I can’t be the only one without a Facebook post!

There is no shortage of commentary on the $15 billion valuation of Microsoft’s deal with Facebook. As Facebook’s investors have said themselves, Facebook needs to perform incredibly well over the coming years to grow into the valuation. So how exactly is that going to be done?

 

To date, Facebook’s monetization strategy has centered mainly on attempts to sell sponsorships for groups or user profile-based text ads called Flyers. A recent conversation with one of the big agencies revealed the cost associated with sponsoring groups, as measured by people and activity in the group, far surpasses traditional CPMs. Yet, the same agency pointed out that no agency employee is getting promoted without having purchased a sponsored group on Facebook. The promise of building relationships with users that are passionate about brands is a major lure for advertisers. How long can Facebook count on agencies to ignore the poor fundamental economics and effectiveness of sponsored groups? It would seem that the revenue realized from groups this year is a temporary anomaly, unless something fundamentally changes in user behavior.

 

As for Flyers, Facebook doesn’t even provide advertisers with click-through rates for the Basic version, suggesting instead that “the value proposition of Flyers is primarily the high volume and localized exposure of your ad, not click through rates”. Flyers Pro is a cost-per-click product that doesn’t address the needs of brand advertisers or those interested in “engagement”. Further, I’m told that click-through rates are only slightly better than for standard banner ads, yielding only a nominal effective CPM for Facebook. This matches the experience that we had at Google working with social networking sites like Orkut, MySpace and Hi5 on various targeting techniques. The fact is that targeting ads based on user profile information performs only marginally better than contextual targeting or no targeting at all. It’s also incredibly difficult for advertisers to purchase campaigns at scale when segmentation and targeting get too granular. So don’t count on Flyers to be the magic monetization bullet either.

 

Recent reports suggest that we will have a much better idea about the future of advertising on and potentially off of Facebook after its big advertising announcement in New York on November 6th. Let’s hope that the new targeting models and ad formats introduced are dramatically different than what we have seen to date.  Importantly, they need to engage users within the context of the primarily communication-oriented activities that take place on Facebook. The success of advertising on Facebook is important not just for the company, but for all of social media, which now accounts for over 25% of all web page views. Someone is going to crack the social media monetization problem. To live up to its expectations and valuation, Facebook better hope that it has devised the scalable, effective social media monetization solution that has so far eluded its competitors and its recent investor.

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