Facebook Advertising is Fool's Gold
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Th attitude of "eyeballs not revenue" and finding that repeatable, scalable formula are almost a religion on HN and in startups. It's generally a strategy I approve of.
Even dropping 20% since the IPO (currently trading at just over $30 as I write this; and bear in mind that even Groupon--at least initially--enjoyed a nice IPO bounce), the company is trading at a huge P/E ratio.
I get why this is: it's speculative. FB is still viewed as a growth company and the speculators feel that there is huge unrealised monetization potential.
I remain a skeptic regarding the value of "social" in advertising. The OP is right: all this data just means--maybe--a slightly higher CTR, at which point Facebook is just another display ad network and that doesn't justify their valuation.
As an aside, IMHO Twitter is in this same "put up or shut up" boat. I don't believe Facebook is doomed (IMHO Twitter is). I just believe the value of the data silo they have is both overstated and transitory (at some point--one way or the other--Facebook won't be the gatekeeper to your profile and social graph).
Facebook has done a lot of things right as a business (the Like button being foremost among those IMHO). Personally I believe their biggest mistake was spurning Apple: Apple wanted to use Facebook for their Ping boondoggle.
Disclaimer: I work for Google in display advertising.
I'm not exactly sure what the deal is with Amazon, but their p/e was much more realistic in the not-so-distant past:
Ratios have to be considered in context of expected future growth and expected future profit margin (revenue grows a little but profit grows a lot). Even considering that, some ratios seem extreme.
FB Forward P/E: 44.85
FB PEG Ratio: 1.67
AMZN Forward P/E: 85.52
AMZN PEG Ratio: 5.92
CRM Forward P/E: 69.06
CRM PEG Ratio: 3.29
Basically, Amazon forgoes profit to get market share, will push out all competitors, build a huge barrier to entry with excellent execution and logistics, and then raise prices to increase profit. Traders are buying now and holding until that happens.
2 - anybody citing GM pulling $10M in annual spend is an idiot, unless you think GM is in the business of sending out press releases announcing all of their advertising budget changes. No? Then there's something else going on here; perhaps some bare-knuckled negotiation tactics.
3 - fb collects a tax on gaming. Plus Zynga and some others may be cleared to start doing online poker for real money [1]. fb taxes that at 30%.
4 - low ctr is fine for direct response as long as you have proportionally low costs. What this does for the user experience is another question =P
5 - lots of people in adtech very much want Google not to win everything. See the rise of the ABG (anybody but google) exchange: appnexus + aol + microsoft [2]. I expect yahoo inventory to start showing up there once yahoo realizes they no longer have the technical ability to run an ad exchange. Scott talking about selling off rmx can't have helped retain technical talent, and at this point it's a fat question why anyone would want it. Yahoo will sell a bunch of guaranteed delivery, but I think a bunch of the rest will show up on appnexus eventually, if it isn't already there blind.
5a - contributing to the above, hopefully google will get investigated for antitrust. For starters, hiding search query terms in the referrer string should trigger an investigation. They use that data in adsense, and it's particularly valuable for targeting ads on low text pages. Now they're hiding that from other ad networks, I can't find any public statement guaranteeing they're not letting adsense see it. Google also uses search query results to juice display retargeting.
6 - ctr isn't particularly important for brand advertisers. There is a growing disparity of the ratios of ad spend / time spent in different media, with TV higher. Thus behind some of fb's valuation is the thesis that brand advertising dollars will be moving from tv to online, and fb is probably poised to take a big chunk of those. If/when this happens is unknown, but winning bets on those sorts of things is how investors get paid.
7 - fb may still be given a giant present from the EU depending on just how their anti cookie laws work in practice. The morons in GB rolled it all back 24h before the implementation deadline, but other member states may go all in and more or less ban 3rd party cookies. Then we'll be stuck in a tagless world, and I bet fb will get an enormous amount of spend.
[1] http://venturebeat.com/2012/01/20/the-deanbeat-should-zynga-...
[2] http://www.adweek.com/news/technology/aol-make-inventory-ava...
If (via a Distributed Social Networking Protocol) people were subscribed to several social networks focused on their hobbies and interests, then I believe Social Media Advertising would be more viable, and more useful to the audience.
I also think that when you look past all the fanfare and hyperbole surrounding social networking, what you're left with is really sophisticated bulletin boards and forums.
