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Facebook's Friday IPO may have been cause for celebration on the company's Menlo Park campus, but it was hardly the coming out party major players on Wall Street had hoped it would be.

Beset by technical glitches at the NASDAQ and perhaps more skepticism from the market than anticipated, Facebook's shares failed to 'pop' as many expected.

The company's underwriters were forced to step in to keep Facebook's shares from falling below the $38 offering price.

That underwriters will attempt to keep new issues from falling below their offering price on their first day of trading is an unwritten rule on Wall Street, where the one thing that often matters more than money is reputation. But the underwriters haven't stepped in to stop today's bloodbath, which has seen Facebook shares pushed down by approximately 12% in early trading, bringing the company's valuation well below the much-talked-about $100bn mark.

As I wrote on Friday, trading in FB shares will make for great entertainment in the coming days and weeks, particularly when skeptics gain the opportunity to bet against the company by shorting and purchasing options. But beyond the entertainment, Facebook's IPO woes highlight the fact that many questions remain about the company's business.

That business, which is largely driven by advertising, clearly has a lot of potential, but industry players, observers and investors are split on how much that potential can be translated into profit.

At the center of the debate are questions over the efficacy of Facebook's ad products. Yesterday, an article by Peter Faulkner was published on Ireland's TheJournal.ie. Faulkner owns Faulkner Packaging, which was founded in 1860. His article, which was apparently written before GM announced that it was halting paid Facebook advertising, describes his company's experience with Facebook ads:

So far I have spent €160. Time to look at the number of our own website visits clicked through from the Facebook pages. Result? Two! €160 quid for two clicks, each of whom looked at two site pages.
 
Clearly something is not right, so I decide to view the profiles of all those who clicked the ads. They hit one common spot – they were all in the UK. But they were aged from 13 to about 70, many were unemployed or in education, we even had a Muslim fundamentalist who is very concerned about things in Pakistan. Lots and lots of doting mothers with FB pages full of cutesy little life mottoes. It may well suit some types of businesses but I can say we are not among that number.

According to Faulker, his company has been using Google AdWords since 2002 and by his analysis, Google accounts for some 92% of all traffic his websites have received since last January. "I am but a simple engineer, but if you hold 92 per cent of the space, you own it. I am going to do my business with the top banana: the owner!" he writes.

Faulkner's comment that Facebook "may well suit some types of businesses but I can say we are not among that number" highlights what is arguably the largest problem with Facebook's ad model: its addressable market size is likely far smaller than many have believed.

Major companies like Ford, which is apparently more satisfied than GM with its Facebook advertising, can justify many campaigns as 'branding' initiatives. Whether you're skeptical about the ROI from these campaigns or not, billions are spent on them each year and there's a real role for Facebook to play in this market.

But for the vast majority of businesses that aren't looking for branding and don't have hundreds of millions (or billions) of dollars to spend keeping their brands top-of-mind with consumers, Facebook hasn't yet proven that it can deliver a return. Without that ability, Facebook will never be able to acquire and retain the Faulkner Packagings of the world, many of which happily spend thousands of dollars a year with Google.

That's a big deal because without a compelling proposition that convinces SMEs to spend money month after month, Facebook probably doesn't have a pathway to Google-like revenue -- at least as far as advertising is concerned. Unless and until Facebook can win over business owners like Peter Faulkner, one has to assume that Facebook's addressable market is currently much, much smaller than many have suggested. That in turn suggests that much of the skepticism over Facebook's valuation and future prospects is well-placed.

Patricio Robles

Published 21 May, 2012 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2392 more posts from this author

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Alec Cochrane

Alec Cochrane, Head of Optimisation at Blue Latitude

It's ridiculous to think that Facebook is ever going to have the same response rate of Google. People who are on Google have already made the active choice of searching for a product/brand/whatever so are one step further down the process.

