Sunday, May 13, 2012

Why Advertisers Should Be Afraid of the Facebook IPO


When it comes to investing, Wall Street is not satisfied with the Facebook of today, the bulls want to know where the growth will come tomorrow!

The sense of urgency around Facebook’s search for new revenue streams is driven by the perception that “Sponsored Stories” and “Facebook Ads”, the two products behind the current business, won’t satisfy Wall Street’s insatiable appetite for growth. Even if Wall Street is pigeon holing sponsored stories as yesterday’s growth story, the folks on Madison Avenue know that Facebook may not be done with that cash cow quite yet.

As every digital marketer knows, a Facebook page only reaches 16% of its intended audience during a month. Where does that 16% number come from? Facebook would likely maintain that it’s the result of the EdgeRank algorithm designed to keep the newsfeed uncluttered and relevant.

At the moment, the 16% rule applies to all content published on Facebook, meaning brand pages as well as personal ones.

That pitifully small number makes Sponsored Stories a must for any company serious about using Facebook as a marketing vehicle.

What’s to stop Facebook from assigning content posted from brand pages a lesser weight in the algorithm? The answer is nothing. As Josh Constine of TechCrunch points out, “The fact is that Facebook controls the news feed like an editor-in-chief controls a newspaper’s front page. It decides what kinds of content its users see.”

If Facebook lowered the organic reach of brand page content from 16% to 15% many advertisers would have to increase their marketing budgets to maintain the same level of aggregate reach. In this age of precise reporting and advanced analytics, there are countless businesses that know exactly what the ROI of their Facebook page is. Lessen their “organic” reach on Facebook and they will see a corresponding drop in business. To compensate for that drop, advertisers would have no choice but to plus up their ad spend.

Take a step away from the impatient climate of Wall Street and there are plenty of potential growth opportunities for Facebook: international, mobile, research and Facebook Credits to name a few. The problem is that it will take time for Facebook to turn those opportunities into scalable businesses. In the world of quarterly earnings, Wall Street is unlikely to wait around. 

Lucky for Facebook, it has its hand on a lever that can instantly create growth. As the pressure of being a public company mounts, tweaking EdgeRank is something Facebook will have to consider. To investors, that’s good news, for advertisers, not so much.  

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  1. @dinoj1 - I think your basic premise is right- that FB might be tempted to "deflate" reach to drive revenue.

    But I struggle to agree that "there are countless businesses that know exactly what the ROI of their Facebook page is"

    I believe precious *few* companies know their Facebook ROI across their paid and organic activity. For the vast majority of brands their Facebook investment is more about FOMO than hard-nosed ROI.

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  2. @MaMu, thank you for the comment and I agree with your feedback. There are definitely countless brands who have NO IDEA what the ROI of FB is. But, I think this applies more to blue chip advertisers who can afford that luxury.

    If we shift our focus to the long/mid tail of FB advertisers, like small local biz or online retailers, I believe they do have a good idea of FB ROI and actually use it as a DR tactic.

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