I can see that from a marketing point of view, having one point of access to that many people might seem like a dream come true, but the numbers are suggesting that's not the case at all. Facebook is not the answer to an online advertisers dream. I don't think it ever will be.
If (via a Distributed Social Networking Protocol) people were subscribed to several social networks focused on their hobbies and interests, then I believe Social Media Advertising would be more viable, and more useful to the audience.
You don't need DSNP: niche social networks already exist. Ravelry and GoodReads, as examples, seem to be making a decent go of it. Would love to know how their advertising does.
Imagine if you could only check your Hotmail emails on the Hotmail website or through one of the official Hotmail Apps.
That's how Social networking works right now. API's won't cut the mustard. We need a DSNP.
As a matter of fact, nowadays advertisement industry is the biggest bubble of the world. Every year, trillions of dollars completely wasted by irrelevant advertising unnecessarily. What is even worse is, the user experience is badly hurt by ads and spams. Such marketing system can be called as attention-driven marketing system. Everything is done to attract attentions. However, only a few attentions are really attracted, but majority of the attentions may not be finally turned into intentions. As a result, majority of the marketing costs are totally wasted.
The future marketing systems will be built on intentions. Intention-driven commerce systems need let every user to express his/her intentions freely and help him/her achieve his/her intentions in highly optimized way by socialization and crowd-sourcing. The future world needs to be a world without displaying ads, but only pure relevant information that matches users' intentions dynamically and real-timely. This is the very objective of my current startup project as well.
I can imagine very well how I would target people who like the series 24 if I'm launching a new thriller. Or readers of Hacker News for a tech conference. Etc...
Also, empirically, users refuse to pay for stuff and want advertising so they're not out of pocket. For the 1e6 + 999th time: " If you are not paying for it, you're not the customer; you're the product being sold."
This is why advertising has been such a profitable business. That's because targeting of traditional advertising system is not good. As a result, traditional marketing has to be attention-driven. You have no better choice other than throwing trillions of dollars to attract attentions, and hopefully several percent of the attracted attentions will be finally converted to your new customers so that your business can continuously run. As a matter of fact, a huge amount of your marketing costs are completely wasted, and it is necessary due to low efficiency of the advertising model. This well-known fact is clearly shown that the low efficient classical display advertising model need be disrupted and replaced.
Fortunately, with the help of Internet and advancement of information processing technology, targeting will be significantly improved, and it has to be improved. However, it could not be attention-based, because attention is intrinsically low efficient on targeting. It has to be intention-based, which is intrinsically well targeted and accurate. For instance, with prior knowledge of your intention on buying some orange juice in front of a Trader Joe's, I will recommend you some good juices. It will be interesting information to me instead of advertisements. On the contrary, it will be totally annoying to me if you shout out at me about some high-end computers just because you know I'm a computer science student or a software programmer, but you don't know I just bought a super cool Macbook last week and don't need a new computer in next few months or even years.
To solve the targeting issue, intention-based marketing systems will be an ideal alternative to current dominant attention-driven marketing systems. Attracting attention is surely helpful. But it has to be complementary, not the primary driving force. It will be intention-based and intention-driven systems that can significantly improve targeting accuracy and marketing efficiency. That is the future!
Facebook is gathering what amounts to a static picture of each user then selling ads based on the pictures. There really isn't a time component in the data (though perhaps they can add one now that the service has existed for many years).
On the other hand, Google has more or less assembled a bunch of archetypes based on behavior (people who search for X later purchase Y, etc.). Then they match queries to these archetypes. The time component is front-and-center here because the archetype match was prompted by a user action.
A purchase is really a time-related event that transforms the user in some sense. By purchasing something you're changing "who" you are from the perspective of an advertiser (e.g. a Chevy driver could become an Audi driver).
So Facebook has a great picture of "who" each user is at a the moment, but no real way of knowing "who" each user would like to become or when. Hence, perhaps, some of their difficulty in selling ads.
Or not.
1) ones that give you what you want
2) ones that drive demand
Google dominates (1) and I assume Facebook is trying to dominate (2) which includes a lot more display advertising (and TV, and billboards). Facebook probably thinks a lot of demand-driving advertising can be accomplished through viral online marketing through FB platforms and they are likely trying to exploit these channels with services for paying customers.
Imagine paying Facebook to simulate something being trendy among people's trend-setting friends. It'll be a fine line but this must be what they hope to do.
Agree the $100B is too high, but certainly they're easily a profitable company, long-term.
