09670652e2f55a31d8e Sunday, May 20, 2012

      … i strongly dispute your last sentence. a person may be smart. people are not. (agree with you otherwise though.)

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  3. Amazing how this miconception about Facebook ad CTR persists. Yes, if you compare it to AdWords search ads. But FB ads are display ads, and if you compare them to AdWords display ads, you’ll see similar CTR’s.

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    1. Thanks, Brian — but whether Facebook’s click through rates are the same or worse, the fact is that they are just run-of-the-mill display ads, and that’s a tough business to be in.

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      1. They are better than run of the mill because of the targeting options, and the social dimension (“so and so liked this”)… Not to mention the sponsored posts… I think you’re oversimplifying here.

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  4. Also, Facebook ads are not like putting ads up in a park, unless you use zero targeting. The Facebook ad interface has 15 targeting criteria you can use to get in front of just the right people. Yes, it’s not search intent, but it’s a bit more targeted than that analogy suggests. Combine them with Google AdWords remarketing, and you can stay in front of any window-shopping-clickers.

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    1. Brian, your argument is valid about the 15 targeting criteria. But most people if all will only respond to those targets if in the moment in time, they happen to be aware that there is a compelling need for them to respond. It is still different from a search paid advertising when the searcher is already in the path of “searching” which means that person expects to find something he is searching.

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      1. Without question, it is not intent-based. But it is incredible at targeting very specific audiences- not perfect, but better than any other display ad platform. Why? By virtue of the personal data FB has about so many of us, which Google does not have.

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  5. Facebook needs to be the platform for chillin’ with your peeps:

    http://smoothspan.wordpress.com/2012/05/16/facebooks-next-business-model/

    Cheers,

    BW

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  6. Facebook Ads are ‘targeted’, but they convert relatively low because Facebook users KNOW it’s an “ad”. Impression based CTR monetized Ads, like forms, don’t convert above 1% on average which is so wimpy that’s why some companies are rethinking Facebook Ad Spend. Thus we see Work At Home and Earn Big” solicitation and the dreaded “jumping” animated banner. Maybe… (sorry, some sarcasm here) Facebook should PAY it’s users to click on ads, then click rates would skyrocket.

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  7. I dont remember i ever clicked on facebook sponsored Ads ever. I have clicked on Google Ads and Twitter promoted Ads but never on facebook ads.

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  8. yuryprokashev Wednesday, May 16, 2012

    I also never click on ads in FB.
    The reason behind this: I do not search anything particular on FB. Just making my brain rest, checking news from my friends.
    And so millions people don’t search anything particular.

    FB is not Google. FB users are not searching. They are not obsessed to find something particular by desperate clicking.
    They are just having fun!
    It is naive to hope FB can compete with Search Engines on ads CTR basis.

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  9. Since the days of the invention of Adsense, Google has been trying to diversify itself too — Android, YouTube, health, the cloud, self-driving cars, etc.

    I don’t have the numbers in front of me, but I think something like 95% of their revenue is still search ads. And Facebook’s social ads share is probably 99%.

    However, I suspect that in a few years, one of those companies has done better job of diversifying itself. My guess is that Facebook will overtake other areas — maybe mobile, maybe search, but my bet would be on [DRAMATIC PAUSE WAIT FOR SPECULATION...] ecommerce!

    In other words, I don’t think Facebook will be solely an advertising-driven media company for long.

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  10. So, we’re not sure Facebook is a good place for ads to live because…people don’t go there to look for ads? Tell me, exactly where do they go to look at ads? Do you sit down to watch TV and fast forward the program to get to the ads? Do you wait for you favorite song on the radio to end so you can hear an ad? The fact that it is a social network makes it no more or less “right” as a place to advertise…and with what they have done to restrict size and placement and add targeting options, one could argue it is a hell of a lot better place to be with your ad $. For consumers It is a much easier ad to ignore because it does not interrupt your content in a direct way.

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    1. Americans are funny in that we secretly LIKE ads. The Super Bowl is essential a spectacle of “Ads as Entertainment”. The issue with the people that make ads and are responsible for ROAS (Return on Ad Spend) is humans naturally “filter out” and ignore “messages” (signals as it were) every second on an average day. This is where “interest categories” and demographics come into play. TV is passive so viewers watch the stream of images and sound and ads flow naturally through programming because we’ve been condition with the :30 and :60 sec. spots and 1/2 programming. Facebook ads seem ‘unnatural’ in a social setting much like soliciting at a social event. It’s out of place and inappropriate. I heard Zuck and Eduardo clashed over this exact ‘feature’ of Facebook in the beginning and Zuck won out on lower profile ads. The targeting is good in FB, but you REALLY have to know your demo to use it effectively. CTR is still only 0.05% though!

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    2. yuryprokashev Friday, May 18, 2012

      There is only one place, where I go intentionally for ads – it is search engine. :)
      Targeted ads are relevant for me if I search something particular.
      Perhaps, FB should think about shifting to search business, as Google is trying to conquer social with Google +.
      It will be very interesting clash. :)

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