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Facebook needs ad initiatives with quicker payoffs February 6, 2012

Posted by David Card in Uncategorized.
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Facebook showed its hand in preparation for what Om called the mother of all initial public offerings. Its S-1 prospectus revealed that it has a $3.2 billion advertising business that grew 69 percent in 2011. That growth has naturally slowed from a furious 145 percent pace the previous year, but observers criticizing Facebook for its lack of business detail might well wonder how sustainable that growth will be. Facebook appears more focused on proving the long-term promise of social media marketing than on taking some immediate steps like adding traditional ad formats and selling mechanisms to boost this year’s ad sales.

Facebook’s documentation says its 2011 growth came mostly from volume, and that volume was driven by user growth. It is going to get harder for Facebook to gain users, as its penetration in Western markets is as high as 84 percent, and it shows no sign of figuring out how to enter China. That means it must either show more ads to users or raise their value and price. Facebook was able to raise ad prices 18 percent during the course of 2011, but it struggled to do so as the year progressed. According to the S-1, a December price increase only offset an intentional cutback on the number of ads it showed rather than growing the whole revenue pie. Facebook needs to spice up its ads to maintain its near-term growth.

Making Facebook ads work

Facebook remains mired in the market of low-cost display ads, as evidenced by its $4 revenue per user compared with Yahoo’s $7 and AOL’s $10. Facebook’s ads are a mix of performance-based units where the advertiser pays only when they are clicked on and ads for branding that are purchased by CPM impressions. Facebook could charge more for each type if it could raise their effectiveness versus the advertiser’s objectives, increasing clicks from qualified users (who will make a purchase or fill out a registration) or demonstrating brand lift or increased awareness.

According to Webtrends, Facebook’s click-through rates are only half that of the industry average of 0.1 percent. Facebook brags about its ability to target ads based on its mass of user data, including users’ interests gleaned from their profiles, Likes and content-sharing activity. But Forrester Research says marketers have not found Facebook campaigns to be particularly effective, and I have heard the same. I am a total believer that data-based targeting will improve ad effectiveness, but clearly Facebook has not yet proven its case to advertisers.

Facebook should be more opportunistic

Facebook’s approach to advertising is more like Google’s than Yahoo’s. That is, Facebook sells most of its advertising through a bid-based automated marketplace. Forrester’s Nate Elliott thinks Facebook could beef up this system, especially by adding analytics tools. But Facebook ads, no matter how well targeted, will probably never show the ROI of search-based advertising, where the user has explicitly indicated to the advertiser that he is actively researching or shopping.

Facebook is betting on the promise of social while ignoring more-traditional opportunities. Its latest project is to move Sponsored Stories — ad units related to a user’s friends’ activities that call them out by name — into the news feed. The idea is that marketing tied to friends is more engaging and likely to be acted on or passed along. Facebook points to a Nielsen study that says this increases user recall. Indeed, the concept is promising, attracting positive responses from smart interactive agencies like iCrossing.

But rather than painstakingly reinventing advertising along social lines, Facebook could see some immediate gains with a more traditional approach to a couple of areas.

  • Selling. While Facebook’s automated marketplace also allows buying a guaranteed number of impressions for a fixed price, it doesn’t guarantee location, timing or frequency. Brand advertisers like to buy that way and will spend money with portals instead of Facebook. Likewise Facebook might want to hire more experienced, schmoozing salespeople to service those advertisers and agencies. Its marketing expenses were up 46 percent to over $400 million, but that’s a fraction of Yahoo’s $1.1 billion.
  • Formats. Facebook doesn’t offer big ad units that support rich media or video. The company believes that would harm the user experience. But surely an interstitial once a day or between photos wouldn’t drive users away. Especially if it were targeted by interest or were entertaining, à la movie trailers. The portals can sell this kind of thing for $250,000 a spot.

These moves would certainly help Facebook triple the projected growth rate of 20 percent for U.S. online display ads. But it is unlikely the company will make them. Facebook seems intent on playing for the long run exclusively. That may pay off over time, but Facebook will miss out on near-term market share gains and revenue growth and on chances to build relationships with big advertisers.

Question of the week

Will Facebook maintain its growth in ad sales?
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