Actually, those of you that know me, have probably already figured out that this is a leading, bogus title. Even if this is the latest, hottest, newest, most exciting thing from Wall Street, I seriously don’t think Facebook is going to make a dent in the local advertising. Why? Because there are already some serious clouds forming in its over-hyped empire.
Now don’t get me wrong – I enjoy some of the info sharing with widely dispersed friends and family that Facebook can bring. I just don’t see this as the local advertising nirvana that it is being made out to be by some.
By the time you are reading this, Facebook will have completed its initial IPO stock offering, and with a final price at $38 a share, it should raise about $18.4 zilllion (ok, billion), becoming the second-largest U.S. IPO ever. That’s a lot of cash no matter what you think of their business model.
Facebook is also one of the few profitable Internet companies to go public recently — it had net income of $205 million in the first three months of 2012, on revenue of $1.06 billion. In all of 2011, it earned $1 billion, up from $606 million a year earlier. That’s a far cry from 2007, when it posted a net loss of $138 million and revenue of just $153 million.
But at these kinds of valuation levels, the expectations will be huge. And as we know in the Yellow Page industry, everyone will be gunning to take a piece of their pie. Therein lies the rub. So let’s look at the cracks already appearing in their armor.
Problem, #1 – Expectations require results, big results
To meet these over inflated expectations, Facebook will need to cook up new streams of revenue that indicate a future beyond its current revenue model of just advertising. Last year, advertising represented 85% of Facebook’s revenue of $3.7 billion. At its IPO, Facebook will likely be valued at about 100 times its current profit, meaning it must fuel growth by somehow figuring out how to squeeze a lot more value out of its 900 million users.
For example, their latest revenue test came a week or so ago when the company began charging users in New Zealand as much as two New Zealand dollars ($1.53) a post to ensure that their own friends see what they write. The service, dubbed “Highlight”, seems contradictory to Facebook’s long-standing pledge, emblazoned on its home page, that the site is “free and always will be.” The service is similar to one for marketers, called “Reach Generator”, which Facebook introduced in February, for brands to pay per “fan” to reach those users 75% of the time with marketing messages. Naturally, some users have been puzzled by Facebook’s fee to make posts show up more often. Maybe they just need to add an asterisk to that free pledge.
A Facebook spokesman was quoted as saying that the company constantly tries new features. “This particular test is simply to gauge people’s interest in this method of sharing with their friends,” but declined to say how the experiment was going.
The problem is that Facebook already has a reputation of fast and furious product introductions that don’t always stick. For example, it abandoned a major 2007 initiative called “Beacon” that sent data from external websites to Facebook, and a 2011 effort at selling daily deals, similar to what Groupon offers.
Problem # 2 – The return on their advertising sucks
As I’m sure you heard, General Motors has announced it is withdrawing its advertising on Facebook because it just wasn’t seeing the results they expected. GM currently spends about $40M on its Facebook presence, with about $10M of that for advertising. But GM isn’t the only company to see weak results for its Facebook ads: Wordstream estimated that Facebook ads have an average click-through rate of just 0.051%. That’s barely half the 0.1% rate typically seen for Internet ads, and a small fraction of what Google has (0.4%). Moreover, analyst noted that Facebook’s 6.5% Q/Q revenue decline in seasonally weak Q1 compares unfavorably with the 1% increase posted by Google’s display ads for the same period, and that from a much larger base.
Problem #3 – Most advertisers have no idea how to use Facebook to their advantage
If you do a quick Google search you will see a whole rash of stories on this. Given the experience the Yellow Page industry has with SMB’s, where those marketing a range of products often see sales calls now running 2 to 3 hours, why would we think that these same SMBs would understand Facebook seamlessly? And the bigger question is that if they struggle with this newest, hottest of internet sites, what does that say about the future of social network advertising?
Problem #4 – Users don’t trust the site
One benefit of print Yellow Pages has always been its huge trust factor amongst consumers. For Facebook, a recent global survey by the digital marketing agency, Greenlight, revealed that a full 30% of people ‘strongly distrust’ Facebook with their personal data. Additionally 44% confirm they would ‘never’ click on Facebook sponsored ads, and 31% indicated they rarely click on them. That kind of distrust and lack of interest in Facebook as an advertising vehicle does not bode well for Facebook’s advertising programs.
We’ll have to see what the future holds but the early signals aren’t showing me any indication that Facebook is a platform to connect buyers and sellers. To communicate and share with others, yes. But to find local products and services? Not yet. Not even close.