People on Facebook are not going to Facebook to find adverts for GM (or packaging for when they are at work). Even those in the demographic that GM (or Faulkner Packaging) wants to target. Facebook advertising should be seen as very targetted display advertising. Advertising that you don't expect direct click through (except in rare cases), but do expect brand recognition.

As such, you should be treating it like you treat any campaign of that sort with metrics of that sort of advertising: What is the rememberability of brand, what is the likelihood of buying in the future, how likely are you to recommend, etc.

I'm not a simple engineer, but if I suggested that because 90% of the drive of a car comes from the engine, I should get rid of the steering wheel then you'd look at me like I was a loony and suggest that "He doesn't get it." In this case I'm not sure Peter Faulkner got it either.

Having said all that, the likelihood of social media making a difference to any of those metrics I mentioned in a B2B packaging space are slim to none. And slim just left town. Probably the right decision by Peter, even if the reasoning wasn't quite there.

over 4 years ago

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Peter Faulkner

Patricio, you hit the nail on the head, the FB offering is rather narrow for companies such as ours.

To Alec I actually did some research before I tried the FB advertising exercise, despite my reservations. If I can use web desiners SEO and AdWords to drive traffic and then sales, through my websites, FB needs to win my finite ad dollars. Because this does not work, I am the clown?

I tried it because every piece of advice I read on social marketing tells me ALL. SMEs need to get into this space. That most of those plugging this line are "digital marketing gurus" with a vested interest tells it's own tale. We are not over 150 years in business by ignoring change and new opportunities. Spending a bit of time and very small bucks on the exercise was fantastic value. I getting a great education in the topic as a bonus. My sites are inundated with visitors from the bruhaha created by my article in a digital only newspaper, digital marketing I love it.

For the record the two products we advertised are our own globally branded and trade marked lines which are marketed to the Direct Mail and Promotional Marketing industries especially the designers and specifiers. It seemed to me that many of these are extremely likely to be FB users.. The hitch was that the FB advertising pitch gives the impression that they can target any segment and demographic . My little exercise showed that this is absolute BS, that even a simple engineer can decipher.

The Digital Marketing industry is in real danger of overselling itself and a valuable tool will be debased by exaggerated claims. I am keeping my FB pages, but just not spending on their advertising offering. These platforms may well develop much as the Internet itself has done over the past 15 years or so.

over 4 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Peter,

Thanks for your comment. I think there's a long overdue discussion to be had about the way social ads have been sold to SMEs and Facebook's IPO performance may just be the catalyst.

Alec,

You're right: Google has the 'intent' factor, which underpins the efficacy of its ads. Facebook doesn't have that.

You're probably also right that Facebook ads should be looked at more as a display advertising solution.

The problem: display advertising is not something most businesses like Faulkner Packaging are interested in because, as you note, brands that purchase display ads increasingly justify their purchases along 'brand recognition' lines.

The display advertising market is a big one to be sure, but again, it's a lot smaller than the market many have suggested Facebook is targeting. There's also the fact that the hype around Facebook certainly hasn't been based on the notion that Facebook is simply going to be a display advertising player; Facebook is supposed to bring something new, different, revolutionary to advertisers.

As for your "he doesn't get it" comment, here's the thing: the number of SMEs that spend anywhere from a few thousand to a few hundred thousand dollars per year on AdWords is huge. If AdWords was a complete dud, most of them would drop it like a bad habit and Google would be far poorer than it is today.

I'd venture a guess that Peter Faulkner has probably spent, at a minimum, a six-figure sum with Google over the past decade. His Facebook spend to date? €160. Obviously, he didn't lose his shirt before cutting his loses. Facebook's loss? Potentially tens or hundreds of thousands of dollars in paid ad revenue over the course of the next decade. Which begs the question: who lost more? Mr. Faulkner or Facebook? I think the answer is obvious.

Frankly, I think it would behoove Facebook and digital marketers targeting SMEs to stop blaming business owners for the shortcomings of their social ad campaigns. They're largely experimenting and trying to see if there's value, which is what they should be doing. In many cases, they're not seeing any value and are recognizing that the bill of goods they have been sold isn't the bill of goods they have received.

