There’s been a lot of attention paid to Facebook’s business model recently, especially with the news that General Motors has killed a $10-million advertising campaign devoted to the giant social network — not exactly a great sign of confidence in advance of the world’s most eagerly anticipated IPO. And GM’s move is only the latest indication of discontent, as other advertisers are also questioning their spending. What all of these moves reinforce is that while Facebook may look like and function like a social network for the majority of its users, on the business side it looks almost exactly like a traditional media company, and that is both good and bad.
The Washington Post’s Hayley Tsukayama reports on the three things you need to know about the Facebook IPO, which will drop this week.
Like Twitter, the content within Facebook may be generated entirely by users, but the business model is all about advertising, just like any other media entity. According to the social network’s latest S-1 securities filing, advertising accounted for more than 80 percent of its $1-billion in revenue in the most recent quarter. And while some of that represents experiments with “social advertising” such as Sponsored Stories and other features, much of it is essentially run-of-the-mill banner and display advertising — not all that different from what you would find on a newspaper or magazine website, or any blog network.
In some ways, Facebook ads are actually worse than regular ads
That helps explain why Facebook’s advertising isn’t exactly setting the ad world on fire: in fact, according to at least one study, clickthrough rates for ads on the social network are actually lower than the already abysmal clickthrough rates for regular Web advertising (for what it’s worth, Ford says that it is more than happy with its spending on Facebook, unlike General Motors).
Facebook actually has an even bigger mountain to climb than newspapers or other media entities do when it comes to advertising, since the social nature of the network could actually interfere with the effectiveness of traditional ads. Sir Martin Sorrell, chairman of WPP Group, has said that he isn’t even sure advertising can work within an environment like Facebook, which is inherently about social connections and conversation. As angel investor and blogger Chris Dixon notes, ads on Facebook are like putting billboards in a park:
When people use Facebook, they are generally socializing with friends. You can put billboards all over a park, and maybe sometimes you’ll happen to convert people from non-purchasing to purchasing intents. But you end up with a cluttered park, and not very effective advertising.
As Dixon points out, what made advertising such a spectacular business for Google was that people who are searching for things are already part-way down the road toward wanting to buy something — in other words, they are further along the spectrum of “purchasing intent.” And at least the readers of newspaper websites and other media entities are theoretically interested in information about the world, current affairs, even entertainment. Many Facebook users are simply there to socialize, share photos, etc. How does that translate into a receptive environment for advertising?