A big part of Google's success is that #1 is much easier to prove than #2.
"People bought our product more because they had become familiar with it over the last month via newspaper/radio/Facebook ads" is a hard-to-prove claim.
"We got X clicks from Google ads leading directly to Y purchases" is much easier.
Advertising on the Facebook site itself seems not to be working, but I could foresee a situation where website owners allow Facebook to display ads on their site for a fee per click just like AdSense. Facebook already has a javascript presence on many, many websites already.
Right now the problem is getting people to believe in Facebook's revenue to get some confidence back in the market.
Not saying it's is a silver bullet by any means.
From wikipedia [1]:
In Q1 2011, Google earned US$2.43 billion ($9.71 billion annualized),
or 28% of total revenue, through Google AdSense
Facebook advertising is much much cheaper than Google advertising on a per-click and per-impression basis.
With Google ads, advertisers are used to paying as much as $20/click in some areas. I've never heard of a FB advertiser paying more than $2/click.
Likewise, CPMs on FB are in the single digit pennies quite often. On the web, banner ads are around $0.75 CPMs for decent sites.
Facebook might have looked at this and might believe that if they launched a network like this, the payouts just wouldn't be able to compete with what Google's able to give publishers.
Maybe that is/was one of the aims behind the Like button? Facebook could use that connection to tailor the adverts displayed to the user (along with the site's content!), provided the user is logged into Facebook at the time.
Admittedly, I think doing so would kick up a bit of a stink ;)
But AdSense is very vulnerable: intent (the search string), which is the one reason Google advertising works, is absent from AdSense.
As an example, I once wrote a blog post with a title like "startup financing: take the elevator, not the stairs". Google placed ads on that post for Thyssen elevators. It had just no clue that the topic was startups, not actual elevators. Not impressed.
We've recently started to expand the use of the query words in referral
URLs to a few hours so we can so we can continue to deliver more relevant
ads. The technical way that we're doing this is by associating the
relevant query words in the referral URL with the existing advertising
cookie on the user's browser. After a short period of time (a few hours)
the query words are no longer used for the purposes of matching ads.
Google uses search activity from the past several hours to help match
ads in adsense for content[1]. Hiding those from other ad networks is,
imo, one of the best reasons they should be sued for antitrust.
Google has recently started hiding search query strings by stripping them from the referrer for logged in users and has made noise that sounds like this will eventually happen for all users. This hurts ad networks because it removes some of the intent they use to help target ads, and crucially hurts the most when trying to target ads on low information pages. However, Google can certainly internally continue to give this information to adsense in order to target content. This is the sort of thing antitrust law is meant to prevent: using a monopoly in one area (search and sem) to juice your business elsewhere (display ad network).
> What researchers discovered was that people bought milkshakes as a breakfast replacement because it was entertaining during a long, boring commute, and would keep them full until lunch.
How do you advertise for them on Google? If they search for "breakfast replacement for long, boring commute"?
For anyone who can match their product to search queries, Google is the way to go, agreed. But not all products can, because people are not actively looking for solving a problem/need that your product solves.
If I look at my current facebook ads, these are not things I actively search for, e.g. drinks, shavers, parties, facebook games, ... If I had to spend marketing $ on these, I'd probably choose facebook ads over AdWords as well.
Personally, I don't have a FB account, or own any stock but this targeted 'bashing' seems useless and has the smell of targeted anti-FB propaganda. Why don't we focus on the real issue being people rights to privacy and the shady practices of FB?
More focus on the real issues please, do not get distracted by the 'anti-hype' of the week.
These things are all connected. The public is being sold the idea that this is a $100BB company, one of the biggest in the world. Yet when some of us look at it (yourself, even) we see a great tool that doesn't justify the price as a business: as cletus says at the top of the thread, Facebook may just be another ad network that depends on its massive, engaged user base. Yet FB has problems with how it actually treats those users, through privacy issues and shady practices..
Yes, they're different things.
Some products do great with intent-based advertising. Other products (that you didn't even know you needed) need other forms of advertising.
My personal anecdote: Facebook ads are the only online Ads I click with any regularity. They are targeted to my interests, such as programming. They also hit me at a time when I am mostly bored and clicking around on anything that interests me.
