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Facebook and advertising: between a rock and a hard place

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As Facebook gets ready to start its IPO “road show” next week, with a public offering reportedly set for May 18, convincing analysts and investors that it is worth $100 billion or so becomes ever more important. And a big part of that story — possibly the biggest — is the social network’s potential as a platform for social advertising. But some advertisers seem to be lukewarm at best on the value of a Facebook ad, according to the Wall Street Journal, while others complain they can’t get the giant social network to do the kinds of things they want to do in order to boost their effectiveness. This dilemma is a central challenge for the soon-to-be public company.

Given the popular belief that “if you aren’t paying for it, then you are the product” — a view that sees Facebook as a rapacious collector of personal data that wants nothing more than to sell users to the highest bidder — it might be a little jarring to see the social network as the one defending users against the demands of advertisers. Nevertheless, that’s the picture that emerges from a CNET piece about the concerns some companies have: They say they can’t get the company interested in doing anything special for larger clients, the ones that presumably will help justify that $100 billion market cap. Says one agency:

We know the reach is there. The problem is that Facebook isn’t willing to do anything different for the client that wants to spend $10,000 versus $10 million.

Another agency spokesman says the social network is “very focused on the consumer experience, and less focused on revenue and working with advertisers.” In other words, advertisers seem to feel Facebook is spending too much time on user features and not enough time sucking up to major brands. That may comfort some users who believe the company has already sold them down the river for advertising dollars, but it isn’t going to soothe the fears of investors or analysts who are looking at Facebook as an investment — one whose market value could be five times that of Google when it went public.

As we have discussed before, those concerns have been fuelled by a number of factors, including Facebook’s somewhat lackluster financial results for the first quarter, which it reported a week ago in a revised S-1 securities filing. Although revenue was up strongly year over year, it actually dropped compared to the preceding quarter, and the company’s net income fell as well. Two of the main factors in that decline were a dropoff in advertising revenue (which Facebook said was due to seasonal factors that affect any advertising business) and a sharp increase in marketing expenses.

Can Facebook prove social ads are worth extra?

The bigger picture is that Facebook is still struggling to prove that social forms of advertising work and that they are worth paying extra for. Although the giant social network is approaching one billion active users, the amount it makes from each of those users is still relatively small — just $5 on average per year. And one of the reasons is that click-through rates for Facebook ads are still tiny: on the order of .05 percent. That’s substantially worse than the industry average, and it seems to be getting worse instead of better.

This is the conundrum some advertisers seem to be wrestling with, according to the Wall Street Journal: Despite the attention Facebook has gotten for bringing social elements to marketing and advertising, and despite the dramatic reach the social network has built up by having over 900 million users, some companies appear to still be unconvinced that advertising there gets them anything special — like, say, making a sale. According to one marketer who works for an auto company:

The question with Facebook and many of the social media sites is, “What are we getting for our dollars?” If a consumer sees my ad [does that] ultimately lead to a new vehicle sale?

Some of that attitude is likely the result of the advertising industry’s failure to appreciate how dramatically social networks are altering the fundamentals of their business, but that’s part of what makes Facebook’s challenge so difficult. It has to find a way to sell advertisers on the value of what it offers as opposed to simple banner ads. But it has to do this without adding all kinds of ad-related features that make the site even less friendly to users. More advertising could just wind up killing the goose that laid the golden egg.

At the moment, many of the major corporations and agencies that are spending money on Facebook seem to be doing it mostly as an experiment. Even WPP Group Chairman Sir Martin Sorrell — whose firm is one of the largest advertising and marketing firms in the world — has said Facebook “is a social medium, not an advertising one.” Until that perception changes or Facebook comes up with other things to tempt major brands, it is going to have a substantial mountain to climb.

Post and thumbnail images courtesy of Flickr users Robert S. Donovan and dutchmassive

10 Responses to “Facebook and advertising: between a rock and a hard place”

  1. Cathe

    This is a beginner question–when setting up pages, does the content aka posts and or ads show up on the admin’s personal timeline. I want to make sure that we don’t annoy people, and that we our truly communicating with our target audience.

  2. I think Facebook ads are great, they are just often poorly thought out. The have worked great for me in a local context. I use ads directed at fans (and their friends) of pages I control. We use Facebook events to promote real world events where me make money selling food and bev. to attendees (also ticket sales). This is the exact opposite of what national/global marketers are looking for.

    I agree with the comment that the “conversation” possibilities with a brand are limited at best. It will be either “I love you” or “I hate you” and not much else to say. Big advertisers shouldn’t try to spark forced interactions.

    Also, I find it ironic that they complain that Facebook won’t compromise their product enough to suit their promo needs. None of these brands would compromise their product why should Facebook? (The insight here is that FB’s real product is the user experience not the ad sales experience).

  3. I have never clicked on a Facebook ad and neither has anyone I know based on a quick (unscientific) survey of my acquaintances. The ads that they used to present to me weren’t even relevant to my interest. Of course with AdBlock Plus I haven’t seen an ad in more than a year. Has anyone here ever clicked on a Facebook Ad and bought something as a result?

  4. Quick question. What does Google do special for large advertisers? From what I can tell, the answer is also nothing. Google ads are very rigid and somewhat non-obtrusive as a result. Facebook, like Google, know that doing something special for the advertiser will cause the user to stop using their app.

    • That’s a good point, Grant — but as a number of people have mentioned, Google is positioned farther down the “funnel of intent,” so people are close to making a purchase when they are searching. Spending time on social networks is not really the same — at least, not yet.

  5. ronald

    Google’s intent advertising is like Best Buy advertising, standardized keyword categories. FB should build their advertising around conversation like an Apple store, after all social is about conversation.

    • aepxc

      But you never really want to have a conversation with a brand (it’s not human), and only rarely about a brand in a commercial setting (think a distant cousin’s awkward sales pitch about some crappy MLM scheme – conversations about brands only work when everyone feels there’s no money immediately at stake).

      Mind you, I’d also argue that Apple’s stores and marketing are not about conversation either – Apple has its focus firmly centered on its products and their use cases. It’s not even on Facebook or Twitter in any meaningful way.

      • ronald

        Sharing as well as email is an async conversation. Presenting a use case can be a conversation. Last time I was inside a best buy, I ask the sales rep a question. What does he do, reads me the data from the small tags. Great I can read myself, same as the problem with Google it presents the same data over and over again.
        Collecting data about my way to purchase, research, recommendations, notes, narrowing of choice, all put in context leaves plenty of room for brands to show their use case as differentiators to me. Little meaningless spec tags or banner ads just don’t cut it for me to make a purchasing decision. Or being lured to a web store which doesn’t have the product because they bought a stupid keyword just …. Let’s just say makes me angry.
        That’s just me, maybe advertising has to be dumb. Don’t know.

  6. Simon

    Ads in social media just get in the way, I don’t visit these sites when I’m in consumer mode. When I’m searching however, I’m far more likely to be looking for a product or researching a purchase. I believe advertising in search is always going to be more valuable that advertising in social media.