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Facebook Dropping The Ball With Its Advertisers

May 3, 2012
Image Credit: Guillaume Paumier (CC BY 3.0)

Various media reports are pointing out that Facebook‘s advertising business is a tangled mess, which could be a warning to those wanting to invest once the company goes public.

The social network is expected to gain a valuation of $100 billion after it makes its initial public offering (IPO) on May 18.  However, reports by the Wall Street Journal and CNET are raising the question of how Facebook plans to make itself worth that much as its advertising business starts to slowly slide, and revenue seems weak compared to the traffic brought in by the world’s most popular social network.

Michael Sprague, vice president of marketing at Kia Motors Corp.’s North American division, told the Journal that Kia has advertised on Facebook since 2009, but he is unclear if consumers even see the automaker’s ad.

Kia and other advertisers are unsure about the analytics behind which ads are being seen by Facebook’s 900 million users.

Advertisers are able to directly track the return from ads on sites like Google and Yahoo because they offer traditional display and search ads on their sites.  But, Facebook doesn’t permit third-party surveys on its site or allow ads to be tagged with “cookies,” which is software that tracks where people go online.

Facebook reported a downslide in its most recent first-quarter ad revenue, down 7.5 percent from the previous three months.  The company blamed the slide on “seasonal trends.”

Considering the company’s ad revenue is $3 billion per year, its $100 valuation would be 33 times its advertising revenue, compared to Google which is just valued at 5.5 times its advertising revenue, according to the Wall Street Journal report.

Jed Williams, an analyst at BIA Kelsey, told the Journal that in order for Facebook to justify its valuation, its revenue would have to grow 41 percent annually for the next five years.

The Journal reported that Facebook has been alienating its advertisers, saying Facebook has stymied some advertisers attempts to get more ad measurement.

“There’s a pretty high degree of animosity right now with Facebook because they have become so powerful,” Rob Griffin, global director of product development at Havas Digital, told the news agency.

David Smith, the CEO of digital agency Mediasmith, told CNET that the social network “doesn’t seem to care,” and questions whether they “want the big bucks.”

CNET reported that another executive at one of the world’s biggest interactive agencies who spoke on the condition of anonymity said the problem is that Facebook is not willing to offer anything different to the client wanting to spend $10,000 versus $10 million.

Rebecca Greenfield wrote in a feature for the Atlantic Wire that Facebook’s current attitude towards advertisers is due to Mark Zuckerberg’s “hacker way” of focusing on the product more than the business.  She said the company often chooses user experience over appeasing their business partners.

A co-president of U.S. operations of Tribal DDB said that his company has been trying to call Facebook, but have not found someone else on the other end of the line.

“For the longest time, we’ve been trying to call Facebook to do business with them and there’s nobody to pick up the call,” Parker told CNET. “They’re very focused on the consumer experience, and less focused on revenue and working with advertisers.”

The bridges are not burned for the social network yet, advertisers like Kia are still willing to work with Facebook to figure it out.

For now, “being on Facebook sends a message,” Sprague told the Wall Street Journal. “Consumers they say ‘Facebook is working with Kia, I like Facebook ergo I like Kia.’ That’s what we are hoping for.”


Source: RedOrbit Staff & Wire Reports



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