May 17, 2012

Facebook: The Best Show In Town

Well, well, well. This whole Facebook carnival is getting mighty fun to watch.

It seems like only yesterday we had this to say about advertising on Facebook...
"No marketer in his right mind would pay to be ignored by a small number of people. But there is apparently great appeal in being ignored by hundreds of millions."
Suddenly, however, in the last few days everyone has abruptly discovered what we've been saying about Facebook for a long time -- no one pays any attention to the ads.

On Tuesday, the big bomb hit when GM announced it was cancelling $10 million in Facebook ads. According the The Wall Street Journal...
"General Motors Co. plans to stop advertising on Facebook after the auto maker's executives determined their paid ads had little impact on consumers' car purchases... (GM) will continue to expand its use of marketing through Facebook's pages, in which marketers can display content at no cost..." 
Well, I'll be darned. Six months ago, you read the following here at The Ad Contrarian...
One of the problems Facebook has is that the free part -- having a Facebook page -- is way more attractive to marketers than the paid part -- advertising. Unfortunately for Facebook, you make more money selling stuff than giving it away. It's one of those pesky laws of economics.
Now, 2 of the 3 biggest advertisers in America have decided that the free part of Facebook is a lot more attractive to them than the paid part.

And apparently the trend may be snowballing. According to the NY Times...
Several analysts believe that GM’s decision will cause other marketers to take at least a second look at their own Facebook strategy. Melissa Parrish, an analyst at Forrester, wrote in an e-mail...“My colleagues and I have spoken with several other advertisers who were already thinking of putting their dollars elsewhere... Now that G.M. has done so in such a large and public way, many of the fence-sitters will know that they’re not alone in their disappointment about their results.”
Also according to MediaPost..
... even before the GM announcement Forrester analyst Nate Elliott wrote this damning judgment: “Marketing on Facebook doesn’t work very well, and marketers can’t count on things improving anytime soon.... And so every day more smart marketers are going to wake up and look for other places to dedicate their social resources."
Apparently, hell hath no fury like a lemming scorned.

Just for the heck of it, I did a little math.

If Facebook's IPO valuation comes in at $100 billion, as many predict, that would be over 30 times its ad revenue. Google is valued at about 5 times its ad revenue. So the people who are going to bid up Facebook are paying 6 times as much for a dollar of ad revenue from Facebook then they'd pay for a dollar's worth of ad revenue from Google.

According to a calculation I did, Google produces 25 times the revenue per minute spent on it than Facebook does.

So if my math is right (which it rarely is -- never trust copywriter math) and a) investors will be paying 6 times as much for a dollar's worth of Facebook ad revenue, and b) Google produces revenue at a rate that is 25 times faster than Facebook, then investors are paying 150 times as much for a minute spent by a viewer on Facebook than for a minute on Google.

In what universe does that make sense?

On the eve of the big IPO, The Ad Contrarian turns investment adviser. You'd be wise to stay away.


headlemur said...


TC/Writer Underground said...

The reaction to the GM news by All The Usual Social Media Suspects was immediate. Variations of "they just don't get it" popped up like dandelions in my lawn, and one guru even said:

 "Diverting money into other online channels may sell cars in the short term, but will fail in the longer term, as consumers spend more and more of their time on social platforms like Facebook."

Yes, organizations with confidence in their products are always much better served by *not* getting their product into the hands of consumers and focusing instead on fuzzy notions of engagement.

Another marketing "guru" said you'd never send an email to a subset of your customer list, so why would you do so on Facebook?

Uhh, do much email marketing?

We're about to learn (and re-learn, and learn again) just how vacuous many social media experts are -- and how little grasp they have of general marketing principles outside of social media jargon.

Sean Peake said...

Remember, Zuckerberg still has controlling interest with over 51% of common shares

Olin Graczyk said...

Thank you for proving I'm at least somewhat rational.  People are crazy.  I don't invest in "potential" based on audience size.  I invest in "potential" based on ideas and clever revenue streams.  

Facebook took something new and innovative, and slapped a dinosaur on it to weigh it down (Facebook ads).  Surely, someone over there will figure out that they need to think a bit harder about how that ship will make money in exchange for value to marketers.  Stop just slapping ads on everything.

Jeff said...

While I agree with the article, it helps to remember that Facebook is actually profitable.  And a healthy proportion of those profits come from games like Farmville and such.  It is, in fact, conceivable for Facebook to have a decent future if all it ever did was continue to be a gaming platform for popular social games. It's not like people are investing entirely in vaporware. 

And while Facebook has not yet figured out how to make their advertising work, the potential upside if they DO figure that out just might be worth the risk of investing.  Not investing now while the stock is overvalued, but investing at some point, so long as one remains realistic about the risks.