Analysis: Facebook's advertising woes

Just before Facebook's IPO, General Motors withdrew its $10 million advertising budget on the grounds that the ads on it did not produce the expected results. From then on, it would only use the free media provided by Facebook for brand marketing. General Motors thus became the first major advertiser to express dissatisfaction and doubts about Facebook's advertising business. As early as January, Procter & Gamble CEO Robert McDonald announced that he would cut P&G's annual advertising investment of up to $10 billion and instead focus more on Facebook's free advertising.

Procter & Gamble, AT&T and General Motors are the three largest advertisers in the United States. Fast-moving consumer goods and automobiles are the industries most closely related to people's lives. However, Facebook cannot earn any revenue from Procter & Gamble and General Motors now. This is indeed a big warning for other advertisers on Facebook. They will inevitably think twice before continuing to increase their advertising investment on Facebook.

Compared with Facebook, Google is undoubtedly a better choice for companies in terms of advertising investment efficiency, and survey data also supports this view. In terms of online audience, Google covers 90% of Internet users, while Facebook, despite having 900 million users, only has 51%. Comparing the revenue of the two companies in the first quarter of 2012, Google's revenue was 2.9 billion US dollars, a year-on-year increase of 1% and a month-on-month increase of 0.7%, while Facebook's revenue was 1.06 billion US dollars, a year-on-year decrease of 6.5% and a month-on-month decrease of 32%. The click-through rate of ads on Facebook is only 0.051%, while Google's data is 4%.

More than 80% of Facebook's revenue comes from advertising, and advertising revenue mainly relies on display advertising revenue on the website. Compared with Google's keyword advertising, Facebook's revenue method is not only single, but its development model is also quite suspicious and worrying. Google's keyword search recommends specific products to users based on their interests and habits. When users search with Google, they must have related demands in real life, and Google's advertising is the link between such demands and products.

However, Facebook is constrained by its display advertising model and cannot provide users with more useful information. For most Facebook users, they are only concerned about friends and sharing on Facebook and are rarely interested in product ads on the page. Moreover, based on Facebook's social attributes, in order to take care of the user experience, it cannot allow ads to be placed indiscriminately and can only select relatively limited ads to be placed. There are also restrictions on the location and size of ads on the page. Over time, users will inevitably get used to this.

The hidden danger behind this habit is that once users get used to an advertisement that has no necessary connection with their needs, they will gradually ignore its existence and regard the advertisement as a natural part of the Facebook page. In this way, the "social advertising" model that Facebook has painstakingly created will eventually become a dead element on the page that is ignored by users, and become a concept with only user data and influence but no actual benefits. This situation is undoubtedly a very bad signal for a company with a scale of hundreds of billions as soon as it goes public.

What makes Facebook even more cautious is the current user privacy issue, which forces Facebook to tread on thin ice in terms of user data collection and advertising operations. Advertising must be based on user data. Compared with a single social community, Google has an unparalleled advantage in collecting user data. Today, when users pay more and more attention to their privacy, every advertising strategy of Facebook will inevitably receive special attention and even criticism from the outside world. This requires Facebook to develop an advertising revenue model that is in line with the interests of itself, advertisers and users. Obviously, it will be a very difficult and possibly long process. These factors will greatly affect the final effect of Facebook's advertising operations.

For Facebook, which has relied on advertising revenue to continue its development so far, only by getting its advertising business on the right track and establishing a clear and mature revenue model can it truly deserve its market value of 100 billion and prove that it is not just a flash in the pan or a bubble.

After all, good advertising is not as good as good revenue, and Facebook’s current advertising revenue is not good enough to be called “good”.