When I find myself on Google, I am on a mission for very specific information. Even if I am shopping, I do a research phase and a purchasing phase. Ads in the research phase don't woo me. I google straight to trusted sources. Once I'm in the purchase phase (shopping for best price), I am not wooed either because the ads are too broad. E.G, I want the D3100, not just any camera in general.
I completely understand Google's strategy of "intent" based ads. I just think Facebook's user data is even stronger.
I used to work for Hyves, which was until a year ago or something the biggest social network in the Netherlands. Hyves lost to Facebook in terms of number of users, but something that they did do right was modernization. Hyves had an in-house sales team and studio, which sold custom viral campaigns to cooperate advertisers. These campaigns could usually go together with a TV campaign and/or other media.
For some products search engine advertisement is the right kind of advertisement (parrot secrets, maybe cars, I don't know), for others not such much (food stuffs for example).
Now think of the targeting you can get there.
I listen to Donovan, The Beatles, The Stone Roses, Mozart, Au, REM, Dj Shadow, Handsome Boy Modelling School, Chopin, Ludovico Einaudi and Daft Punk (to name but a few).
I've liked pages for five star greek hotels, the burger place on the corner, the guy who sells awesome falafel's on Hoxton market. You know I saw this video of a talking dog that I thought was totally awesome.
Just this month, I read an article on the Greek debt crisis in the economist, an article on David Beckham in the Daily mail website, I shared a wikipedia page about Rommel, I liked an article about continuous integration with node.js and Jenkins.
Now sell me a car.
I actually like Volkswagens and Volvos, but you won't find that anywhere in my Facebook data.
I'd bet there's actually a pretty high correlation between many of the things you just listed and a preference for VWs and Volvos. It doesn't really take that many data points to start filling in the blanks.
But I think this kind of targeting is going to be more useful in selling you a product you don't yet know about but are likely to want than it is a car that you are almost certainly already aware of.
Daft Punk? You're 30-ish. Mozart and Chopin? College graduate. Like a 5-star Greek hotel (but not that many other luxury items)? Shit, I've narrowed down your disposable income into a fairly narrow bucket. I can also tell that you don't have any children. I would target the shit out of you for Volvo, Volkswagen, Acura, Infiniti, Mercedes, BMW and Audi.
And that's just my own guesstimates. Backed up by proper data I'm sure I could do way better.
And why not Lincoln, Cadillac, Lexus, Saab and Jaguar? In fact, Volkswagen isn't a luxury brand (no more than Honda, Nissan, Toyota), and hardly fits among the brands you mentioned above. Yet it's a preference of the OP. So, I think you've proven his point; your targeting hardly tells us anything.
Lincoln and Cadillac maybe not, too -- perhaps Americans who holiday in Europe are much more likely to buy European cars. If I had more data I could draw up some correlations and tell you exactly how much more likely they are to buy European cars and whether it's still worth waving a shiny new MKZ in front of our Volvo fan.
There's always exceptions to any of these correlations between stuff we like and other stuff we might like. In fact we're all exceptions; we all like things which are anticorrelated with other things we like. But that's not a big problem -- your targeting algorithm doesn't have to be perfect, it just has to be significantly better than random scattershot... and ideally, better than Google.
In an ideal world, I'd only serve Acura ads to people who:
a) Are buying a new car soon
b) Are certain to buy an Acura if they see an ad for one, and
c) Are certain to not buy an Acura if they don't see an ad for one.
but failing that I'll settle for targeting people who are in vaguely the right age group and income bracket.
Actually, I think car sales are a bad example; if I wanted to sell cars I'd use google ads, because people buying a new car already know they're buying a new car, and are probably out there doing research on the subject of new cars. Whoever posted the milkshake example had the right idea for facebook ads.
Google ads can sell you stuff that you're looking for, Facebook ads (if implemented properly) can sell you stuff you don't yet know that you want.
I think a lot of Facebook's value depends on just how useful that personalized information is, and how difficult it will be for a competitor like Google to extract in other ways. My guess is that it will turn out to be pretty useful as advertising campaigns (and brands themselves) become more and more segmented, but also not so hard for traditional cookie-tracking methods to get 80%+ of the same useful information.
Well, that is, if Facebook does it properly. And you don't block them.
Not that I'm defending Facebook advertising (there's other reasons that I think it's largely pointless, at least from a click-through perspective - the primary one being that if I'm going on a social media site, I'm usually going to be social, not to buy a new car or book a holiday), but the fact that one particular market can't necessarily target one particular user doesn't seem to be a great argument against it.