If Facebook doesn't fix that, and soon, Facebook's most profitable product to date (its stock) may continue to look less and less appealing the more investors critically evaluate the company's business prospects.

over 4 years ago

Alec Cochrane

Alec Cochrane, Head of Optimisation at Blue Latitude

Peter, Patricio,

I see what you are trying to say: Facebook advertising is being mis-sold by digital marketers as the a rival to Google. It probably won't work well for SMEs (as you rightly say Peter) for several years until it has developed and website owners understand the purpose.

In the early days (and in my experience quite recently too!) many companies I've worked with (large and small) have been spending very poorly on Google - we're not in anything new here! Then again my job is measurement, so I'm always pulled in on the ones that don't work well.

My car analogy was really aimed at GM until I reread the article and rewrote my comment (although not that well), so please don't take offence, because none was meant!

Maybe Facebook will follow the route of Google and start providing free measurement systems to (try to) prove their ads work.

Cheers,
Alec

over 4 years ago

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Edmond McLaughlin

Peter,

I think you got caught up in the marketing meta-storm of social media: Social media is an echo chamber filled with social media experts who are excited about the potential of social media because social media is so effective at creating excitement about the potential of social media in other would-be social media experts! (Pass it on!)

It's easy to get caught in the loop. But your cautious approach to advertising on a new property, whether its facebook or any other, is the same that any company's approach should be: try it, but measure it. Measure it, in part, against the performance of other properties. But measure it on it's own merits, too, just as you have.

If you're providing B2B services and a property doesn't deliver prospects, leads, or sales, then it's not a property worth putting your ad spend into.

Ed

over 4 years ago

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Peter Faulkner

Gentlemen

I am glad I found this site, the discussion on the topic is clearly that of level headed industry professionals interested in analysing a topic and making sense of the results. Digital is already huge and one ignores it at one's peril, but it is only part of a marketing/advertising strategy. Just because a company is small does not mean it should not have a full spectrum approach to the various mediums. The budget by definition is also smaller and great care has to be taken to maximise returns from the available resources.
We are involved in Direct Mail/Marketing products and we use it ourselves, nothing like getting a sample into the punters hands. It is not widely known but Google is a very large spender on DM with a multi million dollar spend. We do some print advertising in specific journals such as Creative Review, every issue for the past 12 years, because it works. We also do occasional inserts in the magazine too. We do a bunch of Adwords campaigns and monitor the results and modify/tweak accordingly. We do email marketing on a regular basis using the ubiquitous ConstantContact, always striving to find the holy grail of getting our message opened by people who are genuinely interested in our offering. We segment and tailor our messages differently for each group, agencies, former customers, designers etc etc. We do the work.
I write SME opinion pieces for various magazines, blogs, online newspapers and the like which do deliver some decent spin off visits to our sites and consequent business. Something must have rubbed off along the line, My grand-uncle, Brendan Bracken, owned the Financial Times and was UK Minister for Information with Churchills wartime government, I am aware of the huge power of the wider media. I strive to find ways to harness any access to benefit my business.
I remain hungry to learn and understand how best to use Digital in all it's manifestations, even if my efforts sometimes draw ridicule for that " uncool sad old grey haired git" . I do love the arrogant innocence of the young, so passionate about their generational property, how dare I invade their space. You've got to love them, I was young myself once, which they seem to discount but they are the future.

Cheers

Peter

over 4 years ago

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Peter Faulkner

PS. The timing of my last article for the day after the Facebook IPO was no accident!

Peter

over 4 years ago

Eoin Kenneally

Eoin Kenneally, Ecommerce Consultant at Consultant

Really insightful discussion into this area.

over 4 years ago

Isaac Sarayiah

Isaac Sarayiah, Blogger at www.theSarayiahpost.com

I do a little bit of advertising on Facebook and there are clearly problems with it such as clicks registering on FB but not on my blog's (http://www.theSarayiahpost.com) analytics but still being charged for them.

