Facebook CEO Mark Zuckerberg reportedly said, 'They trust me. Dumb fucks!" about Facebook user privacy. But, the same could apply to Facebook as an advertising platform. (Click Image To Enlarge)
Facebook Inc. has built a $3 billion-a-year advertising business by convincing marketers to buy new forms of advertising designed to create buzz around their brands.
But some advertisers with big spending accounts are wondering whether they're getting their money's worth.
The doubt lingers as bankers and prospective investors decide how to value Facebook for an initial public offering planned for May 18, said people familiar with the matter. Facebook executives will be pitching the company to big investors in an IPO roadshow starting Monday, these people said.
Facebook Inc. is planning to start its roadshow to pitch its stock to investors on Monday, but some advertisers are frustrated with the social-media titan. Drew Dowell has details on the News Hub. Photo: Reuters.
Michael Sprague, vice president of marketing at Kia Motors Corp.'s North American division said.
"The question with Facebook and many of the social media sites is, 'What are we getting for our dollars?'"
The automaker has advertised on Facebook since 2009 and plans to increase its ad spending on the site. While building brand awareness on a site with 900 million users is valuable, Mr. Sprague said he's unclear if "a consumer sees my ad, and does that ultimately lead to a new vehicle sale?"
The concerns from Kia and other advertisers underscore the difficulties of measuring results of nascent-forms of social-media advertising.
Google Inc. and Yahoo Inc. sell traditional display and search ads on their sites. Facebook also offers image and text-based ads, but it pushes new methods that haven't been fully tested.
For example, last year Facebook launched a "Sponsored Stories" feature that lets advertisers rebroadcast people's positive posts on the site's main news feed to highlight them. Advertisers pay a rate based on impressions, or views those posts get.
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While advertisers can directly track the return from ads on Google and Yahoo, Facebook mostly doesn't permit third-party surveys on its site or allow ads to be tagged with "cookies," software that tracks what people do online after seeing an ad.
Last week, Facebook showed its advertising growth doesn't always go up. The company reported its first-quarter ad revenue rose 37% to $872 million from a year ago, but it was down 7.5% from the previous three months. Facebook blamed "seasonal trends" for the decline, as well as shifting user growth where the company generates less revenue per user.
The questions about Facebook's ad business also creates a dilemma for bankers and investors who must decide whether Facebook deserves a lofty valuation. People familiar with the matter have said Facebook will seek a $100 billion valuation.At that figure, Facebook's valuation would also be about 33 times its advertising revenue, compared with 5.5 times for Google. The reason for the discrepancy is in large part due to the fact that Facebook is still a young company with faster growth than Google, which is worth $200 billion but had $36.5 billion in ad revenue last year.
Click Image To View Facebook Amended S-1 Filing Interactive Viewer
Jed Williams, an analyst at BIA Kelsey, said that in order to justify that valuation, Facebook's revenue would have to grow 41% annually for the next five years. That's a much steeper climb than Google's recent revenue growth of 24% in 2010 and 29% in 2011.
Facebook Valuation Timeline - 2004 through January 2011 (Click Image To Enlarge)
Still, Mr. Williams said much of Facebook's valuation isn't around the hard numbers of its ad business as it currently stands, but said it's a "more general bet."
He said.
"When you have an audience that sticky and big you'll figure it out. If you're Facebook, you have to figure it out in a hurry."
Advertisers, meanwhile, are trying gauge their own performance on Facebook. In March, Martin Sorrell, chief executive officer of WPP Group, the world's largest ad company, told attendees at a conference that "clients, for the very first time, are starting to question the measurement issue" on social media.
Mr. Sorrell added.
"The area is a very sexy area, and clients have gone in almost willy-nilly, because it's fashionable to do so."
But now that such ad spending has ramped up, he said finance departments "are increasingly starting to look at the value of those investments."
WPP, which works on behalf of companies such as Unliver PLC and Procter & Gamble Co., said it expects to double its ad spending on Facebook this year to about $400 million. WPP said it will spend "north" of $2 billion with Google this year, up from about $1.6 billion last year.
It doesn't help that Facebook has alienated some advertisers with what they perceive as a highhanded attitude that implies that marketers have nowhere else to turn. Some media buyers and advertisers said Facebook has stymied their attempts to get more ad measurement, for instance.
Rob Griffin, global director of product development at French firm Havas Digital, a unit of Havas SA said.
"There's a pretty high degree of animosity right now with Facebook because they have become so powerful."
The tension, he added, is partly the result of how quickly Facebook has had to scale its business.
For its part, Facebook has made repeated attempts to quell marketers' concerns about the effectiveness of its ads. Last year, the company began working with research firms comScore Inc. and Nielsen Co. to offer tools that let big brands track their social media campaigns on the site.
Nielsen, for example, measures consumers who saw an ad on Facebook and compares them with a similar control group of Facebook users who didn't see the ad. It then matches that up against shopper data to see how ad exposure affected sales of the product.
Still, Nielson Co says not all types of ads are easy to measure all the way to purchase. They add it's particularly tough to get that level of detail from car ads, luxury goods and high-end clothing because such purchases aren't made regularly and often different emotional things play into those purchase decisions.
Some big advertisers have conducted research that shows social networking campaigns have boosted their sales. Ford Motor Co. said by using Facebook ads instead of Super Bowl ads in marketing its 2011 Explorer, shopping activity for the Explorer jumped 104% versus the average shopping lift of 14% following a Super Bowl ad.
