October 03, 2012

Facebook Tying Itself In Knots

Let's go back a few years.

Old media paradigms were dying and new media paradigms were being developed.

The logic went like this:
  • Consumers were no longer docile and malleable. The web had changed all that. 
  • Old advertising metrics like reach and frequency were no longer relevant. Simply counting the number of purported impressions was shallow and outdated thinking.
  • Instead, the true measure of advertising effectiveness was engagement. Engagement did not measure how many ads ran and how often they ran, it measured the impact the ads had on the consumer.
  • The ultimate measure of engagement was interactivity. The willingness of a consumer to interact with an ad was the litmus test of its ability to engage.
  • Online advertising, and in particular display (banner) advertising, was uniquely suited to create interactivity because it was hyperlinked.
This new philosophy of advertising effectiveness seemed secure and well-accepted.

And then disaster hit. It became clear that consumers had no interest in engaging with advertising. Levels of interactivity (clicks on display ads) were astoundingly, shockingly low.

Meanwhile, the online media industry, the advertising industry, and the marketing industry had bet the farm on interactivity.

They needed a new story and they needed it quickly.

This was most starkly the case for Facebook. Facebook, by far the world's most successful social media platform, was locked into a dubious revenue model. Their amazing social media success provided them with very little revenue, and the only way for them to make money was by selling display ads, just like a million other websites.

But their problem was more acute. The level of advertising interactivity on Facebook (as measured by clicks) was even more disastrous than the industry as a whole. It was so low, in fact, that they refused to publish it.

They adopted a very clever revenue solution. Instead of charging advertisers on a cost-per-thousand basis (the traditional model for a media buy) they offered to charge on a cost-per-click basis. The theory behind this was that the real value of the advertising was in its ability to generate the click, the embodiment of engagement.

They only charged you for actual clicks. All those non-clickers didn't matter. You weren't paying for them.

As an advertiser, you were only paying for the gold. Clicks represented the valuable customers, the ones whose engagement and interest were proven.

This pricing structure was attractive to a great many advertisers, and the nasty little problem of click-through rates got swept under the rug.

Now the story takes a strange turn. Facebook is not generating enough revenue to justify its once lofty valuation, or even its not-so-lofty current valuation.

In an effort to convince the marketing industry that it is a powerful advertising medium, Facebook has begun singing a new tune. Or maybe its an old tune. According to Mashable, they made a big presentation this past week:
"Facebook on Monday continued its mission to convince the world’s top marketers that the standard means of measuring an online ad’s performance — the click-through rate — doesn’t matter."
And what does Facebook now say is the true measure of advertising value?
"(their Director of Pricing and Measurement)...proposed that the industry rely on the two measurements that have served TV well...reach and frequency."
Back to the future.

Facebook is so lost in its quest to prove its advertising relevance that it has tortured the logic of advertising value beyond comprehension. Their business model is now based on completely contradictory principles:
  • Their pricing structure is based on the value of clicks. 
  • But their business philosophy is that clicks have no value.
They better make up their mind pretty quickly or this may go down as one of the all-time great business shambles.

Thanks to the great Dave Trott for calling the Mashable article to my attention.

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