On Monday, Facebook will begin the ritualistic process of wooing Wall Strret investors ahead of its forthcoming IPO, according to a report in The Wall Street Journal. Facebook’s “road show” comes ahead of a May 18 target IPO date, the paper said. Circle your calendars for May 18 — it’s the most anticipated IPO in years, and the buzz about $100 billion-dollar valuations will reach deafening levels before founder and CEO Mark Zuckerberg finally steps up to the podium at the NASDAQ. But just weeks before the IPO, some marketers are already complaining about Facebook’s advertising business — not a great sign for a company that gets the vast majority of its revenue from online ads.
The fundamental issue dogging Facebook, like all social networking sites, is that unlike Google and Amazon, people use social services to hang out with their friends, not search or shop. When your goal is to share links and photos, ads can seem like a distraction. Google, by contrast, is a site that people use — by definition — because they’re searching for something, so there’s a natural opportunity to present ads relating to what people are looking for.
Social sites like Facebook have had a harder time coming up with the right formula for advertising. From the beginning, founder Mark Zuckerberg insisted on a clean, clear layout, and once advertising was introduced it had to be unobtrusive, in contrast to MySpace, which became overwhelmed with annoying banner and pop-up ads. Twitter has been similarly cautious, resisting in-your-face advertising, though it could mean more revenue in the short term.
It’s gotten to the point that advertisers are now openly expressing frustration that Facebook won’t take their money, according to a must-read by Paul Sloan of CNET News. “For the longest time, we’ve been trying to call Facebook to do business with them and there’s nobody to pick up the call,” Mike Parker, the co-president of U.S. operations of Tribal DDB tells Sloan. “They’re very focused on the consumer experience, and less focused on revenue and working with advertisers.”
Zuckerberg’s ambivalence toward advertising goes beyond just design — generating revenue itself sometimes seems to take a back seat to improving the Facebook experience. Zuckerberg says he didn’t initially view his company as business first and foremost — or even, really, as a company — but rather as a means of social transformation. “Facebook was originally not created to be a company,” Zuckerberg wrote in Facebook’s prospectus. “It was built to accomplish a social mission — to make the world more open and connected.” He added: “We don’t build services to make money, we make money to build better services.”
One can see signs of this ambivalence toward advertising in Facebook’s recent financial performance. Although the company reported last week that its first-quarter ad sales rose 37%, that figure was a 7.5% decline from the previous quarter — a drop that the company attributed to a “seasonal” factors. At this point in its history, Facebook should not be in the position of making excuses for declining growth rates.
(More: Why Facebook’s IPO Matters)
Meanwhile, some big-time advertisers still aren’t wholly sold on the company’s ad value proposition. “The question with Facebook and many of the social media sites is, ‘What are we getting for our dollars?’” Michael Sprague, vice president of marketing at Kia Motors Corp.’s North American division, said to The Journal. On one level, this is somewhat surprising, given that Facebook has such detailed information about its users and should thus be able to target ads very specifically to their interests, and then measure the results. But Facebook is much more restrictive than Google and Yahoo about providing third-parties like advertisers and outside measuring groups with data about user activity and ad metrics. Google and Yahoo, for example, allow advertisers to directly track ad performance in much more detail than Facebook does.
In some ways, however, Facebook does look like it is getting its act together for its public debut, lately moving to shore up several vulnerabilities. The company pulled off a blockbuster $1 billion purchase of photo-sharing start-up Instagram, in part to bolster its mobile presence. And as the tech patent wars continue to escalate, it recently spent $550 million to buy 650 patents that Microsoft had just acquired from AOL, deepening its intellectual property arsenal for its patent showdown with Yahoo.
But Facebook still is just scratching the surface with its ad strategy, and its ad business remains far from mature — it hasn’t moved past adolescence and settled on a model to reliably produce results. Facebook’s IPO may end its days as a private company, but Facebook’s work to build an advertising model worthy of its valuation is only just beginning.