Do Facebook ads work?
The question lies at the very core of the newly-gone-public company as it tries to convince investors that it has what takes to convert the online activities of almost a billion registered users into sustainable revenues that justify its once-lofty valuation.
It's been a challenge so far. Initially priced at $38, the share value has slumped to barely $27 largely based on fears that the company still hasn't cracked the social media advertising code. Facebook has been criticized for its low click-through rate (CTR), which means relatively few users actually click on the ads and even fewer buy anything when they do.
Facebook doesn't publish its own CTR figures, but Webtrends data puts them at 0.05 per cent - or one in 2,000. Google's CTR is eight times higher. WordStream says those numbers are worsening, down by 8 per cent this year alone.
That doesn't mean Facebook isn't doing everything it can to change minds. Four notable moves this week confirm just how seriously it's focused on raising its credibility as a mainstream social media advertising platform:
- The company presented a research paper, jointly written with comScore, that analyzed spending patterns by users who become so-called fans of brands on their respective Facebook pages. The Power of Like 2: How Social Marketing Works claims users who become fans of a brand, and friends of those users, spend more on those brands' products and services than non-fans. This so-called "earned media exposure" predisposes users to be more loyal to a given brand, which can make them more likely to click on paid advertisements, as well.
- It's launching a new service, Facebook Exchange, that allows advertisers to track users' browsing history across the web, then actively bid on Facebook display ads that match that activity. This so-called real-time bidding technology uses cookies, small pieces of code that web sites save on users' computers, to track — and learn from — online usage patterns. It allows advertisers to precisely customize their ads, which can in turn drive up response rates and return on investment.
- It's testing a new way of selling ads. Shareable ad units allow advertisers to make non-Facebook ads shareable within Facebook via the company's Open Graph environment — a change that bypasses earlier requirement to buy ads exclusively through Facebook. The pilot program, currently limited to select advertisers, could potentially make the process easier and more efficient for larger scale, multi-platform marketing buys.
- It has partnered closely with Apple to include rich Facebook functionality in the upcoming updates to the mobile operating system, iOS 6, that drives every iPhone, iPad and iPod touch. The changes will embed Facebook deeply into virtually every corner of Apple's mobile universe, including Siri, contact management, gaming and notifications. New buttons in iTunes and the App Store will allow users to share and like content with their Facebook communities. A public application programming interface (API) will allow developers to build Apple/Facebook-friendly apps and services. Tighter iOS integration will drive marginal revenue from sales generated through Apple-based mobile channels.
Unfortunately for Facebook, most of these moves are already old hat. Real-time bidding has been a pillar of Google's revenue generation efforts for years, Twitter is already a deeply embedded fixture on current versions of Apple's mobile operating system, and for every paper that correlates Facebook fans and likes to increased purchase activity, there's another data point that reinforces how far behind the company is.
The company generated US$3.7 billion in revenue last year, mostly from advertising, but it continues to be dogged by criticism that it isn't nearly enough given its global-scale user base. It's a perception that only grew darker after the company reported first quarter ad revenues had dropped 7.5 per cent from the previous quarter, and after General Motors, citing inconclusive data that the investment was generating enough of a return, pulled its paid ads from Facebook just days before this month's IPO.
Granted, the automaker's $10 million spend had been a small fraction its annual $1.8 billion annual advertising budget, but the optics of the pullout cast a pall over Facebook's ability to woo — and keep — other players in the lucrative automotive segment.
The solution to Facebook's advertising dilemma could lie in the data it collects on its users. Detailed activity-generated knowledge of demographics, wants and needs could be used to refine its targeting algorithms and increase the punch of every advertising dollar. Its frequent run-ins with North American and European authorities over privacy, however, could hamper its ability to collect and use that information.
In a letter he sent to shareholders as part of Facebook's official S1 filing, CEO Mark Zuckerberg wrote, "Simply put: we don't build services to make money; we make money to build better services."
As investors continue to doubt Facebook's ability to convert its huge user base into sustainable advertising revenue, he may want to rethink that statement.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca