Government // Mobile & Wireless
Commentary
5/25/2012
12:12 PM
Thomas Claburn
Thomas Claburn
Commentary
Connect Directly
Google+
LinkedIn
Twitter
RSS
E-Mail
50%
50%

Facebook's Advertising Problem

GM says Facebook ads don't work. While search was made for advertising, social will be harder for marketers.

Facebook's History: From Dorm To IPO Darling
Facebook's History: From Dorm To IPO Darling
(click image for larger view and for slideshow)
It may never be clear how much General Motors' public disparagement of Facebook advertising helped cool investor enthusiasm for the social network.

But even if Facebook's IPO woes owe more to problems with stock trading software and skepticism among financial industry insiders than to GM's claim that Facebook advertising doesn't work, the automaker's dissatisfaction with Facebook ads bears further consideration.

Facebook is clearly worth a lot of money. Perhaps not the $100 billion argued with the opening share price of $38, but its present $70 billion market capitalization is not a trivial valuation.

At the same time, other tech companies that straddled advertising and content have flown high and fallen. AOL had a valuation of $222 billion in December 1999. Today, it's worth about $2.6 billion. Yahoo, the darling of the 1990s, is still trying to recapture its glory days after years of uninspired management.

[ Learn more about Facebook's stock offering snafus. Read Facebook's Tech-Snarled IPO: What We Know. ]

Facebook is arguably special because it knows so much about its users and because it has so many of them--845 million monthly active users, according to the company. But other once-popular websites like MySpace and Friendster have risen and fallen. There's no reason to assume that Facebook will be forever.

As Facebook itself says in its prospectus, "A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels."

Facebook's plan to generate revenue from its users depends on increasing the amount of time people spend on the site to increase their exposure to advertising. The problem is that people seem to react to advertising the way bacteria react to antibiotics: Those who don't succumb build up immunity.

The first banner ad ran in 1994 at HotWired.com. It had a click-through rate (CTR) of 78%, and the CTR has declined significantly since then. Banner ads had a 3% CTR in the mid-1990s and that dropped to 0.28% in 2003, according to a 2010 study, "Internet Advertising Formats and Effectiveness."

Author and advertising entrepreneur John Battelle recently expressed hope that the ad industry could come up with something to replace the increasingly anemic display ad. "Boxes and rectangles on the side or top of a website simply do not deliver against brand advertising goals," he wrote on his blog. "Like it or not, boxes and rectangles have, for the most part, become the province of direct response advertising, or brand advertising that pays, on average, as if it's driven by direct response metrics. And unless you're running a high-traffic site about asbestos lawsuits, that just doesn't pay the bills for content sites."

Why is display advertising in decline? A rise in ad blocking may have something to do with it. In 2009, Wladimir Palant, creator of popular ad blocking extension Adblock Plus, indicated that 5% of Firefox users had installed ad blocking software.

Earlier this month, ClarityRay, a startup based in Israel, claimed that overall rate of blocked ad impressions is 9.26% in the United States and Europe and predicted that ad blocking will double over the next 20 months.

It's worth noting that ClarityRay is not a disinterested party in this issue--it offers software-as-a-service to publishers to enable them to offer paid subscriptions to those who'd otherwise block ads.

Whether Facebook is seeing more of its ad impressions being blocked remains unclear. The company didn't respond to a request to discuss ad blocking. But even if it's somehow immune to this apparent increase in ad blocking, Facebook is still likely to be forced to come up with new ways to reach users with advertising messages as current Facebook ad formats become less and less effective over time.

All this might be nothing more than the ongoing need for marketers to find fresh ways to reach people were it not for the social nature of Facebook.

There's only so far you can push marketing before people turn to technology for defense or abandon the platform entirely. And that distance is much smaller where friends are involved. Social advertising has limits that other advertising does not.

Facebook is going to have a hard time turning social interactions into billable advertising opportunities.

Mobile Connect addresses the strategic direction that will define enterprise IT for the next decade--building and managing information systems that run on a mobile platform. Mobile Connect will bring together enterprise mobility thought leaders to discuss the innovations in mobile, and how forward-thinking companies are getting the technology to work for them, providing unprecedented business value. It happens in Boston, June 18-20. Register today.

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Deb Donston-Miller
50%
50%
Deb Donston-Miller,
User Rank: Apprentice
6/1/2012 | 2:38:01 AM
re: Facebook's Advertising Problem
Just as marketers have discovered the power of content, I think advertisers are going to have to become content producers as well. Take the P&G Best Job ad (http://www.youtube.com/watch?v.... I've seen it shared and discussed at lot. I may not click on or even look at a display ad on Facebook, but offer me a tear-jerking video about a mom whose years of self-sacrificing results in her daughter succeeding in gymnastics at the Olympics? I'm all over it.

Deb Donston-Miller
Contributing Editor, The BrainYard
MyW0r1d
50%
50%
MyW0r1d,
User Rank: Strategist
5/29/2012 | 2:09:02 PM
re: Facebook's Advertising Problem
Ad Blocking software is GREAT. As more web pages are dynamic and filled with pop up ads, streaming images, etc. navigating to find information has been like running an obstacle course not wondering if but when I have to close my browser hijacked by unwanted adware. I place it in the indispensible software category for Windows based systems with antiVirus software as more hackers turn to web based from email attachment delivery methods. It's almost a greater plague than political advertising which has become so incredibly negative that they have lost any credible value.

I also believe FB's difference compared to other shooting stars has been its embracing of games. Look at the iPhone app store for instance in which the number one category is Games and the next closest is merely half that number (http://148apps.biz/app-store-m... ). People want to be entertained and FB uses games to a much greater extent than other similar efforts. In doing so they may see the ad, but like the political advertisement we simply skip it as having lost any credible value.
jhkjhk
50%
50%
jhkjhk,
User Rank: Apprentice
5/27/2012 | 5:40:32 PM
re: Facebook's Advertising Problem
Facebook is for lonely people. As a private person, I see no value in it. I have an account but almost never use it because I want to be left alone. USA Today and other sites are busily promoting Facebook, e.g. if you want to post a comment (like Disqus). I never click side ads anywhere, so all Facebook can use me for is my email address for spammers; if that starts happening, I and most users will close the account.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest - September 10, 2014
A high-scale relational database? NoSQL database? Hadoop? Event-processing technology? When it comes to big data, one size doesn't fit all. Here's how to decide.
Flash Poll
Video
Slideshows
Twitter Feed
InformationWeek Radio
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.