Facebook is aiming to go public and wants to do it in a huge way - with a valuation bigger than any previous American tech company. Ever. In fact, Facebook's valuation puts it ahead of many well-established technology companies like Hewlett-Packard and would put it in the top 5 most valuable tech businesses in North America.
But Facebook has a big problem that it's failed to address, but that it carefully leaves out of its PR and public statements.
Facebook isn't very good at delivering quality, quantifiable advertising to its primary means of income (advertisers).
This was highlighted this week when General Motors dropped its Facebook advertising campaign (about $10 million worth), though the company will continue its other social media efforts and (non-paid) advertising on Facebook (another $30 million annually). In other words: GM, the world's second-largest automaker by volume, is dropping the Facebook advertising it pays Facebook for directly, but keeping its more grass roots advertising that Facebook doesn't get paid for.
GM isn't alone either. Other companies are doing the same. Facebook says, in its initial public offering (IPO) filings, that 82% of its income is from direct advertising like what GM just pulled from the site. That's a big chunk of its value, I'd say, so when big players stop writing checks, FB should become worried.
Like most others who've pulled out of paid ads on Facebook in the past few months, GM cited a lack of measurable success for its paid ad campaigns on the social networking site. The key word there is 'measurable.'
Likely, these campaigns have more success than many other advertising venues might have. With newspapers and magazines, for instance, there is no way to measure the number of readers who look through that publication, see the ad, and do something positive for the advertiser (buy a product, look into it, talk to their friends about it, etc). In online advertising, the opposite is true: you can usually know almost everything users are doing when they see your ads - from ignoring them to clicking through or even doing searches based on the material.
Yet with Facebook, you get none of that. From the advertiser's perspective, FB gives almost no information regarding how users are interacting with your ads. They tell you how many saw it and you can get rough demographics as well, but that's about all.
This is a huge flaw in the soon-to-be-public social networking site's setup and one that is very quickly going to come back to haunt it. In fact, that haunting may already be happening as big names like GM step away from the platform as a paid advertising venue.
The problem is compounded by another issue: user distrust and lack of loyalty. According to CNBC, polls show that Facebook users rarely click on ads (about 57% totally ignore them, with most of the rest only occasionally clicking). All told, only 4% said they 'often' click on ads. Pretty dismal numbers.
Further, when asked how safe they felt buying products through a Facebook ad or link, 54% said it was 'not safe at all' and only 8% thought it was 'extremely safe' to do so.
Facebook clearly has a double-whammy going on here. It can't report metrics effectively to its advertisers and if it could, those metrics would likely be so pathetic that advertisers would be leaving in droves.
The valuation FB has for itself in its IPO seems pretty inflated when you consider that its primary means of income is suffering so much.