However, I think that FB has a unique advantage which may be being overlooked and that is it holds so much information about its userbase that you can define with a much greater degree of accuracy the target audience for your ads.

As regards FB's much hyped flotation - this is history repeating itself. As I write on my blog in articles, "The Butterfly Effect," "Black Friday" and "Stupid Politicians" - we are entering what I term "Global Meltdown" as there is no solution to the debt crisis and FB's flotation marks the top.

over 4 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Alec,

"I see what you are trying to say: Facebook advertising is being mis-sold by digital marketers as the a rival to Google. It probably won't work well for SMEs (as you rightly say Peter) for several years until it has developed and website owners understand the purpose."

I think the jury is out on whether Facebook ads will *ever* work for SMEs.

While it's possible Facebook will have a stroke of brilliance and come up with a remarkable new product, the company has been trying for years and I think there's good reason to believe that Facebook's addressable market is naturally limited. Those who point to Google and say "Google didn't have AdWords when it launched" are forgetting that it didn't take Google eight-plus years to stumble upon pay-per-click.

Facebook is a social environment. Users are there to interact with others, browse photos, etc. These activities don't easily lend themselves to commercial interruption. Yes, Facebook has lots and lots of data. That makes for some interesting targeting opportunities, and there's even the potential for Facebook to mine its user-generated content in an effort to identify interest of a commercial nature. But at the end of the day, given what we have seen over the past several years and what we know today, it seems there's a very good possibility that Facebook will never have an ad product that, on a wide scale, can be justified by a significant number of marketers as anything other than a 'branding' tool. The perfect ad product will always be just around the corner, slightly out-of-reach.

There's nothing inherently wrong with this. Facebook can still probably generate a few billion dollars a year consistently by focusing on brand marketers -- so long as it keeps its audience relatively happy and throws brand marketers a few bones.

The problem, of course, is that Facebook's valuation has the built-in expectation that Facebook can generate substantially more ad revenue than this. Now that Facebook is publicly-traded, this creates a whole host of issues that will put pressure on company management, and be publicized and scrutinized to no end.

over 4 years ago

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Peter Faulkner

I remain engaged with the posters on the original article on thejjournal.ie where the columnists are encouraged to respond to the comment posters, nice touch I think. I got into a particulate thought train in responding and copy it below as I think it brings some perpective to the whole role of digital as part of an integrated rather than

. As a free service FB is great, a huge amount of potential for free, happy days. My problem is with the efficacy of their advertising offering and their abiliity to deliver and with those peddaling FB as a complete marketing solution. I am old enough to remember the charletons who made fortunes from the Y2K bug furore, they feasted on our fears and ignorance. Let’s not get carried away here, marketing/promoting a business is a multifaceted task, and the loadings apportioned to the range of available tools and their respective costs, along with the differences between different types of businesses will eventually evolve into an effective route to winning. One poster said , do, measure and then try something else and measure again.. He/she was so right. It, is obvious from the remarks made by contributors that some of them “live” in the social digital space that they have never even countenanced that this might be only but a single aspect of a wider marketing/selling effort, it is not the be all and end all of promoting a business. Is the model so delicate and special that it should not be subjected to reasonable sceptical query?
The people who work in our business do a superb job of delivering top quality products to everyone that entrusts their order to us at good prices. We have a huge list of testimonials from satisfied customers, both new and old. That does not happen by accident and we work very hard to maintain these performance levels. New customers cost a lot of money to win, we are in a repeat order business with a relatively low margin and individual sales invoice value, we really need their repeat business to sustain our business. If we do mess up on occasion, we fix it, whatever the cost.

over 4 years ago

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Peter Faulkner

Pity there is not a spelling grammar check... Paticular rather than particulate.... No on second thoughts I is just bits and pieces.

The first para somehow got truncated and should have finishesd " rather than as a sole element of a a way to promote a business"

Sorry about that

Peter

over 4 years ago

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