Facebook's IPO could impact marketing

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American Apparel did not see returns on its Facebook ads in 2011
American Apparel did not see returns on its Facebook ads in 2011

It's hard to resist paying attention to an estimated audience of 845 million — Facebook's ad revenue grew 69% in 2011 to $3.2 billion, comprising 85% of the company's total revenue, according to filings with the Securities and Exchange Commission. Many marketers and advertisers have bought into the idea of reaching this massive group of consumers on the popular social network. Yet, Facebook's plan for a $5 billion initial public offering (IPO) has the potential to change Facebook's advertising structure.

Martin Pepper, interactive marketing and new media services at Champion Energy Services, doesn't believe the IPO will mean much for brands that advertise on Facebook — or at least not right away. “The extra funding should bring in more innovation and customer support for advertisers,” he says.

The energy services provider has used Facebook advertising on and off since 2010. The return on investment on its Facebook campaigns has been comparable to the results it realized from Google AdWords and better than those for site sponsorship, Pepper explains.

The reality of advertising is it's all about context. When the right person receives the right message at the right moment, then an ad becomes timely advice worth acting on, Pepper says. “That's what Champion Energy looks for when it targets Facebook users based on their shared data,” he says.

Brian Carter, Internet marketing expert and an author of two Facebook marketing tomes, thinks the IPO will result in increased advertising competition on Facebook, forcing ad prices to rise. That was going to happen anyway, he says, but the question is how quickly it will occur after the IPO. He notes an increase in the price of advertising using Google AdWords, which he says has forced some companies to stop using the platform. Many will likely move to Facebook as long as it remains affordable, he says.

Not all brands have experienced success with Facebook advertising. Take, for example, American Apparel. The clothing retailer was spending close to $1 million a year on Facebook ads as recently as 2011, but is now down to just a few thousand dollars a week.

“Why? The return is not there,” says Ryan Holiday, director of marketing at American Apparel. “Unless you're selling apps or lead generation, I think Facebook ads are underwhelming.”

Holiday believes this lack of ROI will have massive implications for Facebook as a public company. “They are going to need to show major growth and attract large companies and branding advertisers, yet, this is what they are weakest at,” Holiday relates. “I see bad things ahead for the Facebook IPO and perhaps, rising dissatisfaction among clients.”

Holiday believes that some of Facebook's new programs, such as Sponsored Story ads, have a sketchy vibe to them and resulted from increased pressure for revenue. These ads ask advertisers to pay to send messages to their own fans. “It's a conflict of interest, where the worse that Facebook's algorithm functions, the more advertisers will be willing to pay to reach people who ‘like' their pages,” Holiday says.

Headsets.com also didn't have much luck with Facebook ads, so CEO Mike Faith is not interested in the IPO. “We wanted [advertising] to work simply because of the potential rollout size, but Facebook users, like many Internet users, seem to make a good job of ignoring the ‘look at me' screams that advertisers make,” Faith says.

Facebook's advertising value is generally low, says Faith, which will affect the company's ability to lift revenues over time. With customer expectations of a free service, Faith doesn't believe that Facebook has the ability to diversify its revenues towards payments or subscriptions from users.


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