A Ford spokesmanCharles Zinkowski said more than 20% of the company's digital media spend is on Facebook, but declined to be specific. He said.
"The number one trusted source of information for consumers is recommendations from friends and family. Facebook provides a reliable platform to leverage that insight at scale."
Still, he said it's difficult to measure Facebook's value against other forms of advertising.
On Tuesday, research firm eMarketer released a study showing 84% of executives it recently polled said that social media campaigns had boosted the effectiveness of sales and marketing efforts. Yet eMarketer also said that "while measuring followers and Facebook 'likes' provides marketers with a hard number, no one yet knows how those numbers translate into a quantifiable return for brands."
Some ad executives caution that a calculation of monetary returns is an incorrect way of viewing Facebook ads.
As Facebook prepares to go public, one question looms: does advertising on the social network work? Advertisers say they're still not sure what they're getting for their dollars. Shayndi Raice has details on The News Hub. Photo: AFP/Getty Images.
Sarah Hofstetter, president of digital ad agency 360i, a unit of the Japanese ad agency Dentsu Inc said.
"If a marketer measures [return on investment] as direct sales from the Web, then Facebook may not be the ideal platform. But if the goal is to move the needle on brand health metrics, whether its awareness or engagement,... then Facebook should be a key part of the marketing mix for most consumer brands."
Some brands have figured out ways around Facebook's measurement limitations. They have hired ad companies like Buddy Media Inc., which can give advertisers a deeper understanding of how Facebook's promotions work, or install apps that offer advertisers the ability to track users by allowing people to opt in to cookies.
Kia, meanwhile, said it is working with Facebook to get better measurement of the effectiveness of its ads. Kia declined to provide ad spending figures.
For now, Mr. Sprague said.
"Being on Facebook sends a message. Consumers they say 'Facebook is working with Kia, I like Facebook ergo I like Kia.' That's what we are hoping for."
COMMENTARY: I have to admit that I enjoy picking on Facebook because it is basically selling "bigness" over advertising effectiveness and its problems showing a tangible ROI on social media advertising. Although some brands have gone on the record and claimed increases in revenues from advertising on Facebook, the vast majority still have doubts about Facebook as an effective advertising platform. I am one of those critics, and believe that 2012 will be a watershed year for Facebook. It will either crack the social media code and prove conclusively that it can be a viable social media advertising platform or finally fall flat on its face.
It does not surprise me that there have been so many Facebook critics on both the financial and social media side. I look at the failures and weak points, and they are glaring:
- Facebook shutsdown Facebook Places, its location-based check-in service due to lack of interest. foursquare is now the LBSN market leader with 15 million users, but still few revenues.
- Facebook acquires Gowalla, a location-based social network, for $15 million in November 2011, but just a couple of months later shutsdown the site claiming that it acquired the site for its talent.
- Facebook shutsdown Facebook Deals abruptly after failing to catchon with its users. However, on April 26, 2012, Facebook announces Facebook Group Deals, a daily deal offering that will compete headon with Groupon and LivingSocial, the daily deals leaders.
- Facebook commerce or F-commerce potential has been brought into question. Several major brands, including Gap, Nordstroms and Penneys shutdown their Facebook embedded ecommerce stores earlier this year, just a few months after launching them. The reason: F-commerce doesn't work.
- Facebook remains largely behind most competitors when it comes to penetrating and generating revenues from mobile. It made up some ground by acquiring mobile photosharing app Instagram for an incredible $1 billion. Instagram has zero revenues, but it has 30 million users, and photosharing remains an important activity of content sharing on Facebook, and the technology gets Facebook into mobile in a big way.
- Facebook depends for 11% of its revenues from online social games leader Zynga. However, Zynga's revenue model has come under scrutiny by social media experts and Wall Street. Only 3% of its users actually pay for playing Zynga games. It's longstanding social game leaders Farmville and Mafia Wars have dropped out of the top 10 social games, and Zynga's newest games are not doing so well. This could negatively impact Facebook's revenues from Zynga.
- Facebook's IPO gives Mark Zuckerberg voting control over the company. The guy is only 27 years old, and just learning to be a CEO. This should be a major concern to investors. Even if he fucks up big time, nobody can vote him out.
- Facebook is now in its fifth year of selling advertising, and there is no tangible evidence that its advertising platform can produce a positive ROI on its advertising. Facebook is basically selling its "bigness" and its arrogance at being the largest social network in the world with over 900 million users is really all it can offer advertisers.
- Questions remain over Facebook's ad-supported revenue model and concerns that it has reached market saturation in many parts of the world, and this will limit its future advertising revenue growth. In a blog post dated March 20, 2011, I was very critical of its ad-supported revenue model and said it had reached a critical inflection point.
In spite of concerns from its social media analysts, advertisers, Wall Street and Main Street investors, Facebook will have a very successful IPO. The largest in Wall Street history, in fact. It's stock price will have a pretty good pop coming out of the gate, but all of it will be driven by pre-IPO institutional investor hype, Main Street over-indulgence, a whole lot of future potential and the Holy Grail Theory (or Facebook can do no wrong due to its sheer bigness).
Courtesy of an article dated May 1, 2012 appearing in The Wall Street Journal
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