Case Study: Facebook Advertising's Troubling Future

On May 18, 2012, social media cornerstone Facebook transitioned from a privately owned company to a publicly traded one: for the right price, anyone could own a share of Facebook stock and have a say in how the company operated. On the tech giant's first day of trading, one share of Facebook stock could be bought for $38.89. Less than three weeks later, that same share was worth just $25.61-less than two thirds of its original value. While Facebook eventually regained its market footing, its shaky launch and early decline reflected many investors' apprehension about the company's economic future. Their fears were not without merit: just three days before Facebook's initial public offering, automobile manufacturer General Motors (GM) announced it would pull all of its advertising from the flagship social network. According to an official at GM, the automaker no longer believed that its paid Facebook advertisements had a significant impact on consumer car purchasing decisions. "That's a damning announcement by GM," said ZDNet blogger Tom Foremski, "and it's not something that any company does in such a public manner."

Indeed, while the loss of GM's $10 million advertising account may have been the most public stain on Facebook's advertising platform, it was far from the only one. "This is a very serious issue for Facebook because there are a lot more companies that have suspended their Facebook ad campaigns without having issued a media alert as GM did," said Foremski. Why are businesses turning away from advertising on Facebook? The answer may lie in the numbers. In a recent Business Pulse survey, nearly 75 percent of respondents self-reported that they either didn't notice or didn't pay much attention to advertising on Facebook. A study conducted by the Greenlight advertising agency found that 44 percent of users never click on Facebook ads, andonly 3 percent click on ads regularly. Some 17.8 million Mozilla Firefox and Google Chrome users even employ Adblock Plus, a browser plug-in that disables Facebook ads entirely.

In the wake of the GM announcement, Facebook commissioned marketing analytics firm comScore to conduct its own study on the effectiveness of Facebook's marketing platform. ComScore found that Facebook activity-including both advertising and earned media (like wall posts, likes, and shares)-had a long-term effect on purchasing. According to Vice President of Industry Analysis Andrew Lipsman, this "proves Facebook earned media and advertising are driving purchase behavior." Facebook's own research, based on 60 large-scale marketing efforts by companies like Applebee's and Best Western, found that 70 percent of advertising campaigns generate a three-to-one return on investment, while 49 percent generate a five-to-one return. Some analysts like digital marketing consultant Andreas Ramos have criticized these studies, however, as lacking objectivity and missing crucial research data.

While Facebook's paid advertising revenue grew by 61 percent in 2012, that growth was predicted to slow to nearly half that in 2013. Journalists and bloggers have been raising questions about Facebook's long-term sustainability as a marketing platform since the social network began offering paid advertising. Now that Facebook must demonstrate profitability to its shareholders, however, the stakes have never been higher for the company to assert a lean, profitable marketing platform. With the aid of some heavy hitting partners, Facebook may do just that. Just a month after GM pulled its ads from Facebook, corporate titans Ford and Coca- Cola announced plans to intensify their social media marketing efforts by investing in new, multi-million dollar advertising campaigns on Facebook. "It can still make money," Tom Foremski ruminates, "but can it make enough to support its share price?" Time will tell for the social media giant.

Questions

1. What can up-and-coming social networks learn from Facebook? What do you think Facebook can do to stay relevant in the future of social media?

2. How might a marketer evaluate the effectiveness of her Facebook advertising campaign? Give an example.

3. If you were a marketing executive with a multi-million dollar budget, how would you approach social media? Which Web sites, and what sorts of campaigns would you focus on (if any)? Would you buy paid advertising on Facebook? Explain your reasoning.