When you are about to have one of the largest public offerings in the world - north of $100 billion and much of the reason for the size of your IPO has to do with advertising revenue, there is nothing worse than having one of the world's largest and most sophisticated advertisers telling you your ads don't work. And that is exactly what just happened to Facebook when GM pulled the plug on a $10 million dollar ad deal.
To put this in perspective, GM is the third largest advertiser in the US and its budget is absolutely huge. Last year in fact it was $1.8B. The interesting part of the situation is that even though GM won't be continuing its ad spend this year it plans on continuing to spend $30M or so for Facebook content.
What this tells us is Facebook is just becoming a driver of the Splinternet or another Internet which advertisers and developers need to take into account. While having free content is great for Facebook and moreover GM will no doubt continue to drive massive web traffic Zuckerberg's way, the challenge becomes how to monetize it all.
Now one could argue that Facebook can just show ads from other companies on all the content GM creates and they currently do this. The issue worth wondering about is what if other advertisers come to the same conclusion and there are no ads from major companies like Ford or Toyota to show on all the GM content.
Let's further consider GM wastes massive amounts of its ad budget on TV. By waste I mean branding is a very tough business in that it is tough to target branding ads directly to your audience. In other words when you see an ad on TV for a Chevy truck - a category which only a percentage of the population would buy, the rest of the ad spend could be considered wasted.
So GM is comfortable with wasted ad spend - most companies realize this is just the way branding works.
But on the web there is more measurability meaning that GM likely compared its click through rates on Facebook with other sites like Google, etc and decided there weren't enough people clicking to keep the ad campaign running. Typically the online advertising division of companies is more results oriented than those in the TV or radio areas.
Let's remember people have likened advertising on social networks to an interuption of a conversation between friends and this GM news seems to echo the sentiment.
And perhaps most importantly if you had to surmise what sort of ad would be most successful on Facebook you would no doubt say those targeting consumers - and automobiles would likely be at the top of the list. And here we have this massive consumer automobile advertising company complaining about advertising effectiveness.
Now it is worth pointing out that advertisers use different metrics to measure ad effectiveness. In my career I have seen one company decide an advertising product isn't for them and their direct competitor loves the exact same product. This happens at trade shows as well where the booth of company A does poorly but company B competes directly with company A and has a full booth of people and signs up for a larger booth at the next event.
So this could be an issue of a single company using measurement tools which put a poor spotlight on Facebook's results.
But it could also be the equivalent of IBM pulling out of COMDEX and subsequently sinking the largest trade show in the US virtually overnight.
Now I am not trying to be over-dramatic here - Facebook isn't going to go away any time soon but if this example becomes a trend it may have to refocus its ad push on advertising outside its network using the rich targeting data it continues to amass.
And while the Facebook IPO seems to be the hottest thing since the launch of the iPhone it remains to be seen if in one year the stock becomes more like high flyer Google or sinking ship Vonage.
See Henry Blodget's take and the original article in the Wall Street Journal.
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